Bloom Energy Corp - Quarter Report: 2020 March (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 quarter ended: March 31, 2020 | |
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/0001664703/000166470320000037/download1.jpg)
BLOOM ENERGY CORPORATION
(Exact name of Registrant as specified in its charter)
________________________________________________________________________
Delaware | 77-0565408 |
(Sate 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 is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ¨ No þ
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 þ Non-accelerated filer ¨ 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 April 30, 2020 was as follows:
Class A Common Stock $0.0001 par value 93,996,955 shares
Class B Common Stock $0.0001 par value 31,168,927 shares
Bloom Energy Corporation
Quarterly Report on Form 10-Q for the Three Months Ended March 31, 2020
Table of Contents
Page | |
PART I - FINANCIAL INFORMATION | |
Item 1 - Financial Statements (Unaudited) | |
Condensed Consolidated Balance Sheets | |
Condensed Consolidated Statements of Operations | |
Condensed Consolidated Statements of Comprehensive Loss | |
Condensed Consolidated Statements of Redeemable Noncontrolling Interest, Stockholders' Deficit and Noncontrolling Interest | |
Condensed Consolidated Statements of Cash Flows | |
Notes to Condensed Consolidated Financial Statements | |
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations | |
Item 3 - Quantitative and Qualitative Disclosures About Market Risk | |
Item 4 - Controls and Procedures | |
PART II - OTHER INFORMATION | |
Item 1 - Legal Proceedings | |
Item 1A - Risk Factors | |
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds | |
Item 3 - Defaults Upon Senior Securities | |
Item 4 - Mine Safety Disclosures | |
Item 5 - Other Information | |
Item 6 - Exhibits | |
Signatures |
Unless the context otherwise requires, the terms "we," "us," "our," "Bloom Energy," and the "Company" each refer to Bloom Energy Corporation and all of its subsidiaries.
Explanatory Note
As previously disclosed, we restated the relevant unaudited interim condensed consolidated financial statements for the quarterly periods ended September 30, 2019, June 30, 2019, and March 31, 2019. The quarterly restatements are or will be effective with the filing of our 2020 Quarterly Reports on Form 10-Q. See Note 2, Restatement of Previously Issued Consolidated Financial Statements, in Item 1, Condensed Consolidated Financial Statements, for additional information related to the restatement of our condensed consolidated financial statements for the period ended March 31, 2019.
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Part I
ITEM 1 - FINANCIAL STATEMENTS
Bloom Energy Corporation
Condensed Consolidated Balance Sheets
(in thousands, unaudited)
March 31, 2020 | December 31, 2019 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents1 | $ | 180,307 | $ | 202,823 | ||||
Restricted cash1 | 29,730 | 30,804 | ||||||
Accounts receivable1 | 35,691 | 37,828 | ||||||
Inventories | 107,204 | 109,606 | ||||||
Deferred cost of revenue | 79,799 | 58,470 | ||||||
Customer financing receivable1 | 5,170 | 5,108 | ||||||
Prepaid expenses and other current assets1 | 24,994 | 28,068 | ||||||
Total current assets | 462,895 | 472,707 | ||||||
Property, plant and equipment, net1 | 606,850 | 607,059 | ||||||
Customer financing receivable, non-current1 | 49,446 | 50,747 | ||||||
Restricted cash, non-current1 | 143,882 | 143,761 | ||||||
Deferred cost of revenue, non-current | 4,939 | 6,665 | ||||||
Other long-term assets1 | 44,596 | 41,652 | ||||||
Total assets | $ | 1,312,608 | $ | 1,322,591 | ||||
Liabilities, Redeemable Noncontrolling Interest, Stockholders’ Deficit and Noncontrolling Interest | ||||||||
Current liabilities: | ||||||||
Accounts payable1 | $ | 60,401 | $ | 55,579 | ||||
Accrued warranty | 11,014 | 10,333 | ||||||
Accrued expenses and other current liabilities1 | 77,809 | 70,284 | ||||||
Deferred revenue and customer deposits1 | 99,046 | 89,192 | ||||||
Financing obligations | 11,248 | 10,993 | ||||||
Current portion of recourse debt | 15,117 | 304,627 | ||||||
Current portion of non-recourse debt1 | 8,670 | 8,273 | ||||||
Current portion of recourse debt from related parties | — | 20,801 | ||||||
Current portion of non-recourse debt from related parties1 | 2,439 | 3,882 | ||||||
Total current liabilities | 285,744 | 573,964 | ||||||
Derivative liabilities1 | 23,377 | 17,551 | ||||||
Deferred revenue and customer deposits, net of current portion1 | 120,927 | 125,529 | ||||||
Financing obligations, non-current | 443,407 | 446,165 | ||||||
Long-term portion of recourse debt | 396,097 | 75,962 | ||||||
Long-term portion of non-recourse debt1 | 190,295 | 192,180 | ||||||
Long-term portion of recourse debt from related parties | 52,786 | — | ||||||
Long-term portion of non-recourse debt from related parties1 | 30,597 | 31,087 | ||||||
Other long-term liabilities1 | 28,543 | 28,013 | ||||||
Total liabilities | 1,571,773 | 1,490,451 | ||||||
Commitments and contingencies (Note 14) | ||||||||
Redeemable noncontrolling interest | 67 | 443 | ||||||
Total stockholders’ deficit | (333,099 | ) | (259,594 | ) | ||||
Noncontrolling interest | 73,867 | 91,291 | ||||||
Total liabilities, redeemable noncontrolling interest, stockholders' deficit and noncontrolling interest | $ | 1,312,608 | $ | 1,322,591 |
1We have variable interest entities which represent a portion of the consolidated balances recorded within these financial statement line items in the condensed consolidated balance sheets (see Note 13, Power Purchase Agreement Programs).
The accompanying notes are an integral part of these condensed consolidated financial statements.
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Bloom Energy Corporation
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
As Restated | ||||||||
Revenue: | ||||||||
Product | $ | 99,559 | $ | 90,926 | ||||
Installation | 16,618 | 12,219 | ||||||
Service | 25,147 | 23,467 | ||||||
Electricity | 15,375 | 20,389 | ||||||
Total revenue | 156,699 | 147,001 | ||||||
Cost of revenue: | ||||||||
Product | 72,489 | 88,772 | ||||||
Installation | 20,779 | 15,760 | ||||||
Service | 30,970 | 27,921 | ||||||
Electricity | 12,530 | 12,984 | ||||||
Total cost of revenue | 136,768 | 145,437 | ||||||
Gross profit | 19,931 | 1,564 | ||||||
Operating expenses: | ||||||||
Research and development | 23,279 | 28,859 | ||||||
Sales and marketing | 13,949 | 20,373 | ||||||
General and administrative | 29,098 | 39,074 | ||||||
Total operating expenses | 66,326 | 88,306 | ||||||
Loss from operations | (46,395 | ) | (86,742 | ) | ||||
Interest income | 819 | 1,885 | ||||||
Interest expense | (20,754 | ) | (21,800 | ) | ||||
Interest expense to related parties | (1,366 | ) | (1,612 | ) | ||||
Other income (expense), net | (8 | ) | 265 | |||||
Loss on extinguishment of debt | (14,098 | ) | — | |||||
Gain (loss) on revaluation of embedded derivatives | 284 | (540 | ) | |||||
Loss before income taxes | (81,518 | ) | (108,544 | ) | ||||
Income tax provision | 124 | 208 | ||||||
Net loss | (81,642 | ) | (108,752 | ) | ||||
Less: net loss attributable to noncontrolling interests and redeemable noncontrolling interests | (5,693 | ) | (3,832 | ) | ||||
Net loss attributable to Class A and Class B common stockholders | $ | (75,949 | ) | $ | (104,920 | ) | ||
Net loss per share available to Class A and Class B common stockholders, basic and diluted | $ | (0.61 | ) | $ | (0.94 | ) | ||
Weighted average shares used to compute net loss per share attributable to Class A and Class B common stockholders, basic and diluted | 123,763 | 111,842 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
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Bloom Energy Corporation
Condensed Consolidated Statements of Comprehensive Loss
(in thousands)
(unaudited)
Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
As Restated | ||||||||
Net loss | $ | (81,642 | ) | $ | (108,752 | ) | ||
Other comprehensive income (loss), net of taxes: | ||||||||
Unrealized gain on available-for-sale securities | — | 17 | ||||||
Change in derivative instruments designated and qualifying in cash flow hedges | (8,214 | ) | (2,191 | ) | ||||
Other comprehensive loss, net of taxes | (8,214 | ) | (2,174 | ) | ||||
Comprehensive loss | (89,856 | ) | (110,926 | ) | ||||
Less: comprehensive loss attributable to noncontrolling interests and redeemable noncontrolling interests | (13,902 | ) | (5,880 | ) | ||||
Comprehensive loss attributable to Class A and Class B stockholders | $ | (75,954 | ) | $ | (105,046 | ) |
The accompanying notes are an integral part of these condensed consolidated financial statements.
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Bloom Energy Corporation
Condensed Consolidated Statements of Redeemable Noncontrolling Interest, Stockholders' Deficit and Noncontrolling Interest
(in thousands, except share amounts) (unaudited)
Three Months Ended March 31, 2020 | ||||||||||||||||||||||||||||||||
Redeemable Noncontrolling Interest | Class A and Class B Common Stock¹ | Additional Paid-In Capital | Accumulated Other Comprehensive Income (Loss) | Accumulated Deficit | Total Stockholders' Deficit | Noncontrolling Interest | ||||||||||||||||||||||||||
Amount | Shares | Amount | ||||||||||||||||||||||||||||||
Balances at December 31, 2019 | $ | 443 | 121,036,289 | $ | 12 | $ | 2,686,759 | $ | 19 | $ | (2,946,384 | ) | $ | (259,594 | ) | $ | 91,291 | |||||||||||||||
Adjustment of embedded derivative related to debt extinguishment | — | — | — | (24,071 | ) | — | — | (24,071 | ) | — | ||||||||||||||||||||||
Issuance of restricted stock awards | — | 3,010,606 | — | — | — | — | — | — | ||||||||||||||||||||||||
ESPP purchase | — | 992,846 | — | 4,177 | — | — | 4,177 | — | ||||||||||||||||||||||||
Exercise of stock options | — | 110,949 | — | 667 | — | — | 667 | — | ||||||||||||||||||||||||
Stock-based compensation expense | — | — | — | 21,676 | — | — | 21,676 | — | ||||||||||||||||||||||||
Change in effective portion of interest rate swap agreement | — | — | — | — | (5 | ) | — | (5 | ) | (8,209 | ) | |||||||||||||||||||||
Distributions to noncontrolling interests | (1 | ) | — | — | — | — | — | — | (3,897 | ) | ||||||||||||||||||||||
Net loss | (375 | ) | — | — | — | — | (75,949 | ) | (75,949 | ) | (5,318 | ) | ||||||||||||||||||||
Balances at March 31, 2020 | $ | 67 | 125,150,690 | $ | 12 | $ | 2,689,208 | $ | 14 | $ | (3,022,333 | ) | $ | (333,099 | ) | $ | 73,867 |
Three Months Ended March 31, 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 | $ | 2,481,352 | $ | 131 | $ | (2,624,104 | ) | $ | (142,610 | ) | $ | 125,110 | |||||||||||||||
Cumulative effect upon adoption of new accounting standard (ASC 606) | — | — | — | — | — | (17,996 | ) | (17,996 | ) | — | ||||||||||||||||||||||
Issuance of restricted stock awards | — | 2,960,462 | — | — | — | — | — | — | ||||||||||||||||||||||||
ESPP purchase | — | 696,036 | — | 6,916 | — | — | 6,916 | — | ||||||||||||||||||||||||
Exercise of stock options | — | 136,382 | — | 577 | — | — | 577 | — | ||||||||||||||||||||||||
Stock-based compensation expense | — | — | — | 63,166 | — | — | 63,166 | — | ||||||||||||||||||||||||
Unrealized loss on available for sale securities | — | — | — | — | 17 | — | 17 | — | ||||||||||||||||||||||||
Change in effective portion of interest rate swap agreement | — | — | — | — | (143 | ) | — | (143 | ) | (2,048 | ) | |||||||||||||||||||||
Distributions to noncontrolling interests | (282 | ) | — | — | — | — | — | — | (2,613 | ) | ||||||||||||||||||||||
Cumulative effect of hedge accounting standard adoption | — | — | — | — | — | 130 | 130 | (130 | ) | |||||||||||||||||||||||
Net income (loss) (as restated) | 1,823 | — | — | — | — | (104,920 | ) | (104,920 | ) | (5,655 | ) | |||||||||||||||||||||
Balances at March 31, 2019 (as restated) | $ | 58,802 | 113,214,063 | $ | 11 | $ | 2,552,011 | $ | 5 | $ | (2,746,890 | ) | $ | (194,863 | ) | $ | 114,664 | |||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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Bloom Energy Corporation
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
As Restated | ||||||||
Cash flows from operating activities: | ||||||||
Net loss | $ | (81,642 | ) | $ | (108,752 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Depreciation and amortization | 13,034 | 14,225 | ||||||
Write-off of property, plant and equipment, net | 1 | 1 | ||||||
Revaluation of derivative contracts | 241 | 87 | ||||||
Stock-based compensation | 23,019 | 67,822 | ||||||
Loss (gain) on long-term REC purchase contract | (4 | ) | 59 | |||||
Loss on extinguishment of debt | 14,098 | — | ||||||
Amortization of debt issuance cost | 4,755 | 5,152 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | 2,136 | 4,131 | ||||||
Inventories | 2,083 | 11,087 | ||||||
Deferred cost of revenue | (19,494 | ) | (11,084 | ) | ||||
Customer financing receivable and other | 1,240 | 1,339 | ||||||
Prepaid expenses and other current assets | 3,060 | 6,628 | ||||||
Other long-term assets | (2,924 | ) | (416 | ) | ||||
Accounts payable | 4,822 | (2,464 | ) | |||||
Accrued warranty | 681 | (2,697 | ) | |||||
Accrued expenses and other current liabilities | 509 | (373 | ) | |||||
Deferred revenue and customer deposits | 5,253 | 1,244 | ||||||
Other long-term liabilities | 1,184 | 4,166 | ||||||
Net cash used in operating activities | (27,948 | ) | (9,845 | ) | ||||
Cash flows from investing activities: | ||||||||
Purchase of property, plant and equipment | (12,360 | ) | (11,946 | ) | ||||
Payments for acquisition of intangible assets | — | (848 | ) | |||||
Proceeds from maturity of marketable securities | — | 104,500 | ||||||
Net cash provided by (used in) investing activities | (12,360 | ) | 91,706 | |||||
Cash flows from financing activities: | ||||||||
Proceeds from issuance of debt to related parties | 30,000 | — | ||||||
Repayment of debt | (9,128 | ) | (5,016 | ) | ||||
Repayment of debt to related parties | (2,105 | ) | (778 | ) | ||||
Proceeds from financing obligations | — | 10,961 | ||||||
Repayment of financing obligations | (2,503 | ) | (1,883 | ) | ||||
Distributions to noncontrolling and redeemable noncontrolling interests | (4,270 | ) | (3,189 | ) | ||||
Proceeds from issuance of common stock | 4,845 | 7,493 | ||||||
Net cash provided by financing activities | 16,839 | 7,588 | ||||||
Net increase (decrease) in cash, cash equivalents, and restricted cash | (23,469 | ) | 89,449 | |||||
Cash, cash equivalents, and restricted cash: | ||||||||
Beginning of period | 377,388 | 280,485 | ||||||
End of period | $ | 353,919 | $ | 369,934 | ||||
Supplemental disclosure of cash flow information: | ||||||||
Cash paid during the period for interest | $ | 17,790 | $ | 20,383 | ||||
Cash paid during the period for taxes | 29 | 222 | ||||||
Non-cash investing and financing activities: | ||||||||
Liabilities recorded for property, plant and equipment | $ | 466 | $ | 2,067 | ||||
Accrued distributions to Equity Investors | 1 | 282 | ||||||
Accrued interest for notes | 467 | 439 | ||||||
Accrued debt issuance costs | 2,970 | — | ||||||
Adjustment of embedded derivative related to debt extinguishment | 24,071 | — |
The accompanying notes are an integral part of these condensed consolidated financial statements.
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Bloom Energy Corporation
Notes to Condensed Consolidated Financial Statements
1. Nature of Business, Liquidity, Basis of Presentation and Summary of Significant Accounting Policies
Nature of Business
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 operating losses and negative cash flows from operations since our inception. As of December 31, 2019, the current portion of our total debt was $337.6 million, which would have required cash payments of $353.5 million in 2020, the difference in these amounts primarily being due to a debt discount on the 6% Convertible Notes Due 2020, and at that time cash and cash equivalents and other liquidity was insufficient to satisfy the above current debt obligations as well as operating cash flow requirements as of December 31, 2019. On March 31, 2020, we extended the maturity for our current debt to reduce our required debt payments in the next 12 months. After the following debt extensions were completed, the current portion of our total debt was $26.2 million as of March 31, 2020. Notable elements of our debt extension are as follows:
• | On March 31, 2020, we entered into an Amendment Support Agreement (the “Amendment Support Agreement”)with the beneficial owners (the “Noteholders”) of our outstanding 6% Convertible Notes due December 1, 2020 (the “10% Convertible Notes”) pursuant to which such Noteholders agreed to extend the maturity date of the outstanding 6% Convertible Notes to December 1, 2021, increase the interest rate from 6% to 10%, and reduce the strike price on the conversion feature from $11.25 to $8.00 per share. The Amendment Support Agreement required that we repay at least $70.0 million of the 10% Convertible Notes on or before September 1, 2020, which we satisfied through a cash payment in the amount of $70.0 million on May 1, 2020. The amended terms are reflected in the Amended and Restated Indenture between the Company and US Bank National Association dated April 20, 2020. |
• | In conjunction with entering into the Amendment Support Agreement on March 31, 2020, we also entered into a 10% Convertible Note Purchase Agreement with Foris Ventures, LLC, a new Noteholder, and New Enterprise Associates 10, Limited Partnership, an existing Noteholder, and we issued an additional $30.0 million aggregate principal amount of 10% Convertible Notes. The Amended and Restated Indenture was also amended to reflect a new principle amount of $290.0 million to accommodate the additional $30.0 million in new 10% Convertible Notes. |
• | On March 31, 2020, we entered into an Amended and Restated Subordinated Secured Convertible Note Modification Agreement (the “Constellation Note Modification Agreement”) with Constellation NewEnergy, Inc. (“Constellation”), pursuant to which Constellation agreed to extend the maturity date to December 31, 2021, increase the interest rate from 5% to 10% and reduce the strike price on the conversion feature from $38.64 to $8.00 per share. |
• | On May 1, 2020, we entered into a note purchase agreement (the “Note Purchase Agreement”) pursuant to which certain investors have agreed to purchase, and we have issued, $70.0 million of 10.25% Senior Secured Notes due 2027 in a private placement. The proceeds from this note were used to extinguish the $70.0 million of 10% Convertible Notes on May 1, 2020. |
Additionally, the impact of COVID-19 on our ability to execute our business strategy and on our financial position and results of operations is uncertain. Our future cash flow 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 product, our ability to secure financing for customer use, the timing of installations, the timing of receipt by us of distributions from our PPA Entities and overall economic conditions including the impact of COVID-19 on our ongoing and future operations. However, in the opinion of management, the combination of our existing cash and cash equivalents, the extension of the 10% Convertible Notes and 10% Constellation Note to December 2021, the proceeds from the 10% Convertible Note Purchase Agreement, the proceeds from the 10.25% Senior Secured Note and operating cash flows is expected to be sufficient to meet our operational and capital cash flow requirements and other cash flow needs for the next 12 months from the date of issuance of this Quarterly Report on Form 10-Q.
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For additional information, see Note 7, Outstanding Loans and Security Agreements and Note 17, Subsequent Events.
Basis of Presentation
We have prepared the unaudited condensed consolidated financial statements included herein pursuant to the rules and regulations of the U.S. Securities and Exchange Commission ("SEC"), and as permitted by those rules, the condensed consolidated financial statements do not include all disclosures required by generally accepted accounting principles as applied in the United States (“U.S. GAAP”). However, we believe that the disclosures herein are adequate to ensure the information presented is not misleading. The consolidated balance sheets as of March 31, 2020 and December 31, 2019 (the latter has been derived from the audited consolidated financial statements included in the our Annual Report on Form 10-K for the fiscal year ended December 31, 2019), and the condensed consolidated statements of operations, of comprehensive loss, of redeemable noncontrolling interest, stockholders' deficit and noncontrolling interest, and of cash flows for the three months ended March 31, 2020 and 2019, and related notes, 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, 2019, as filed with the SEC on March 31, 2020.
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, 2020.
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 haves 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 and PPA IIIb Entities, as discussed in Note 13, Power Purchase Agreement Programs. 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.
Use of Estimates
The preparation of 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. The most significant estimates include the determination of the stand-alone selling price, including material rights estimates, inventory valuation, specifically excess and obsolescence provisions for obsolete or unsellable inventory and, in relation to property, plant and equipment (specifically Energy Servers), assumptions relating to economic useful lives and impairment assessments.
Other accounting estimates include variable consideration relating to product performance guaranties, assumptions to compute the fair value of lease and non-lease components and related financing obligations such as incremental borrowing rates, estimated output, efficiency and residual value of the Energy Servers, warranty, product performance guaranties and extended maintenance, derivative valuations, estimates for recapture of U.S. Treasury grants and similar grants, estimates relating to contractual indemnities provisions, estimates for income taxes and deferred tax asset valuation allowances, and stock-based compensation costs. The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition, including sales, expenses, our allowance for doubtful accounts, stock-based compensation, the carrying value of our long-lived assets, inventory, financial assets, and valuation allowances for tax assets, will depend on future developments that are highly uncertain, including as a result of new information that may emerge concerning COVID-19 and the actions taken to contain it or treat it, as well as the economic impact on local, regional, national and international customers, suppliers and markets. We have made estimates of the impact of COVID-19 within our financial statements and there may be changes to those estimates in future periods as new information becomes available. 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 quarters ended March 31, 2020 and 2019, total revenue in the Asia Pacific region was 37% and 33%, respectively, of our total revenue.
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Credit Risk - At March 31, 2020, one customer, Costco Wholesale Corporation accounted for approximately 8% of accounts receivable. At December 31, 2019, two customers, Costco Wholesale Corporation and The Kraft Group LLC accounted for approximately 19% and 17% of accounts receivable, respectively. At March 31, 2020 and December 31, 2019, 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 quarter ended March 31, 2020, revenue from two customers, SK Engineering & Construction Co., Ltd. (SK E&C) and Duke Energy accounted for approximately 36% and 31%, respectively, of our total revenue. In the quarter ended March 31, 2019, revenue from three customers, SK E&C, The Southern Company, and Costco accounted for approximately 32%, 27%, and 12%, respectively, of our total revenue. Duke Energy and The Southern Company wholly own a Third-Party PPA which purchases Energy Servers from us, however such purchases and resulting revenue are made on behalf of various customers of these two Third-Party PPAs.
Summary of Significant Accounting Policies
The significant accounting policies used in preparation of these condensed consolidated financial statements for the three months ended March 31, 2020 are consistent with those discussed in Note 1 to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2019, except as described below.
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.
Accounting Guidance Implemented in 2020
Fair Value Measurement - In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement ("ASU 2018-13"). ASU 2018-13 has eliminated, amended and added disclosure requirements for fair value measurements. Entities will no longer be required to disclose the amount of, and reasons for, transfers between Level 1 and Level 2 of the fair value hierarchy, the policy of timing of transfers between levels of the fair value hierarchy and the valuation processes for Level 3 fair value measurements. Companies will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU 2018-13 is effective for annual and interim periods beginning after December 15, 2019. Early adoption is permitted. We adopted ASU 2018-13 as of January 1, 2020 and the adoption did not have a material effect on our financial statements and related disclosures. See Note 5, Fair Value.
Stock Compensation - In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation: Improvements to Nonemployee Share-Based Payment Accounting ("ASU 2018-07") which aligns the accounting for share-based payment awards issued to employees and nonemployees. Measurement of equity-classified nonemployee awards will now be valued on the grant date and will no longer be remeasured through the performance completion date. ASU 2018-07 also changes the accounting for nonemployee awards with performance conditions to recognize compensation cost when achievement of the performance condition is probable, rather than upon achievement of the performance condition, as well as eliminating the requirement to reassess the equity or liability classification for nonemployee awards upon vesting, except for certain award types. ASU 2018-07 is effective for us for interim and annual reporting periods beginning after December 15, 2019. Early adoption is permitted. We adopted ASU 2018-07 using a modified retrospective approach in January 2020 and the adoption of ASU 2018-07 did not have a material effect on our financial statements and related disclosures.
Accounting Guidance Not Yet Adopted
Leases - In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), as amended (“ASC 842”), which provides new authoritative guidance on lease accounting. Among its provisions, the standard changes the definition of a lease, 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. All leases in scope will be classified as either operating or financing. Operating and financing leases will require the recognition of an asset and liability to be measured at the present value of the lease payments. ASC 842 also makes a distinction between operating and financing leases for purposes of reporting expenses on the income statement. We are the lessee under various agreements for facilities and equipment that are currently accounted for as operating leases and expect to continue to enter into new such leases. Additionally, we expect to continue to enter into Managed Services related financing leases in the future and are the lessor of Energy Servers that are subject to power purchase arrangements with customers under our PPA and Managed Services programs that are currently accounted for as leases.
We are currently evaluating the impact of the adoption of this update on our financial statements. We expect that the most significant impacts will be assessing whether new power purchase arrangements with customers meet the new definition
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of a lease and recognizing right of use assets and lease liabilities for arrangements currently accounted for as operating leases where we are the lessee. We expect to adopt this guidance on a prospective basis on January 1, 2021.
Financial Instruments - In June 2016, the FASB issued ASU 2016-13, Financial Instruments- Credit Losses (Topic 326). The pronouncement was issued to provide more decision-useful information about the expected credit losses on financial instruments and changes the loss impairment methodology. This pronouncement will be effective for us commencing January 1, 2021. A prospective transition approach is required for debt securities for which an 'other than temporary' impairment had been recognized before the effective date. We are currently evaluating the impact of the adoption of this update on our financial statements.
Income taxes - In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes (Topic 740) ("ASU 2019-12"), wherein the accounting for income taxes is simplified by eliminating certain exceptions and implementing additional requirements which result in a more consistent application of ASC 740 Income Taxes. ASU 2019-12 is effective as for public business entities, for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. For all other entities, for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. We are evaluating the effect on our financial statements and related disclosures. We expect to adopt this guidance on a prospective basis on January 1, 2022.
Cessation of LIBOR - In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) Facilitation of the Effects of Reference Rate Reform on Financial Reporting ("ASU 2020-04") which provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued. The amendments in ASU 2020-04 are effective for all entities as of March 12, 2020 through December 31, 2022. An entity may elect to apply the amendments for contract modifications as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. We are currently evaluating the impact of the adoption of this update on our financial statements.
We do not expect any other new accounting standards to have a material impact on our financial position, results of operations or cash flows when they become effective.
2. Restatement of Previously Issued Consolidated Financial Statements
We have restated herein our condensed consolidated financial statements as of and for the quarter ended March 31, 2019. We have also restated related amounts within the accompanying footnotes to the condensed consolidated financial statements.
Restatement Background
As previously disclosed in our Annual Report on Form 10-K as filed on March 31, 2020, on February 11, 2020, our management, in consultation with the Audit Committee of our Board of Directors, determined that Bloom's previously issued consolidated financial statements as of and for the year ended December 31, 2018, as well as financial statements for the three month period ended March 31, 2019, the three and six month periods ended June 30, 2019 and 2018 and the three and nine month periods ended September 30, 2019 and 2018 should no longer be relied upon due to misstatements related to our Managed Services Agreements and similar arrangements and we would restate such financial statements to make the necessary accounting corrections. The revenue for the Managed Services Agreements and similar transactions will now be recognized over the duration of the contract instead of upfront. The restatement also includes corrections for additional identified immaterial misstatements in certain of the impacted periods.
The misstatements impacting the three-month period ended March 31, 2019 are described in greater detail below.
Description of Misstatements
Under our Managed Services program, we sell our equipment to a bank financing party under a sale-leaseback transaction, which pays us for the Energy Server and takes title to the Energy Server. We then enter into a service contract with an end customer, who pays the bank a fixed, monthly fee for its use of the Energy Server and pays us for our maintenance and operation of the Energy Server.
The majority of these Managed Services Agreements and similar transactions were originally recorded as sales, subject to an operating lease, in which revenues and associated costs were recognized at the time of installation and acceptance of the Bloom Energy Server at the customer site.
In December 2019, in the course of reviewing a Managed Services transaction that closed on November 27, 2019, an issue was identified related to the accounting for our Managed Services transactions. The issue primarily related to whether the terms of our Managed Services Agreements and similar arrangements, including the events of default provisions, satisfied the requirements for sales under the revenue accounting standards. Subsequently, it was determined that the previous
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accounting for the Managed Services Agreements and similar transactions was misstated, as the Managed Services Agreements and similar transactions should have been accounted for as financing transactions under lease accounting standards.
The impact of the correction of the misstatement is to recognize amounts received from the bank financing party as a financing obligation, and the Energy Server is recorded within property, plant and equipment, net on our consolidated balance sheets. We recognize revenue for the electricity generated by the systems, based on payments received by the bank from the customer, and the corresponding financing obligations to the bank is also amortized as these payments are received by the bank from the customer, with interest thereon being calculated on an effective interest rate basis. Depreciation expense is also recognized over the estimated useful life of the Energy Server.
In addition, it was determined that stock-based compensation costs relating to manufacturing employees that were previously expensed as incurred incorrectly, should have been capitalized as a component of Energy Server manufacturing costs to inventory, deferred cost of revenues, construction-in-progress and property, plant and equipment in accordance with SEC Staff Accounting Bulletin Topic 14. These costs will now be expensed on consumption of the related inventory and over the economic useful life of the property, plant and equipment, as applicable.
Also, as part of a review of historical revenue agreements as a result of the above errors, it was noted that we failed to identify embedded derivatives in certain revenue agreements for an escalator price protection (“EPP”) feature given to our customers. As a result, we have recorded a derivative liability, with an offset to product revenue, to account for the fair value of this feature at inception and will record the liability at its then fair value at each period end with any changes in fair value recognized in gain (loss) on revaluation of embedded derivatives.
In addition to the impact of the restatement described above, in preparation of the condensed consolidated financial statements for the three months ended March 31, 2020, errors in our Condensed Consolidated Statements of Comprehensive Loss were discovered. For the three months ended March 31, 2019, the presentation of the Statement and other errors identified in the Statement have been corrected, which resulted in an additional $3.8 million increase to Comprehensive Loss, a change of $7.9 million in Comprehensive (Income) Loss Attributable to Noncontrolling Interest and Redeemable Noncontrolling Interests and an additional decrease of $4.1 million to Comprehensive Loss Attributable to Class A and Class B Stockholders. The Condensed Consolidated Statements of Comprehensive Loss for the three and six months ended June 30, 2019 and the three and nine months ended September 30, 2019 will also be corrected when those periods are next reported. In the Consolidated Statements of Comprehensive Loss for the years ended December 31, 2019 and 2018, Comprehensive Loss as previously reported is understated by $5.8 million and overstated by $1.8 million, respectively. In addition, the reconciliation of Comprehensive Loss to Comprehensive Loss Attributable to Class A and Class B Stockholders was erroneously omitted. As it relates to the impact of the errors to the Consolidated Statements of Comprehensive Loss for the years ended December 31, 2019 and 2018, management evaluated the impact of the errors to the previously issued financial statements and concluded the impacts were not material. Accordingly, these items will be corrected when those periods are next reported.
Finally, there were certain other immaterial misstatements identified or which had been previously identified which are also being corrected in connection with the restatement of previously issued financial statements.
Description of Restatement Reconciliation Tables
In the following tables, we have presented a reconciliation of our Condensed Consolidated Balance Sheet and Statements of Operations and Cash Flows from our prior periods as previously reported to the restated amounts as of and for the quarter ended March 31, 2019. In addition to the errors to the Condensed Consolidated Statement of Comprehensive Loss discussed above, that Statement has been restated for the restatement impact to net loss. The Statement of Redeemable Noncontrolling Interest, Stockholders' Deficit and Noncontrolling Interest for the quarter ended March 31, 2019 has also been restated for the restatement impact to Net Loss. See the Condensed Consolidated Statements of Operations reconciliation table below for additional information on the restatement impact to Net Loss.
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Bloom Energy Corporation
Condensed Consolidated Balance Sheet
(in thousands, except share and per share data)
March 31, 2019 | ||||||||||||||||||
As Previously Reported | Restatement Impacts | Restatement Reference | ASC 606 Adoption Impacts | As Restated And Recast | ||||||||||||||
Assets | ||||||||||||||||||
Current assets: | ||||||||||||||||||
Cash and cash equivalents | $ | 320,414 | $ | — | $ | — | $ | 320,414 | ||||||||||
Restricted cash | 18,419 | — | — | 18,419 | ||||||||||||||
Accounts receivable | 84,070 | 3,995 | 1 | (2,418 | ) | 85,647 | ||||||||||||
Inventories | 116,544 | 3,327 | 2 | — | 119,871 | |||||||||||||
Deferred cost of revenue | 66,316 | (13,405 | ) | 3 | — | 52,911 | ||||||||||||
Customer financing receivable | 5,717 | — | — | 5,717 | ||||||||||||||
Prepaid expenses and other current assets | 28,362 | 1,582 | 4 | 129 | 30,073 | |||||||||||||
Total current assets | 639,842 | (4,501 | ) | (2,289 | ) | 633,052 | ||||||||||||
Property, plant and equipment, net | 475,385 | 236,246 | 5 | — | 711,631 | |||||||||||||
Customer financing receivable, non-current | 65,620 | — | — | 65,620 | ||||||||||||||
Restricted cash, non-current | 31,101 | — | — | 31,101 | ||||||||||||||
Deferred cost of revenue, non-current | 72,516 | (70,583 | ) | 3 | — | 1,933 | ||||||||||||
Other long-term assets | 34,386 | 8,486 | 6 | 2,575 | 45,447 | |||||||||||||
Total assets | $ | 1,318,850 | $ | 169,648 | $ | 286 | $ | 1,488,784 | ||||||||||
Liabilities, Redeemable Noncontrolling Interest, Stockholders’ Deficit and Noncontrolling Interests | ||||||||||||||||||
Current liabilities: | ||||||||||||||||||
Accounts payable | $ | 64,425 | $ | — | — | 64,425 | ||||||||||||
Accrued warranty | 16,736 | (1,219 | ) | 7 | (1,280 | ) | 14,237 | |||||||||||
Accrued expenses and other current liabilities | 67,966 | (3,893 | ) | 8 | — | 64,073 | ||||||||||||
Financing obligations | — | 8,819 | 9 | — | 8,819 | |||||||||||||
Deferred revenue and customer deposits | 89,557 | (16,153 | ) | 10 | 1,665 | 75,069 | ||||||||||||
Current portion of recourse debt | 15,683 | — | — | 15,683 | ||||||||||||||
Current portion of non-recourse debt | 19,486 | — | — | 19,486 | ||||||||||||||
Current portion of non-recourse debt from related parties | 2,341 | — | — | 2,341 | ||||||||||||||
Total current liabilities | 276,194 | (12,446 | ) | 385 | 264,133 | |||||||||||||
Derivative liabilities | 11,166 | 4,556 | 11 | — | 15,722 | |||||||||||||
Deferred revenue and customer deposits, net of current portion | 201,863 | (115,432 | ) | 10 | 17,320 | 103,751 | ||||||||||||
Financing obligations, non-current | — | 394,037 | 9 | — | 394,037 | |||||||||||||
Long-term portion of recourse debt | 357,876 | — | — | 357,876 | ||||||||||||||
Long-term portion of non-recourse debt | 284,541 | — | — | 284,541 | ||||||||||||||
Long-term portion of recourse debt from related parties | 27,734 | — | — | 27,734 | ||||||||||||||
Long-term portion of non-recourse debt from related parties | 33,417 | — | — | 33,417 | ||||||||||||||
Other long-term liabilities | 58,032 | (29,062 | ) | 8 | — | 28,970 | ||||||||||||
Total liabilities | 1,250,823 | 241,653 | 17,705 | 1,510,181 | ||||||||||||||
Redeemable noncontrolling interest | 58,802 | — | — | 58,802 | ||||||||||||||
Total stockholders’ deficit | (105,439 | ) | (72,005 | ) | 12 | (17,419 | ) | (194,863 | ) | |||||||||
Noncontrolling interest | 114,664 | — | — | 114,664 | ||||||||||||||
Total liabilities, redeemable noncontrolling interest, stockholders' deficit and noncontrolling interest | $ | 1,318,850 | $ | 169,648 | $ | 286 | $ | 1,488,784 |
1 Accounts receivable — The correction of these misstatements resulted from the change of accounting for Managed Services Agreements, for which the amount recorded to accounts receivable represents amounts invoiced for capacity billings to end customers which have not yet been collected by the financing entity as of the period end.
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2 Inventories — The correction of these misstatements resulted from the change of accounting for inventory, including net capitalization of stock-based compensation cost of $3.8 million and reclassification of inventories of $0.5 million held for shipments to customers under the Managed Services Program and similar arrangements to construction in progress within property, plant and equipment, net.
3 Deferred cost of revenue, current and non-current — The correction of these misstatements resulted from reclassifying deferred cost of revenue to property, plant and equipment, net for the leased Energy Servers under the Managed Services Agreements and similar sale-leaseback arrangements of $13.9 million (short-term) and $70.6 million (long-term), net capitalization of stock-based compensation costs of $2.1 million into current deferred cost of revenue, and the correction of certain other immaterial misstatements identified to relieve installation deferred cost of revenue of $1.7 million.
4 Prepaid expenses and other current assets — The correction of these misstatements resulted from the change of accounting for Managed Services Agreements and similar arrangements whereby prepaid property tax and insurance payments are now classified within prepaid expenses, rather than offset against deferred revenue.
5 Property, plant and equipment, net — The correction of these misstatements resulted from the change of accounting for Managed Services transactions and similar arrangements, whereby product and install costs of goods sold of $232.6 million are now recorded as property, plant and equipment, net in the cases where the risks of ownership have not completely transferred to the financing party. This includes a net capitalization of stock-based compensation cost for these assets of $3.6 million.
6 Other long-term assets — The correction of these misstatements resulted from the change of accounting for Managed Services Agreements and similar arrangements, whereby the timing difference of capacity billings to end customers and the payments received from the financing entity is recorded within long term receivables and prepaid property tax and insurance payments are now classified within other long-term assets, rather than offset against long-term deferred revenue.
7 Accrued warranty — The correction of these misstatements resulted from the change of accounting for accrued warranty which is now recorded on an as-incurred basis for our Managed Services Agreements and similar arrangements, reducing accrued warranty by $0.4 million and the change of accounting for the grid pricing escalation guarantees we provided in some of our sales arrangements, which are now recorded as derivative liabilities, reducing accrued warranty by $0.8 million.
8 Accrued expense and other current liabilities and other long-term liabilities — The correction of these misstatements resulted from the change of accounting for Managed Services Agreements, for which historical accrued liabilities recorded at inception of the agreements, as well as subsequent reductions of those liabilities, were reversed.
9 Financing obligations, current and non-current — The correction of these misstatements resulted from the change of accounting for Managed Services Agreements and similar arrangements, whereby instead of recognizing the upfront proceeds received from the bank as revenue, the proceeds received are classified as financing obligations.
10Deferred revenue and customer deposits, current and non-current — The correction of these misstatements resulted from the change of accounting for the recognition of product and installation revenue from upfront or ratable recognition to recognition of the capacity payments received from the end customer as power is generated by the Energy Servers as electricity revenue.
11 Derivative liabilities — The correction of these misstatements resulted from the change of accounting for embedded derivatives related to grid pricing escalation guarantees we provided in some of our sales arrangements. These are now recorded as derivative liabilities and were previously treated as an accrued liability.
12 Total stockholders' deficit — Relates to the correction of an unadjusted misstatement in the valuation of our 6% Notes derivative, resulting in a credit to additional paid-in capital and additional expense of $0.8 million recorded within other expense, net, together with the cumulative increase to accumulated deficit from the restatement of $72.8 million.
.
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Bloom Energy Corporation
Condensed Consolidated Statement of Operations
(in thousands, except per share data)
Three Months Ended March 31, 2019 | ||||||||||||||||||
As Previously Reported | Restatement Impacts | Restatement Reference | ASC 606 Adoption Impacts | As Restated And Recast | ||||||||||||||
Revenue: | ||||||||||||||||||
Product | $ | 141,734 | $ | (48,171 | ) | a | $ | (2,637 | ) | $ | 90,926 | |||||||
Installation | 22,258 | (11,195 | ) | a | 1,156 | 12,219 | ||||||||||||
Service | 23,290 | (574 | ) | a | 751 | 23,467 | ||||||||||||
Electricity | 13,425 | 6,964 | a | — | 20,389 | |||||||||||||
Total revenue | 200,707 | (52,976 | ) | (730 | ) | 147,001 | ||||||||||||
Cost of revenue: | ||||||||||||||||||
Product | 124,000 | (34,980 | ) | c, d | (248 | ) | 88,772 | |||||||||||
Installation | 24,166 | (8,406 | ) | c | — | 15,760 | ||||||||||||
Service | 27,557 | 1,331 | b, d | (967 | ) | 27,921 | ||||||||||||
Electricity | 9,229 | 3,755 | c | — | 12,984 | |||||||||||||
Total cost of revenue | 184,952 | (38,300 | ) | (1,215 | ) | 145,437 | ||||||||||||
Gross profit | 15,755 | (14,676 | ) | 485 | 1,564 | |||||||||||||
Operating expenses: | ||||||||||||||||||
Research and development | 28,859 | — | — | 28,859 | ||||||||||||||
Sales and marketing | 20,463 | 2 | e | (92 | ) | 20,373 | ||||||||||||
General and administrative | 39,074 | — | — | 39,074 | ||||||||||||||
Total operating expenses | 88,396 | 2 | (92 | ) | 88,306 | |||||||||||||
Loss from operations | (72,641 | ) | (14,678 | ) | 577 | (86,742 | ) | |||||||||||
Interest income | 1,885 | — | — | 1,885 | ||||||||||||||
Interest expense | (15,962 | ) | (5,838 | ) | f | — | (21,800 | ) | ||||||||||
Interest expense to related parties | (1,612 | ) | — | — | (1,612 | ) | ||||||||||||
Other expense, net | 265 | — | — | 265 | ||||||||||||||
Loss on revaluation of warrant liabilities and embedded derivatives | — | (540 | ) | g | — | (540 | ) | |||||||||||
Loss before income taxes | (88,065 | ) | (21,056 | ) | 577 | (108,544 | ) | |||||||||||
Income tax provision | 208 | — | — | 208 | ||||||||||||||
Net loss | (88,273 | ) | (21,056 | ) | 577 | (108,752 | ) | |||||||||||
Less: net loss attributable to noncontrolling interests and redeemable noncontrolling interests | (3,832 | ) | — | — | (3,832 | ) | ||||||||||||
Net loss attributable to Class A and Class B common stockholders | $ | (84,441 | ) | $ | (21,056 | ) | $ | 577 | $ | (104,920 | ) |
a Revenue impacted by Managed Services restatements — The correction of these misstatements resulted from the change from upfront recognition of product and installation revenue to recognition of the capacity payments received from the end customer as power is generated by the Energy Servers as electricity revenue over the term of our Managed Services Agreements and similar sale-leaseback arrangements, which also impacted our service revenue allocation.
b Service cost of revenue impacted by grid pricing escalation guarantees — The correction of these misstatements resulted in a change in the accounting for our grid escalation guarantees that resulted in a decrease in service cost of revenue of $0.1 million.
c Cost of revenue impacted by Managed Services restatements — The correction of these misstatements resulted from the change from upfront recognition of product and installation cost of revenue to recognition of the depreciation expense on the capitalized Energy Servers over their useful life of 21 years for our Managed Services Agreements and similar sale-leaseback transactions, resulting in a decrease in product cost of revenue of $37.5 million and installation cost of revenue of $9.2 million, offset by an increase in electricity cost of revenue of $3.7 million, together with the correction of certain other immaterial misstatements identified to record installation cost of revenue of $0.8 million.
d Cost of revenue impacted by stock-based compensation allocation — The correction of these misstatements resulted from the capitalization of stock-based compensation costs, with a net increase to product cost of revenue of $2.5 million, and an increase in service cost of revenue of $1.4 million due to the expensing of stock-based compensation related to field replacement units.
e Sales and marketing and general and administrative expenses — The correction of these misstatements primarily resulted from the change of accounting for sales commission expense on an as earned basis, to accounting for the expense over the term of our Managed Services Agreements and similar sale-leaseback arrangements.
f Interest expense — The correction of these misstatements resulted from the change of accounting for sales that should have been accounted for as financing transactions, in which the upfront consideration received from the financing party is accounted for as a financing obligation and interest expense is recognized over the term of the Managed Services Agreement using the effective interest method.
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g Gain (loss) on revaluation of warrant liabilities and embedded derivatives — The correction of these misstatements resulted from the change of accounting for the grid pricing escalation guarantees we provided in some of our sales arrangements which is now recorded as a derivative liability that needs to be fair valued each period end. The fair value increased in the period, resulting in a loss of $0.5 million.
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Bloom Energy Corporation
Condensed Consolidated Statements of Cash Flows
(in thousands)
Three Months Ended March 31, 2019 | ||||||||||||||||||
As Previously Reported | Restatement Impacts | Restatement Reference | ASC 606 Adoption Impacts | As Restated And Recast | ||||||||||||||
Cash flows from operating activities: | ||||||||||||||||||
Net loss | $ | (88,273 | ) | $ | (21,056 | ) | $ | 577 | $ | (108,752 | ) | |||||||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||||||||
Depreciation and amortization | 11,271 | 2,954 | A | — | 14,225 | |||||||||||||
Write-off of property, plant and equipment, net | 1 | — | — | 1 | ||||||||||||||
Revaluation of derivative contracts | (453 | ) | 540 | B | — | 87 | ||||||||||||
Stock-based compensation | 63,882 | 3,940 | C | — | 67,822 | |||||||||||||
Loss on long-term REC purchase contract | 59 | — | — | 59 | ||||||||||||||
Amortization of debt issuance cost | 5,152 | — | — | 5,152 | ||||||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||||
Accounts receivable | 816 | (98 | ) | D | 3,413 | 4,131 | ||||||||||||
Inventories | 15,932 | (4,845 | ) | E | — | 11,087 | ||||||||||||
Deferred cost of revenue | 26,014 | (37,098 | ) | F | — | (11,084 | ) | |||||||||||
Customer financing receivable and other | 1,339 | — | — | 1,339 | ||||||||||||||
Prepaid expenses and other current assets | 5,194 | 1,423 | G | 11 | 6,628 | |||||||||||||
Other long-term assets | 83 | (396 | ) | H | (103 | ) | (416 | ) | ||||||||||
Accounts payable | (2,464 | ) | — | — | (2,464 | ) | ||||||||||||
Accrued warranty | (2,500 | ) | 50 | I | (247 | ) | (2,697 | ) | ||||||||||
Accrued expense and other current liabilities | 823 | (1,196 | ) | J | — | (373 | ) | |||||||||||
Deferred revenue and customer deposits | (44,533 | ) | 49,428 | K | (3,651 | ) | 1,244 | |||||||||||
Other long-term liabilities | 3,487 | 679 | L | — | 4,166 | |||||||||||||
Net cash used in operating activities | (4,170 | ) | (5,675 | ) | — | (9,845 | ) | |||||||||||
Cash flows from investing activities: | ||||||||||||||||||
Purchase of property, plant and equipment | (8,543 | ) | (3,403 | ) | M | — | (11,946 | ) | ||||||||||
Payments for acquisition of intangible assets | (848 | ) | — | — | (848 | ) | ||||||||||||
Proceeds from maturity of marketable securities | 104,500 | — | — | 104,500 | ||||||||||||||
Net cash used in investing activities | 95,109 | (3,403 | ) | — | 91,706 | |||||||||||||
Cash flows from financing activities: | ||||||||||||||||||
Repayment of debt | (5,016 | ) | — | — | (5,016 | ) | ||||||||||||
Repayment of debt to related parties | (778 | ) | — | — | (778 | ) | ||||||||||||
Proceeds from financing obligations | — | 10,961 | N | — | 10,961 | |||||||||||||
Repayment of financing obligations | — | (1,883 | ) | N | — | (1,883 | ) | |||||||||||
Distributions to noncontrolling and redeemable noncontrolling interests | (3,189 | ) | — | — | (3,189 | ) | ||||||||||||
Proceeds from issuance of common stock | 7,493 | — | — | 7,493 | ||||||||||||||
Net cash (used in) provided by financing activities | (1,490 | ) | 9,078 | — | 7,588 | |||||||||||||
Net increase in cash, cash equivalents, and restricted cash | 89,449 | — | — | 89,449 | ||||||||||||||
Cash, cash equivalents, and restricted cash: | ||||||||||||||||||
Beginning of period | 280,485 | — | — | 280,485 | ||||||||||||||
End of period | $ | 369,934 | $ | — | $ | — | $ | 369,934 | ||||||||||
Supplemental disclosure of cash flow information: | ||||||||||||||||||
Cash paid during the period for interest | $ | 14,545 | $ | 5,838 | N | $ | — | $ | 20,383 | |||||||||
Cash paid during the period for taxes | 222 | — | — | 222 |
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A Depreciation and amortization — The correction of these misstatements resulted from the change of accounting for Energy Servers under the Managed Services Program and similar arrangements that were previously expensed as product and install cost of revenue, but are now recorded as property, plant and equipment, net and depreciated over their useful lives of 21 years.
B Revaluation of derivative contracts — The correction of these misstatements resulted from the change of accounting for the grid pricing escalation guarantees we provided in some of our sales arrangements. These commitments were previously treated as an accrued liability. We now consider the commitments a derivative liability, with the initial value of recorded as a reduction in product revenue and then any changes in the value adjusted through other expense, net each period thereafter.
C Stock-based compensation — The correction of these misstatements resulted from the change of accounting for stock-based compensation, including net capitalization of stock-based compensation cost into inventory of $4.4 million. The correction of this misstatement also resulted in the capitalization of $0.5 million of stock-based compensation costs related to assets under the Managed Services Programs now recorded as construction in progress within property, plant and equipment, net.
D Accounts receivable — The correction of these misstatements resulted from the change of accounting for Managed Services Agreements, for which the amount recorded to accounts receivable represents amounts invoiced for capacity billings to end customers which have not yet been collected by the financing entity as of the period end.
E Inventories — The correction of these misstatements resulted from the change of accounting for inventories held for shipments planned to customers under the Managed Services Program and similar arrangements now being accounted for as construction in progress within property, plant and equipment, net.
F Deferred cost of revenue, current and non-current — The correction of these misstatements resulted from the change of accounting for Managed Services Agreements and similar arrangements, whereby leased Energy Servers of $37.2 million previously classified as deferred cost of revenue is now recorded as construction in progress within property, plant and equipment, net, and the net capitalization of stock-based compensation expenses of $0.1 million.
G Prepaid expenses and other current assets — The correction of these misstatements resulted from the change of accounting for Managed Services Agreements and similar arrangements, whereby prepaid property tax and insurance payments are now classified within prepaid expenses.
H Other long-term assets — The correction of these misstatements resulted from the change of accounting for Managed Services Agreements and similar arrangements, whereby the timing difference of capacity billings to end customers and the payments received from the financing entity is recorded within long term receivables and prepaid property tax and insurance payments are now classified within other long-term assets, rather than offset against long-term deferred revenue.
I Accrued warranty — The correction of these misstatements resulted from the change of accounting for accrued warranty which is now recorded on an as-incurred basis on our Managed Services Agreements and similar arrangements.
J Accrued expense and other current liabilities and other long-term liabilities — The correction of these misstatements resulted from the change of accounting for Managed Services Agreements and similar arrangements whereby instead of recognizing the bank financing as revenue, the bank financing loan proceeds received and due are classified as a financing liability.
K Deferred revenue and customer deposits, current and non-current — The correction of these misstatements resulted from the change of accounting for the recognition of product and installation revenue from upfront or ratable recognition to the recognition of the capacity payments received from the end customer as power is generated by the Energy Servers as electricity revenue.
L Other long-term liabilities — The correction of these misstatements resulted from the change of accounting for the grid pricing escalation guarantees we provided in some of our sales arrangements. These commitments were previously treated as an accrued liability. We now consider the commitments a derivative liability, with the initial value recorded as a reduction in product revenue and then any changes in the value adjusted through gain (loss) on revaluation of embedded derivatives, net each period thereafter.
M Purchase of property, plant and equipment — The correction of these misstatements resulted from the change of accounting for Managed Services Agreements and similar arrangements, whereby costs previously recognized as product and installation cost of revenue are now recorded as property, plant and equipment, net in the cases where the risks of ownership have not completely transferred to the financing party.
N Proceeds and repayments from financing obligations — The correction of these misstatements resulted from the change of accounting for Managed Services Agreements and similar arrangements, whereby instead of recognizing the upfront proceeds received from the bank as revenue, the proceeds received and due are classified as proceeds from financing obligations and the capacity payments received from the end customer are classified as repayment of financing obligations and interest paid.
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3. Revenue Recognition
Deferred Revenue and Customer Deposits
Deferred revenue and customer deposits as of March 31, 2020 and December 31, 2019 consisted of the following (in thousands):
March 31, 2020 | December 31, 2019 | |||||||
Deferred revenue | $ | 170,034 | $ | 168,223 | ||||
Deferred incentive revenue | 7,232 | 7,397 | ||||||
Customer deposits | 42,707 | 39,101 | ||||||
Deferred revenue and customer deposits | $ | 219,973 | $ | 214,721 |
Deferred revenue activity during the quarters ended March 31, 2020 and 2019 consisted of the following (in thousands):
March 31, 2020 | March 31, 2019 | |||||||
As Restated | ||||||||
Beginning balance | $ | 168,223 | $ | 140,130 | ||||
Additions | 138,113 | 118,359 | ||||||
Revenue recognized | (136,302 | ) | (117,755 | ) | ||||
Ending balance | $ | 170,034 | $ | 140,734 |
Deferred revenue is equivalent to the total transaction price allocated to the performance obligations that are unsatisfied, or partially unsatisfied, as of March 31, 2020. The most significant component of deferred revenue at the end of the period consists of performance obligations relating to the provision of maintenance services under current contracts and future renewal periods which provide customers with material rights over a period that we estimate will be largely commensurate with the period of their expected use of the associated Energy Server. As a result, we expect to recognize these amounts as revenue over a period of up to 21 years, predominantly on a cost-to-cost basis that reflects the cost of providing these services. Deferred revenue also includes performance obligations relating to product acceptance and installation. A significant amount of this deferred revenue is reflected as additions and revenue recognized in the same period and we expect to recognize all amounts within a year.
Revenue by source
We disaggregate revenue from contracts with customers into four revenue categories: (i) product, (ii) installation, (iii) services and (iv) electricity (in thousands):
Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
As Restated | ||||||||
Revenue from contracts with customers: | ||||||||
Product revenue | $ | 99,559 | $ | 90,926 | ||||
Installation revenue | 16,618 | 12,219 | ||||||
Services revenue | 25,147 | 23,467 | ||||||
Electricity revenue | — | 3,418 | ||||||
Total revenue from contract with customers | 141,324 | 130,030 | ||||||
Revenue from contracts accounted for as leases: | ||||||||
Electricity revenue | 15,375 | 16,971 | ||||||
Total revenue | $ | 156,699 | $ | 147,001 |
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4. 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):
March 31, | December 31, | |||||||
2020 | 2019 | |||||||
As Held: | ||||||||
Cash | $ | 82,484 | $ | 100,773 | ||||
Money market funds | 271,435 | 276,615 | ||||||
$ | 353,919 | $ | 377,388 | |||||
As Reported: | ||||||||
Cash and cash equivalents | $ | 180,307 | $ | 202,823 | ||||
Restricted cash | 173,612 | 174,565 | ||||||
$ | 353,919 | $ | 377,388 |
Restricted cash consisted of the following (in thousands):
March 31, | December 31, | |||||||
2020 | 2019 | |||||||
Current: | ||||||||
Restricted cash | $ | 27,256 | $ | 28,494 | ||||
Restricted cash related to PPA Entities 1 | 2,474 | 2,310 | ||||||
Restricted cash, current | $ | 29,730 | $ | 30,804 | ||||
Non-current: | ||||||||
Restricted cash | $ | 10 | $ | 10 | ||||
Restricted cash related to PPA Entities 1 | 143,872 | 143,751 | ||||||
Restricted cash, non-current | 143,882 | 143,761 | ||||||
$ | 173,612 | $ | 174,565 |
1 We have variable interest entities which represent a portion of the consolidated balances recorded within the "restricted cash," and other financial statement line items in the Consolidated Balance Sheets (see Note 13, Power Purchase Agreement Programs). This amount includes $108.7 million and $20.0 million of non-current restricted cash, held in PPA II and PPA IIIb entities, respectively, and as of December 31, 2019, these entities are no longer considered variable interest entities.
Derivative Instruments
We have derivative financial instruments related to natural gas fixed price forward contracts, embedded derivatives in sales contracts, and interest rate swaps. See Note 8, Derivative Financial Instruments for a full description of our derivative financial instruments.
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5. Fair Value
Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis
The tables below set 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 | ||||||||||||||||
March 31, 2020 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Assets | ||||||||||||||||
Cash equivalents: | ||||||||||||||||
Money market funds | $ | 271,435 | $ | — | $ | — | $ | 271,435 | ||||||||
$ | 271,435 | $ | — | $ | — | $ | 271,435 | |||||||||
Liabilities | ||||||||||||||||
Accrued expenses and other current liabilities | $ | 697 | $ | — | $ | — | $ | 697 | ||||||||
Derivatives: | ||||||||||||||||
Natural gas fixed price forward contracts | — | — | 6,503 | 6,503 | ||||||||||||
Embedded EPP derivatives | — | — | 5,892 | 5,892 | ||||||||||||
Interest rate swap agreements | — | 17,415 | — | 17,415 | ||||||||||||
$ | 697 | $ | 17,415 | $ | 12,395 | $ | 30,507 |
Fair Value Measured at Reporting Date Using | ||||||||||||||||
December 31, 2019 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Assets | ||||||||||||||||
Cash equivalents: | ||||||||||||||||
Money market funds | $ | 276,615 | $ | — | $ | — | $ | 276,615 | ||||||||
Interest rate swap agreements | — | 3 | — | 3 | ||||||||||||
$ | 276,615 | $ | 3 | $ | — | $ | 276,618 | |||||||||
Liabilities | ||||||||||||||||
Accrued expenses and other current liabilities | $ | 996 | $ | — | $ | — | $ | 996 | ||||||||
Derivatives: | ||||||||||||||||
Natural gas fixed price forward contracts | — | — | 6,968 | 6,968 | ||||||||||||
Embedded EPP derivatives | — | — | 6,176 | 6,176 | ||||||||||||
Interest rate swap agreements | — | 9,241 | — | 9,241 | ||||||||||||
$ | 996 | $ | 9,241 | $ | 13,144 | $ | 23,381 |
Money Market Funds - Money market funds are valued using quoted market prices for identical securities and are therefore classified as Level 1 financial assets.
Interest Rate Swap Agreements - Interest rate swap agreements are valued using quoted prices for similar contracts and are therefore classified as Level 2 financial assets. Interest rate swaps are designed as hedging instruments and are recognized at fair value on our consolidated balance sheets. As of March 31, 2020, $1.8 million of the gain on the interest rate swaps accumulated in other comprehensive income (loss) is expected to be reclassified into earnings in the next twelve months.
Natural Gas Fixed Price Forward Contracts - Natural gas fixed price forward contracts are valued using a combination of factors including the counterparty's credit rating and estimates of future natural gas prices and therefore, as no observable inputs to support market activity are available, are classified as Level 3 financial liabilities.
The following table provides the number and fair value of our natural gas fixed price forward contracts (in thousands):
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March 31, 2020 | December 31, 2019 | |||||||||||||
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) | 1,699 | $ | 6,503 | 1,991 | $ | 6,968 | ||||||||
¹ Recorded in current liabilities and derivative liabilities in the consolidated balance sheets. | ||||||||||||||
² One MMBTU is a traditional unit of energy used to describe the heat value (energy content) of fuels. |
For the three months ended March 31, 2020 and 2019, we marked-to-market the fair value of our natural gas fixed price forward contracts and recorded an unrealized loss of $0.6 million and an unrealized gain of $0.4 million, respectively, and recorded a realized gain of $1.0 million and a realized gain of $0.5 million, respectively, on the settlement of these contracts in cost of revenue on our condensed consolidated statement of operations.
Embedded EPP Derivative Liability in Sales Contracts - We estimated the fair value of the embedded EPP derivatives in certain sales contracts using a Monte Carlo simulation model which considers various potential electricity price curves over the sales contracts' terms. We use historical grid prices and available forecasts of future electricity prices to estimate future electricity prices. We have classified these derivatives as a Level 3 financial liability. For the three months ended March 31, 2020 and 2019, we marked-to-market the fair value of our embedded EPP derivatives and recorded an unrealized gain of $0.3 million and an unrealized loss of $0.5 million, respectively, in gain (loss) on revaluation of embedded derivatives on our condensed consolidated statement of operations.
There were no transfers between fair value measurement classifications during the periods ended March 31, 2020 and 2019. The changes in the Level 3 financial liabilities were as follows (in thousands):
Natural Gas Fixed Price Forward Contracts | Embedded EPP Derivative Liability | Total | ||||||||||
Liabilities at December 31, 2019 | $ | 6,968 | $ | 6,176 | $ | 13,144 | ||||||
Settlement of natural gas fixed price forward contracts | (1,025 | ) | — | (1,025 | ) | |||||||
Changes in fair value | 560 | (284 | ) | 276 | ||||||||
Liabilities at March 31, 2020 | $ | 6,503 | $ | 5,892 | $ | 12,395 |
The following table presents the unobservable inputs related to our Level 3 liabilities:
For the Three Months Ended March 31, 2020 | ||||||||||||||||
Commodity Contracts | Derivative Liabilities | Valuation Technique | Unobservable Input | Units | Range | Weighted Average | ||||||||||
(in thousands) | ($ per Units) | |||||||||||||||
Natural Gas | $ | 6,503 | Discounted Cash Flow | Forward basis price | MMBtu | $1.69 - $4.61 | $ | 2.88 |
For the Three Months Ended December 31, 2019 | ||||||||||||||||
Commodity Contracts | Derivative Liabilities | Valuation Technique | Unobservable Input | Units | Range | Weighted Average | ||||||||||
(in thousands) | ($ per Units) | |||||||||||||||
Natural Gas | $ | 6,968 | Discounted Cash Flow | Forward basis price | MMBtu | $2.39 - $5.65 | $ | 3.23 |
The unobservable inputs used in the fair value measurement of the natural gas commodity types consist of inputs that are less observable due in part to lack of available broker quotes, supported by little, if any, market activity at the measurement date or are based on internally developed models. Certain basis prices (i.e., the difference in pricing between two locations) included in the valuation of natural gas contracts were deemed unobservable.
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To estimate the liabilities related to the EPP contracts an option pricing method was implemented through a Monte Carlo simulation. The unobservable inputs were simulated based on the available values for Avoided Cost and Cost of Electricity as calculated for March 31, 2020 and December 31, 2019, using an expected growth rate of 7% over the contracts life and volatility of 20%. The estimated growth rate and volatility were estimated based on the historical tariff changes for the period 2008 to 2020. Avoided Cost is the Transmission and Distribution cost expressed in $/kWh avoided in the given year of the contract, calculated using the billing rates of the effective utility tariff applied during the year to the host account for which usage is offset by the generator. If the billing rates within the utility tariff change during the measurement period, the average of the amount of charge for each rate shall be weighted by the number of effective months for each amount.
The inputs listed above would have had a direct impact on the fair values of the above derivatives if they were adjusted. Generally, an increase in natural gas prices and a decrease in electric grid prices would each result in an increase in the estimated fair value of our derivative liabilities.
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):
March 31, 2020 | December 31, 2019 | |||||||||||||||
Net Carrying Value | Fair Value | Net Carrying Value | Fair Value | |||||||||||||
Customer receivables | ||||||||||||||||
Customer financing receivables | $ | 54,616 | $ | 43,567 | $ | 55,855 | $ | 44,002 | ||||||||
Debt instruments | ||||||||||||||||
Recourse: | ||||||||||||||||
LIBOR + 4% term loan due November 2020 | 1,117 | 1,116 | 1,536 | 1,590 | ||||||||||||
10% convertible promissory Constellation note due December 2021 | 40,709 | 40,709 | 36,482 | 32,070 | ||||||||||||
10% convertible promissory notes due December 2021 | 338,944 | 340,694 | 273,410 | 302,047 | ||||||||||||
10% notes due July 2024 | 83,230 | 72,582 | 89,962 | 97,512 | ||||||||||||
Non-recourse: | ||||||||||||||||
7.5% term loan due September 2028 | 33,036 | 32,053 | 34,969 | 41,108 | ||||||||||||
6.07% senior secured notes due March 2030 | 79,319 | 78,831 | 80,016 | 87,618 | ||||||||||||
LIBOR + 2.5% term loan due December 2021 | 119,646 | 104,377 | 120,436 | 120,510 |
Long-Lived Assets - Our long-lived assets include property, plant and equipment and Energy Servers capitalized in connection with our Managed Services Program, Purchase Power Agreement Programs and other similar arrangements. 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 quarter ended March 31, 2020, we upgraded 0.4 megawatts of Energy Servers in PPA IIIb by decommissioning these systems and selling and installing new Energy Servers. As a result of these upgrades, the useful lives of all other remaining Energy Servers included within our long-lived assets were reassessed and we concluded that no change in the useful lives or impairment of these remaining Energy Servers was identified in the period ended March 31, 2020. See Note 13, Purchase Power Agreement Programs for further information.
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6. Balance Sheet Components
Inventories
The components of inventory consisted of the following (in thousands):
March 31, 2020 | December 31, 2019 | |||||||
Raw materials | $ | 59,099 | $ | 67,829 | ||||
Work-in-progress | 18,564 | 21,207 | ||||||
Finished goods | 29,541 | 20,570 | ||||||
$ | 107,204 | $ | 109,606 |
The inventory reserves were $14.9 million and $14.6 million as of March 31, 2020 and December 31, 2019, respectively.
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following (in thousands):
March 31, 2020 | December 31, 2019 | |||||||
Government incentives receivable | $ | 839 | $ | 893 | ||||
Prepaid production insurance | 3,961 | 3,763 | ||||||
Receivables from employees | 6,653 | 6,130 | ||||||
Other prepaid expenses and other current assets | 13,541 | 17,282 | ||||||
$ | 24,994 | $ | 28,068 |
Property, Plant and Equipment, Net
Property, plant and equipment, net consisted of the following (in thousands):
March 31, 2020 | December 31, 2019 | |||||||
Energy Servers | $ | 648,273 | $ | 650,600 | ||||
Computers, software and hardware | 20,453 | 20,275 | ||||||
Machinery and equipment | 102,837 | 101,650 | ||||||
Furniture and fixtures | 8,309 | 8,339 | ||||||
Leasehold improvements | 35,694 | 35,694 | ||||||
Building | 40,512 | 40,512 | ||||||
Construction in progress | 22,854 | 12,611 | ||||||
878,932 | 869,681 | |||||||
Less: Accumulated depreciation | (272,082 | ) | (262,622 | ) | ||||
$ | 606,850 | $ | 607,059 |
Construction in progress increased $10.2 million from 2019, primarily due to an increase of $8.4 million of Energy Servers under our Managed Services sale-leaseback program pending acceptance, and increased $1.8 million primarily due to Delaware plant expansion.
Depreciation expense related to property, plant and equipment was $13.0 million and $13.9 million for the three months ended March 31, 2020 and 2019, respectively.
Property, plant and equipment under operating leases by the PPA Entities was $368.0 million and $371.4 million as of March 31, 2020 and December 31, 2019, respectively. The accumulated depreciation for these assets was $98.3 million and
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$95.5 million as of March 31, 2020 and December 31, 2019, respectively. Depreciation expense related to our property, plant and equipment under operating leases by the PPA Entities was $6.2 million and $6.4 million for the three months ended March 31, 2020 and 2019, respectively.
Customer Financing Receivable
The components of investment in sales-type financing leases consisted of the following (in thousands):
March 31, 2020 | December 31, 2019 | |||||||
Total minimum lease payments to be received | $ | 74,955 | $ | 76,886 | ||||
Less: Amounts representing estimated executing costs | (19,344 | ) | (19,931 | ) | ||||
Net present value of minimum lease payments to be received | 55,611 | 56,955 | ||||||
Estimated residual value of leased assets | 890 | 890 | ||||||
Less: Unearned income | (1,885 | ) | (1,990 | ) | ||||
Net investment in sales-type financing leases | 54,616 | 55,855 | ||||||
Less: Current portion | (5,170 | ) | (5,108 | ) | ||||
Non-current portion of investment in sales-type financing leases | $ | 49,446 | $ | 50,747 |
The future scheduled customer payments from sales-type financing leases were as follows as of March 31, 2020 (in thousands):
Remainder of 2020 | 2021 | 2022 | 2023 | 2024 | Thereafter | |||||||||||||||||||
Future minimum lease payments, less interest | $ | 3,868 | $ | 5,428 | $ | 5,784 | $ | 6,155 | $ | 6,567 | $ | 25,923 |
Other Long-Term Assets
Other long-term assets consisted of the following (in thousands):
March 31, 2020 | December 31, 2019 | |||||||
Prepaid and other long-term assets | $ | 31,134 | $ | 29,153 | ||||
Deferred commissions | 5,668 | 5,007 | ||||||
Equity-method investments | 5,897 | 5,733 | ||||||
Long-term deposits | 1,897 | 1,759 | ||||||
$ | 44,596 | $ | 41,652 |
Accrued Warranty
Accrued warranty liabilities consisted of the following (in thousands):
March 31, 2020 | December 31, 2019 | |||||||
Product warranty | $ | 2,566 | $ | 2,345 | ||||
Product performance | 6,940 | 7,536 | ||||||
Maintenance services contracts | 1,508 | 453 | ||||||
$ | 11,014 | $ | 10,334 |
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Changes in the product warranty and product performance liabilities were as follows (in thousands):
Balances at December 31, 2019 | $ | 9,881 | |
Accrued warranty, net | 514 | ||
Warranty expenditures during period | (889 | ) | |
Balances at March 31, 2020 | $ | 9,506 |
Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following (in thousands):
March 31, 2020 | December 31, 2019 | |||||||
Compensation and benefits | $ | 17,611 | $ | 17,173 | ||||
Current portion of derivative liabilities | 6,434 | 4,834 | ||||||
Sales related liabilities | 391 | 416 | ||||||
Accrued installation | 10,923 | 10,348 | ||||||
Sales tax liabilities | 3,899 | 3,849 | ||||||
Interest payable | 2,880 | 3,875 | ||||||
Accrued payables | 24,860 | 18,650 | ||||||
Other | 10,811 | 11,139 | ||||||
$ | 77,809 | $ | 70,284 |
Other Long-Term Liabilities
Other long-term liabilities consisted of the following (in thousands):
March 31, 2020 | December 31, 2019 | |||||||
Delaware grant | $ | 10,469 | $ | 10,469 | ||||
Other | 18,074 | 17,544 | ||||||
$ | 28,543 | $ | 28,013 |
In March 2012, we entered into an agreement with the Delaware Economic Development Authority to provide a grant of $16.5 million to us 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. We have received $12.0 million of the grant which is contingent upon us meeting certain milestones related to the construction of the manufacturing facility and the employment of full-time workers at the facility through September 30, 2023. We paid $1.5 million in 2017 for recapture provisions, and no additional amounts have been paid. As of March 31, 2020, we have recorded $10.5 million in other long-term liabilities for potential repayments. See Note 14, Commitments and Contingencies for a full description of the grant.
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7. Outstanding Loans and Security Agreements
The following is a summary of our debt as of March 31, 2020 (in thousands):
Unpaid Principal Balance | Net Carrying Value | Unused Borrowing Capacity | Interest Rate | Maturity Dates | Entity | Recourse | ||||||||||||||||||||||
Current | Long- Term | Total | ||||||||||||||||||||||||||
LIBOR + 4% term loan due November 2020 | $ | 1,143 | $ | 1,117 | $ | — | $ | 1,117 | $ | — | LIBOR plus margin | November 2020 | Company | Yes | ||||||||||||||
10% convertible promissory Constellation note due December 2021 | 36,940 | — | 40,709 | 40,709 | — | 10.0% | December 2021 | Company | Yes | |||||||||||||||||||
10% convertible promissory notes due December 2021 * | 319,299 | — | 338,944 | 338,944 | — | 10.0% | December 2021 | Company | Yes | |||||||||||||||||||
10% notes due July 2024 | 86,000 | 14,000 | 69,230 | 83,230 | — | 10.0% | July 2024 | Company | Yes | |||||||||||||||||||
Total recourse debt | 443,382 | 15,117 | 448,883 | 464,000 | — | |||||||||||||||||||||||
7.5% term loan due September 2028 | 36,232 | 2,439 | 30,597 | 33,036 | — | 7.5% | September 2028 | PPA IIIa | No | |||||||||||||||||||
6.07% senior secured notes due March 2030 | 80,255 | 3,330 | 75,989 | 79,319 | — | 6.1% | March 2030 | PPA IV | No | |||||||||||||||||||
LIBOR + 2.5% term loan due December 2021 | 120,818 | 5,340 | 114,306 | 119,646 | — | LIBOR plus margin | December 2021 | PPA V | No | |||||||||||||||||||
Letters of Credit due December 2021 | — | — | — | — | 1,220 | 2.25% | December 2021 | PPA V | No | |||||||||||||||||||
Total non-recourse debt | 237,305 | 11,109 | 220,892 | 232,001 | 1,220 | |||||||||||||||||||||||
Total debt | $ | 680,687 | $ | 26,226 | $ | 669,775 | $ | 696,001 | $ | 1,220 |
* Note that $70.0 million of this amount was due on or before September 1, 2020, but as it was repaid on May 1, 2020 with the proceeds from long-term debt, as described below, this amount has also been classified as long-term in the condensed consolidated balance sheet as of March 31, 2020. See Note 17, Subsequent Events for additional information.
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The following is a summary of our debt as of December 31, 2019 (in thousands):
Unpaid Principal Balance | Net Carrying Value | Unused Borrowing Capacity | Interest Rate | Maturity Dates | Entity | Recourse | ||||||||||||||||||||||
Current | Long- Term | Total | ||||||||||||||||||||||||||
LIBOR + 4% term loan due November 2020 | $ | 1,571 | $ | 1,536 | $ | — | $ | 1,536 | $ | — | LIBOR plus margin | November 2020 | Company | Yes | ||||||||||||||
5% convertible promissory note due December 2020 | 33,104 | 36,482 | — | 36,482 | — | 5.0% | December 2020 | Company | Yes | |||||||||||||||||||
6% convertible promissory notes due December 2020 | 289,299 | 273,410 | — | 273,410 | — | 6.0% | December 2020 | Company | Yes | |||||||||||||||||||
10% notes due July 2024 | 93,000 | 14,000 | 75,962 | 89,962 | — | 10.0% | July 2024 | Company | Yes | |||||||||||||||||||
Total recourse debt | 416,974 | 325,428 | 75,962 | 401,390 | — | |||||||||||||||||||||||
7.5% term loan due September 2028 | 38,337 | 3,882 | 31,087 | 34,969 | — | 7.5% | September 2028 | PPA IIIa | No | |||||||||||||||||||
6.07% senior secured notes due March 2030 | 80,988 | 3,151 | 76,865 | 80,016 | — | 6.1% | March 2030 | PPA IV | No | |||||||||||||||||||
LIBOR + 2.5% term loan due December 2021 | 121,784 | 5,122 | 115,315 | 120,437 | — | LIBOR plus margin | December 2021 | PPA V | No | |||||||||||||||||||
Letters of Credit due December 2021 | — | — | — | — | 1,220 | 2.25% | December 2021 | PPA V | No | |||||||||||||||||||
Total non-recourse debt | 241,109 | 12,155 | 223,267 | 235,422 | 1,220 | |||||||||||||||||||||||
Total debt | $ | 658,083 | $ | 337,583 | $ | 299,229 | $ | 636,812 | $ | 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 March 31, 2020 and December 31, 2019.
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 March 31, 2020 and December 31, 2019 was 5.7% and 6.3%, 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 March 31, 2020 and December 31, 2019, the unpaid principal balance of debt outstanding was $1.1 million and $1.6 million, respectively.
10% Constellation Convertible Promissory Note due 2021 (originally 8% Convertible Promissory Notes) - 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 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 per share. In July 2018, upon our IPO, the $221.6 million of principal and accrued interest of outstanding 5% Notes automatically converted into additional paid-in capital, the conversion of which included all the related-party noteholders. The 5% 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
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common stock. Upon our IPO, conversions of 5,734,440 shares of Class B common stock were issued and the 5% Notes were retired. Constellation, the holder of the 5% Notes ("5% Constellation Note"), has not elected to convert as of March 31, 2020.
On March 31, 2020, we entered into an Amended and Restated Subordinated Secured Convertible Note Modification Agreement (the “Constellation Note Modification Agreement”) which amended the terms of the 5% Constellation Note to extend the maturity date to December 31, 2021 and increased the interest rate from 5% to 10% ("10% Constellation Note"). Additionally, the debt is convertible at the option of Constellation into common stock at any time through the maturity date. We further amended the 10% Constellation Note by reducing the strike price on the conversion feature from $38.64 per share to $8.00 per share. If we fail to meet certain conditions under the Constellation Note Modification Agreement, including obtaining stockholder approval prior to September 1, 2020, the interest rate will be increased to 18% per year. At any time, we may redeem the 10% Constellation Note, at our option, at a redemption price equal to the principal amount of the 10% Constellation Note outstanding, plus accrued and unpaid interest as of the redemption date, plus a certain percentage, determined based on the time of redemption of the aggregate sum of all discounted remaining scheduled interest payments. The discount rate that shall be applied to all remaining scheduled interest payments shall be determined based on the Treasury Rate in effect as of the redemption date, plus 50 basis points, multiplied by the applicable percentage in effect as of the redemption date.
We evaluated the Constellation Note Modification Agreement in accordance with ASC 470-60, Debt - Troubled Debt Restructurings by Debtors, and 470-50, Debt - Modifications and Extinguishments, and concluded that the amendment did not constitute a troubled debt restructuring and, furthermore, the amendment qualified as a substantial modification as a result of the increase in the fair value of the conversion feature due to the reduced strike price. As a result, on March 31, 2020, the 10% Constellation Note, which consisted of $33.1 million in principal and $3.8 million in accrued and unpaid interest, was extinguished and the 10% Constellation Note was recorded at their fair market value which equaled $40.7 million. The difference between the fair market value of the 10% Constellation Note and the carrying value of the 5% Constellation Note of $3.8 million has been recorded, as of March 31, 2020, as a loss on extinguishment of debt in the Condensed Consolidated Statement of Operations.
The new carrying amount of the 10% Constellation Note of $40.7 million, which consists of the $36.9 million principal amount of the 10% Constellation Note and a $3.8 million deemed premium paid for the 10% Constellation Note, was classified as non-current as of March 31, 2020. Furthermore, the $3.8 million deemed premium shall be amortized over the term of the 10% Constellation Note using the effective interest method.
10% Convertible Promissory Notes due December 2021 (Originally 5% Convertible Promissory Notes) - Between December 2015 and September 2016, we issued $260.0 million convertible promissory notes due December 2020, ("5% Convertible Notes") to certain investors (each a "Noteholder" and collectively, the "Noteholders"). The 5% Convertible Notes bore a 5.0% fixed interest rate, payable monthly either in cash or in kind, at our election. We amended the terms of the 5% Convertible Notes in June 2017 to increase the interest rate from 5% to 6% and to reduce the collateral securing the notes ("6% Convertible Notes"). In November 2019, one Noteholder exchanged a portion of their 6% Convertible Notes at the conversion price of $11.25 per share into 616,302 shares of common stock.
The 6% Convertible Notes contained a conversion feature in which the strike price was determined by applying a specified discount to the price of the Company’s stock upon a qualified initial public offering. Until the occurrence of a qualified public offering, the number of shares required to settle this conversion feature could not be determined. Accordingly, this conversion feature was bifurcated from the 6% Convertible Notes and accounted for as a derivative liability in accordance with ASC 815, Derivatives and Hedging. Since the amendments to the 6% Convertible Notes were accounted for as a modification of terms, the derivative liability remained as a separate financial instrument from the 6% Convertible Notes that was separately accounted for with changes in fair value being recognized in earnings. Upon our initial public offering in July 2018, the conversion terms became fixed and met all of the requirements for equity classification. Accordingly, we reclassified the conversion feature from a derivative liability to additional paid in capital. The fair value of the embedded derivative was $178.0 million upon classification.
On March 31, 2020, we entered into an Amendment Support Agreement (the “Amendment Support Agreement”) with the Noteholders of our outstanding 6% Convertible Notes pursuant to which such Noteholders agreed to extend the maturity date of the outstanding 6% Convertible Notes to December 1, 2021 and increase the interest rate from 6% to 10%, ("10% Convertible Notes"). Additionally, the debt is convertible at the option of the Noteholders into common stock at any time through the maturity date and we further amended the10% Convertible Notes by reducing the strike price on the conversion feature from $11.25 to $8.00 per share. In conjunction with entering into the Amendment Support Agreement, on March 31, 2020, we also entered into a Convertible Note Purchase Agreement (the “10% Convertible Note Purchase Agreement”) and issued an additional $30.0 million aggregate principal amount of 10% Convertible Notes to Foris Ventures, LLC, a new Noteholder, and New Enterprise Associates 10, Limited Partnership, an existing Noteholder. The Amendment Support Agreement required that we repay at least $70.0 million of the 10% Convertible Notes on or before September 1, 2020. In return, collateral would be released to support the collateral required under the 10.25% Senior Secured Notes, and 50% of the proceeds from the consummation of certain transactions, including equity offerings or additional indebtedness, will be applied
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to redeem the 10% Convertible Notes at a redemption price equal to (i) 100% of the principal amount of the 10% Convertible Notes, plus (ii) accrued and unpaid interest, plus (iii) a certain percentage, determined based on the time of redemption of the aggregate sum of all discounted remaining scheduled interest payments.. The discount rate to determine the present value decreases, creating a redemption penalty, if redemption occurs after October 21, 2020. The Amended Convertible Notes and the $30.0 million new 10% Convertible Notes are all reflected in the Amended and Restated Indenture between the Company and US National Bank dated April 20, 2020.
We evaluated the Amendment Support Agreement in accordance with ASC 470-60, Debt - Troubled Debt Restructurings by Debtors, and 470-50, Debt - Modifications and Extinguishments, and concluded that the amendment did not constitute a troubled debt restructuring and, furthermore, the amendment qualified as a substantial modification as a result of the increase in the fair value of the conversion feature due to the reduced strike price. As a result, on March 31, 2020, we recorded a $10.3 million loss on extinguishment of debt in the condensed consolidated statement of operations, which was calculated as the difference between the reacquisition price of the 6% Convertible Notes and the carrying value of the 6% Convertible Notes. The total carrying value of the 6% Convertible Notes equaled $279.0 million which consisted of $289.3 million in principal and $1.4 million in accrued and unpaid interest reduced by $10.7 million in unamortized discount and $1.0 million in unamortized debt issuance costs. The total reacquisition price of the 6% Convertible Notes equaled $289.3 million which consisted of the $340.7 million fair value of the 10% Convertible Notes, $1.4 million in accrued and unpaid interest, and $1.2 million of fees paid to Noteholders as part of the amendment, reduced by $24.0 million, the fair value at March 31, 2020 of the embedded derivative relating to the equity classified conversion feature that is reclassified from additional paid in capital, $20.0 million cash received from the additional 10% Convertible Notes that were issued to New Enterprise Associates 10, Limited Partnership, and the $10.0 million issuance to Foris Ventures, LLC.
The new net carrying amount of the 10% Convertible Notes of $338.9 million, which consists of the $319.3 million principal of the 10% Convertible Notes, a $21.4 million premium paid for the 10% Convertible Notes less $1.8 million debt issuance costs was classified as non-current as of March 31, 2020. Furthermore, the $21.4 million deemed premium shall be amortized over the term of the 10% Convertible Notes using the effective interest method.
10% Notes due July 2024 - In June 2017, we issued $100.0 million of senior secured notes ("10% Notes"). The 10% Notes mature in 2024 and bear a 10.0% fixed rate of interest and with principal amortization started July 2019, 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 certain 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 debt service coverage ratio test does restrict our access to the excess cash escrowed in a collection account which would otherwise be released to us on a bi-annual basis after principal amortization and interest payment. The outstanding unpaid principal and accrued interest debt balance of the 10% Notes of $14.0 million and $14.0 million were classified as current as of March 31, 2020 and December 31, 2019, respectively and the outstanding unpaid principal and accrued interest debt balances of the 10% Notes of $69.2 million and $76.0 million were classified as non-current as of March 31, 2020 and December 31, 2019 respectively.
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. In June 2019, as part of the PPA II upgrade of Energy Servers, we paid off the outstanding debt and interest of these notes for the outstanding amount of $77.6 million. The Note Purchase Agreement debt service reserve balance of $11.2 million was written off in June 2019.
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 our 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 $3.8 million as of March 31, 2020 and December 31, 2019, 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 our Energy Servers. In accordance with that agreement, PPA IIIb issued floating rate debt
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based on LIBOR plus a margin of 5.2%, paid quarterly. The aggregate amount of the debt facility was $32.5 million. In December 2019, as part of the PPA IIIa upgrade of Energy Servers, we paid off the outstanding debt and interest of these notes for the outstanding amount of $24.2 million. The credit agreement required us to maintain a debt service reserve for all funded systems, the balance of which was $1.8 million which was written off in December 2019.
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 our 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 $8.1 million as of March 31, 2020 and $8.0 million as of December 31, 2019, 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 our 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. 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 June 2015, PPA V entered into a $131.2 million term loan due December 2021. The agreement also included 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 letter of credit as of March 31, 2020 and December 31, 2019 was $5.0 million. The unused capacity as of March 31, 2020 and December 31, 2019 was $1.2 million.
Related Party Debt
Portions of the above described recourse and non-recourse debt are held by various related parties. See Note 16, Related Party Transactions for a full description.
Repayment Schedule and Interest Expense
The following table presents detail of our outstanding loan principal repayment schedule as of March 31, 2020 (in thousands):
Remainder of 2020 * | $ | 86,493 | |
2021 | 425,609 | ||
2022 | 26,046 | ||
2023 | 29,450 | ||
2024 | 35,941 | ||
Thereafter | 77,148 | ||
$ | 680,687 |
*Note that $70.0 million of this amount was due on or before September 1, 2020, but as it was repaid on May 1, 2020 with the proceeds from long-term debt, as described below, this amount has also been classified as long-term in the condensed consolidated balance sheet as of March 31, 2020. See Note 17, Subsequent Events for additional information.
Interest expense of $22.1 million and $23.4 million for the three months ended March 31, 2020 and 2019, respectively, was recorded in interest expense on the consolidated statements of operations.
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8. Derivative Financial Instruments
Interest Rate Swaps
We use various financial instruments to minimize the impact of variable market conditions on our results of operations. We use interest rate swaps to minimize the impact of fluctuations of interest rate changes on our outstanding debt where LIBOR is applied. We do not enter into derivative contracts for trading or speculative purposes.
The fair values of the derivatives designated as cash flow hedges as of March 31, 2020 and December 31, 2019 on our consolidated balance sheets were as follows (in thousands):
March 31, 2020 | December 31, 2019 | |||||||
Assets | ||||||||
Prepaid expenses and other current assets | $ | — | $ | 3 | ||||
$ | — | $ | 3 | |||||
Liabilities | ||||||||
Accrued expenses and other current liabilities | $ | 1,943 | $ | 782 | ||||
Derivative liabilities | 15,472 | 8,459 | ||||||
$ | 17,415 | $ | 9,241 |
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 and we designated and documented the 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 $183.7 million and $184.2 million as of March 31, 2020 and December 31, 2019, 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 loss of $24,000 attributable to the change in valuation during both of the quarters ended March 31, 2020 and 2019, respectively, and were included in other income (expense), net in the consolidated statement of operations.
The changes in fair value of the derivative contracts designated as cash flow hedges and the amounts recognized in accumulated other comprehensive loss and in earnings were as follows (in thousands):
Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
Beginning balance | $ | 9,238 | $ | 3,548 | ||||
Loss recognized in other comprehensive loss | 8,356 | 2,130 | ||||||
Amounts reclassified from other comprehensive loss to earnings | (142 | ) | 61 | |||||
Net loss recognized in other comprehensive loss | 8,214 | 2,191 | ||||||
Gain recognized in earnings | (37 | ) | (47 | ) | ||||
Ending balance | $ | 17,415 | $ | 5,692 | ||||
Natural Gas Derivatives
On September 1, 2011, we entered into a natural gas fixed price 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. PPA I is the only PPA Company for which natural gas was provided by us. This 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 revenue in the 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 quarter ended March 31, 2020 and 2019, we marked-to-market the fair value of our natural gas fixed price forward contract and recorded an unrealized loss of $0.6 million and an unrealized gain of $0.4 million, respectively. For the
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three months ended March 31, 2020 and 2019, we recorded a realized gain of $1.0 million and realized gain of $0.5 million, respectively, on the settlement of these contracts. Gains and losses are recorded in cost of revenue on the consolidated statement of operations.
Embedded EPP Derivatives in Sales Contracts
Embedded EPP Derivatives in Sales Contracts - We estimated the fair value of the embedded Escalation Protection Plan ("EPP") derivatives in certain sales contracts using a Monte Carlo simulation model which considers various potential electricity price forward curves over the sales contracts' terms. We use historical grid prices and available forecasts of future electricity prices to estimate future electricity prices. The grid pricing EPP guarantees that we provided in some of our sales arrangements represent an embedded derivative, with the initial value accounted for as a reduction in product revenue and any changes, reevaluated quarterly, in the fair market value of the derivative recorded in gain (loss) on revaluation of embedded derivatives. We recorded an unrealized gain of $0.3 million and an unrealized loss of $0.5 million attributable to the change in fair value for the three months ended March 31, 2020 and 2019, respectively. These gains and losses were included within loss on revaluation of embedded derivatives in the Consolidated Statements of Operations. The fair value of these derivatives was $5.9 million and $6.2 million as of March 31, 2020 and December 31, 2019, respectively.
9. Common Stock Warrants
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 March 31, 2020 and December 31, 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.
10. Income Taxes
For the three months ended March 31, 2020 and 2019, we recorded a provision for income taxes of $0.1 million on a pre-tax loss of $81.5 million for an effective tax rate of (0.2)%, and a provision for income taxes of $0.2 million on a pre-tax loss of $108.5 million for an effective tax rate of (0.2)%, respectively.
The effective tax impact for the three months ended March 31, 2020 and 2019 is lower than the statutory federal tax rate primarily due to a full valuation allowance against U.S. deferred tax assets.
11. 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, or RSUs, 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. See Note 9, Common Stock Warrants.
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 March 31, | ||||||||
2020 | 2019 | |||||||
As Restated | ||||||||
Numerator: | ||||||||
Net loss attributable to Class A and Class B common stockholders | $ | (75,949 | ) | $ | (104,920 | ) | ||
Denominator: | ||||||||
Weighted average shares of common stock, basic and diluted | 123,763 | 111,842 | ||||||
Net loss per share available to Class A and Class B common stockholders, basic and diluted | $ | (0.61 | ) | $ | (0.94 | ) |
The following common stock equivalents (in thousands) were excluded from the computation of our net loss per share attributable to common stockholders (diluted) for the periods presented as their inclusion would have been antidilutive:
Three Months Ended March 31, | ||||||
2020 | 2019 | |||||
Convertible and non-convertible redeemable preferred stock and convertible notes | 40,723 | 27,241 | ||||
Stock options to purchase common stock | 4,993 | 5,190 | ||||
45,716 | 32,431 |
12. Stock-Based Compensation and Employee Benefit Plans
Share-based grants are designed to reward employees for their long-term contributions to us and provide incentives for them to remain with Bloom.
2002 Stock Plan
As of March 31, 2020, options to purchase 1,767,487 shares of Class B common stock were outstanding with a weighted average exercise price of $24.13 per share.
2012 Equity Incentive Plan
As of March 31, 2020, options to purchase 9,805,266 shares of Class B common stock were outstanding with a weighted average exercise price of $27.14 per share and no shares were available for future grant. As of March 31, 2020, we had outstanding RSUs that may be settled for 4,093,230 shares of Class B common stock under the plan.
2018 Equity Incentive Plan
As of March 31, 2020, options to purchase 5,933,885 shares of Class A common stock were outstanding with a weighted average exercise price of $9.31 per share and 2,919,204 shares of outstanding RSUs that may be settled for Class A common stock which were granted pursuant to the plan. As of March 31, 2020, we had 23,519,848 shares of Class A common stock available for future grant. No stock options were granted during the three months ended March 31, 2020.
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Stock-Based Compensation Expense
We used the following weighted-average assumptions in applying the Black-Scholes valuation model for determination of options:
Three Months Ended March 31, | ||||
2020 | 2019 | |||
Risk-free interest rate | —% | 2.60% - 2.64% | ||
Expected term (years) | 0 | 6.3 - 6.6 | ||
Expected dividend yield | — | — | ||
Expected volatility | —% | 50.2% |
The following table summarizes the components of stock-based compensation expense in the consolidated statements of operations (in thousands):
Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
As Restated | ||||||||
Cost of revenue | $ | 5,507 | $ | 18,312 | ||||
Research and development | 6,096 | 14,230 | ||||||
Sales and marketing | 3,890 | 11,512 | ||||||
General and administrative | 7,526 | 23,768 | ||||||
$ | 23,019 | $ | 67,822 |
Stock-based Compensation - During the quarters ended March 31, 2020 and 2019, we recognized $23.0 million and $67.8 million of total stock-based compensation costs, respectively. During the quarters ended March 31, 2020 and 2019, we recognized $0.2 million and $3.9 million, respectively, of stock-based compensation expense previously capitalized in inventory and property, plant and equipment.
Stock Option and RSU Activity
The following table summarizes the stock option activity under our stock plans during the reporting period (in thousands), except per share amounts:
Outstanding Options | |||||||||||||
Number of Shares | Weighted Average Exercise Price | Remaining Contractual Life (Years) | Aggregate Intrinsic Value | ||||||||||
(in thousands) | |||||||||||||
December 31, 2019 | 17,837,316 | $ | 20.76 | 6.94 | $ | 14,964 | |||||||
Exercised | (110,949 | ) | 6.14 | ||||||||||
Cancelled | (219,729 | ) | 25.79 | ||||||||||
Balances at March 31, 2020 | 17,506,638 | 20.79 | 6.66 | 6,814 | |||||||||
Vested and expected to vest at Current period end | 16,856,937 | 21.20 | 6.57 | 6,071 | |||||||||
Exercisable at Current period end | 9,499,310 | 28.59 | 4.76 | 9 |
Stock Options - During the quarters ended March 31, 2020 and 2019, we recognized $5.6 million and $9.2 million of stock-based compensation costs for stock options, respectively.
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We did not grant options for Class A common stock during the quarter ended March 31, 2020, and we granted 743,705 options for Class A and Class B common stock during the quarter ended March 31, 2019 and the weighted-average grant-date fair value of those awards was $11.38 per share.
As of March 31, 2020 and 2019, we had unrecognized compensation costs related to unvested stock options of $36.3 million and $65.8 million, respectively. This cost is expected to be recognized over the remaining weighted-average period of 2.4 years and 2.7 years, respectively. We had no excess tax benefits in the quarters ended March 31, 2020 and 2019. Cash received from stock options exercised totaled $0.7 million and $0.6 million ended March 31, 2020 and 2019, respectively.
A summary of our RSUs activity and related information is as follows:
Number of Awards Outstanding | Weighted Average Grant Date Fair Value | ||||||
Unvested Balance at December 31, 2019 | 10,112,266 | $ | 17.29 | ||||
Granted | 78,338 | 10.88 | |||||
Vested | (3,010,606 | ) | 19.80 | ||||
Forfeited | (167,564 | ) | 15.77 | ||||
Balances at March 31, 2020 | 7,012,434 | 16.18 |
Restricted Stock Units (RSUs) - The estimated fair value of RSU awards is based on the fair value of our common stock on the date of grant.
During the quarters ended March 31, 2020 and March 31, 2019, we recognized $13.2 million and $51.0 million of stock-based compensation costs for RSUs, respectively.
As of March 31, 2020, we had $37.6 million of unrecognized stock-based compensation cost related to unvested RSUs. This cost is expected to be recognized over a weighted average period of 1.3 years. As of March 31, 2019, we had $145.5 million of unrecognized stock-based compensation cost related to unvested RSUs. This expense was expected to be recognized over a weighted average period of 1.3 years.
The following table presents the stock activity and the total number of RSUs available for grant under our stock plans as of March 31, 2020:
Plan Shares Available for Grant | |||
Balances at December 31, 2019 | 17,233,144 | ||
Added to plan | 6,263,315 | ||
Granted | (78,338 | ) | |
Cancelled | 385,766 | ||
Expired | (284,039 | ) | |
Balances at March 31, 2020 | 23,519,848 |
2018 Employee Stock Purchase Plan
During the quarter ended March 31, 2020, we added an additional 1,494,819 shares for use under the 2018 ESPP. During the quarters ended March 31, 2020 and 2019, we recognized $2.9 million and $2.8 million of stock-based compensation costs for the ESPP, respectively. We issued 992,846 shares in the quarter ended March 31, 2020 and there were 3,532,380 shares available for issuance under the ESPP as of March 31, 2020. We use the Black-Scholes option pricing model to determine the fair value of shares purchased under the 2018 ESPP with the following weighted average assumptions on the date of grant:
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Three Months Ended March 31, | |||||
2020 | 2019 | ||||
Risk-free interest rate | 1.51% | 2.60% - 2.64% | |||
Expected term (years) | 0.5 - 2.0 | 0.5 - 2.0 | |||
Expected dividend yield | — | — | |||
Expected volatility | 61.0% | 50.2% |
2019 Executive Awards
In November 2019, the Board of Directors approved stock option awards ("2019 Executive Awards") to certain executive staff. The 2019 Executive Awards consist of three vesting tranches with a vesting schedule based on the attainment of market conditions and assuming continued employment and service through each vesting date. Stock-based compensation costs associated with the 2019 Executive Awards is recognized over the service period, even though no tranches of the 2019 Performance Awards vest unless a market condition is achieved. The grant date fair value of the options is determined using a Monte Carlo simulation.
13. 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 our Energy Servers from us. The end customer then enters into a power purchase agreement ("PPA") with the Operating Company to purchase the power generated by our Energy Servers 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 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 master services agreements including warranties and guaranties are billed on a quarterly basis starting in the first quarter following the placed-in-service date of the Energy Server(s) 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 upfront 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 Energy Server depreciation 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"). These 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. 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 consolidated financial statements.
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 the Operating Company in PPA II and therefore, the Operating Company was no longer consolidated as a VIE into our consolidated financial statements as of June 30, 2019. See further discussion below. On November 27, 2019, we entered into a PPA IIIb upgrade of Energy Servers transaction where we bought out the equity interest of the third-party investor, decommissioned the Energy Servers in the Operating Company and sold new Energy Servers deployed at customer sites through our Managed Services financing option. The PPA IIIb Investment Company and Operating Company became wholly-owned by us but no longer met the definition of a VIE. However, we continue consolidating PPA IIIb in our consolidated financial statements. See further discussion below.
In accordance with our Power Purchase Agreement Programs, 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 consolidated financial statements, the sale of Energy Servers by us to the Operating Company
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are treated as intercompany transactions and as a result eliminated in consolidation. 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 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, are used to pay operating expenses (including the management and maintenance 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 as electricity revenue and service 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.
We have established six different PPA Entities to date. The contributed funds are restricted for use by the Operating Company to the purchase of our 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. In 2019, we bought out the tax equity investors' interest in DSGH, the PPA II Investment Company, and admitted two new equity investors as a member of the PPA II Operating Company, retaining only a minor contingent future equity interest in the Operating Company. One of the new equity investors became the managing member which resulted in a change in our ownership interest in the Operating Company and discontinued our controlling financial interest in the PPA II Operating Company. In December 2019, we purchased the tax equity investors' interest in PPA IIIb, which resulted in a change in the ownership structure from a variable interest entity to a wholly owned subsidiary indirectly owned by us.
PPA II Upgrade of Energy Servers
Original Transaction
A wholly-owned subsidiary of Bloom and a wholly-owned subsidiary of Credit Suisse Group AG (“Mehetia”) jointly owned Diamond State Generation Holdings, LLC (“Class A Holdco”). Class A Holdco owned 100% of the membership interests in Diamond State Generation Partners, LLC ("DSGP"). Pursuant to an earlier transaction, DSGP owned and operated 30 megawatts of Energy Servers across two sites in Delaware that achieved operations in 2012 and 2013 and provided alternative energy generation for state tariff rate payers (the “Original Project”). The Original Project had been financed in part by the issuance of non-recourse promissory notes to DSGP (the “Project Debt”).
Overall Upgrade
We upgraded the existing 30 megawatts of Energy Servers used in the Original Project by replacing them with 27.5 megawatts of new Energy Servers. To effect the full upgrade we repurchased all of existing Energy Servers, the proceeds of which were used by DSGP to pay down the Project Debt and to enable Class A Holdco to buy out Mehetia’s interests. To finance the new Energy Servers used in the upgrade, DSGP raised capital from two new members: SP Diamond State Class B Holdings, LLC (“Class B Holdco”), a wholly owned subsidiary of Southern Power Company (“Southern”) and Assured Guaranty Municipal Corporation (“Class C Holdco”). The existing Energy Servers were removed after we repurchased them from DSGP, prior to selling and installing the new Energy Servers. The upgrade was done across two phases and was completed during December 2019.
Commercial Documents
We also entered into an operations and maintenance agreement for the ongoing care of all of the new Energy Servers (the “O&M Agreement”). The operations and maintenance fees under the O&M Agreement are paid on a fixed dollar per kilowatt basis.
The terms and conditions of the EPC Agreement and the O&M Agreement, including the suite of guaranties and warranties provided with respect to the performance of the Energy Servers are customary for our transactions of this type. The
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performance related guaranty and warranty were provided for each investor’s Energy Servers, while the efficiency guaranties and warranties were measured across the entire 27.5 megawatts of Energy Servers.
PPA IIIb Upgrade of Energy Servers
Transaction Overview
As part of the PPA IIIb project established in 2013, Bloom, through a special purpose subsidiary (the “Project Company”), had previously entered into certain agreements for the purpose of developing, financing, owning, operating, maintaining and managing a portfolio of 5.4 megawatts of Energy Servers. On November 27, 2019, we entered into certain agreements through a wholly-owned subsidiary to (i) buy out the existing debt and equity investors in Project Company such that Project Company became indirectly wholly-owned by us, and (ii) upgrade 5.4 megawatts of the existing Energy Servers owned and managed by Project Company by selling and installing new Energy Servers. As of December 31, 2019, 5 megawatts of the PPA IIIb project had been decommissioned and written-off by us, with the remaining 0.4 megawatts decommissioned during the three months ended March 31, 2020.
PPA Entities' Activities Summary
The table below shows the details of the three Investment Companies' VIEs that were active during the first quarter of 2020 and their cumulative activities from inception to the periods indicated (dollars in thousands):
PPA IIIa | PPA IV | PPA V | ||||||||||
Overview: | ||||||||||||
Maximum size of installation (in megawatts) | 10 | 21 | 40 | |||||||||
Installed size (in megawatts) | 10 | 19 | 37 | |||||||||
Term of power purchase agreements (in years) | 15 | 15 | 15 | |||||||||
First system installed | Feb-13 | Sep-14 | Jun-15 | |||||||||
Last system installed | Jun-14 | Mar-16 | Dec-16 | |||||||||
Income (loss) and tax benefits allocation to Equity Investor | 99% | 90% | 99% | |||||||||
Cash allocation to Equity Investor | 99% | 90% | 90% | |||||||||
Income (loss), tax and cash allocations to Equity Investor after the flip date | 5% | No flip | No flip | |||||||||
Equity Investor 1 | US Bank | Exelon Corporation | Exelon Corporation | |||||||||
Put option date 2 | 1st anniversary of flip point | N/A | N/A | |||||||||
Company cash contributions | $ | 32,223 | $ | 11,669 | $ | 27,932 | ||||||
Company non-cash contributions 3 | $ | 8,655 | $ | — | $ | — | ||||||
Equity Investor cash contributions | $ | 36,967 | $ | 84,782 | $ | 227,344 | ||||||
Debt financing | $ | 44,968 | $ | 99,000 | $ | 131,237 | ||||||
Activity as of March 31, 2020: | ||||||||||||
Distributions to Equity Investor | $ | 4,804 | $ | 7,052 | $ | 74,128 | ||||||
Debt repayment—principal | $ | 8,736 | $ | 18,745 | $ | 10,419 | ||||||
Activity as of December 31, 2019: | ||||||||||||
Distributions to Equity Investor | $ | 4,803 | $ | 6,692 | $ | 70,591 | ||||||
Debt repayment—principal | $ | 6,631 | $ | 18,012 | $ | 9,453 | ||||||
1 Investor name represents ultimate parent of subsidiary financing the project. | ||||||||||||
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. |
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 reaches its 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.
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The noncontrolling interests in PPA IIIa are redeemable as a result of the put option held by the Equity Investors as of March 31, 2020 and December 31, 2019. At March 31, 2020, and December 31, 2019, the carrying value of redeemable noncontrolling interests of $0.1 million and $0.4 million, respectively, exceeded the maximum redemption value.
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 our VIEs, including PPA IIIa, PPA IV and PPA V, for their assets and liabilities in our consolidated balance sheets, after eliminations of intercompany transactions and balances, were as follows (in thousands):
March 31, 2020 | December 31, 2019 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 3,104 | $ | 1,894 | ||||
Restricted cash | 2,208 | 2,244 | ||||||
Accounts receivable | 4,207 | 4,194 | ||||||
Customer financing receivable | 5,170 | 5,108 | ||||||
Prepaid expenses and other current assets | 2,212 | 3,587 | ||||||
Total current assets | 16,901 | 17,027 | ||||||
Property and equipment, net | 269,680 | 275,481 | ||||||
Customer financing receivable, non-current | 49,446 | 50,747 | ||||||
Restricted cash | 15,172 | 15,045 | ||||||
Other long-term assets | 301 | 607 | ||||||
Total assets | $ | 351,500 | $ | 358,907 | ||||
Liabilities | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | — | $ | — | ||||
Accrued expenses and other current liabilities | 2,058 | 1,391 | ||||||
Deferred revenue and customer deposits | 662 | 662 | ||||||
Current portion of debt | 11,109 | 12,155 | ||||||
Total current liabilities | 13,829 | 14,208 | ||||||
Derivative liabilities | 15,470 | 8,459 | ||||||
Deferred revenue | 6,570 | 6,735 | ||||||
Long-term portion of debt | 220,892 | 223,267 | ||||||
Other long-term liabilities | 2,492 | 2,355 | ||||||
Total liabilities | $ | 259,253 | $ | 255,024 |
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 our 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 March 31, 2020, and December 31, 2019 (in thousands):
March 31, 2020 | December 31, 2019 | |||||||||||||||||||||||
Bloom Energy | PPA Entities | Consolidated | Bloom Energy | PPA Entities | Consolidated | |||||||||||||||||||
Assets | ||||||||||||||||||||||||
Current assets | $ | 445,994 | $ | 16,901 | $ | 462,895 | $ | 455,680 | $ | 17,027 | $ | 472,707 | ||||||||||||
Long-term assets | 515,114 | 334,599 | 849,713 | 508,004 | 341,880 | 849,884 | ||||||||||||||||||
Total assets | $ | 961,108 | $ | 351,500 | $ | 1,312,608 | $ | 963,684 | $ | 358,907 | $ | 1,322,591 | ||||||||||||
Liabilities | ||||||||||||||||||||||||
Current liabilities | $ | 256,798 | $ | 2,720 | $ | 259,518 | $ | 234,328 | $ | 2,053 | $ | 236,381 | ||||||||||||
Current portion of debt | 15,117 | 11,109 | 26,226 | 325,428 | 12,155 | 337,583 | ||||||||||||||||||
Long-term liabilities | 591,722 | 24,532 | 616,254 | 599,709 | 17,549 | 617,258 | ||||||||||||||||||
Long-term portion of debt | 448,883 | 220,892 | 669,775 | 75,962 | 223,267 | 299,229 | ||||||||||||||||||
Total liabilities | $ | 1,312,520 | $ | 259,253 | $ | 1,571,773 | $ | 1,235,427 | $ | 255,024 | $ | 1,490,451 |
14. Commitments and Contingencies
Commitments
Facilities Leases
We lease most of our facilities, office buildings and equipment under operating leases that expire at various dates through December 2028. Our lease for our former corporate offices in Sunnyvale, California expired in December 2018. We entered into a lease for our corporate headquarters located in San Jose, California, for 181,000 square feet of office space commencing January 2019 and expiring in December 2028. Our headquarters is used for administration, research and development and sales and marketing.
Additionally, we lease various manufacturing facilities in Sunnyvale, California and Mountain View, California. Our current lease for our Sunnyvale manufacturing facilities, entered into in April 2005, expires in 2020. Our current lease for our manufacturing facilities at Mountain View, entered into in December 2011, expired in December 2019 and is extended on a month to month arrangement. These plants together comprise approximately 281,265 square feet of space. We lease additional office space as field offices in the United States and around the world including in India, the Republic of Korea, China and Taiwan.
During the quarters ended March 31, 2020 and 2019, rent expense for all occupied facilities was $2.1 million and $2.0 million, respectively.
Equipment Leases
Beginning in December 2015, we are a party to master lease agreements that provide for the sale of our Energy Servers to third parties and the simultaneous leaseback of the systems which we then sublease to customers. The lease agreements expire on various dates through 2025 and there was no recorded rent expense for the three months ended March 31, 2020 and 2019.
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At March 31, 2020, future minimum lease payments under operating leases and financing obligations were as follows (in thousands):
Operating Leases Obligations | Financing Obligations | Sublease Payments1 | |||||||||
Remainder of 2020 | $ | 5,457 | $ | 28,487 | $ | (28,487 | ) | ||||
2021 | 5,495 | 38,726 | (38,726 | ) | |||||||
2022 | 4,168 | 39,680 | (39,680 | ) | |||||||
2023 | 4,230 | 40,582 | (40,582 | ) | |||||||
2024 | 4,356 | 38,442 | (38,442 | ) | |||||||
Thereafter | 17,913 | 117,592 | (117,592 | ) | |||||||
Total lease payments | $ | 41,619 | 303,509 | $ | (303,509 | ) | |||||
Less: imputed interest | (177,345 | ) | |||||||||
Total lease obligations | 126,164 | ||||||||||
Less: current obligations | (11,248 | ) | |||||||||
Long-term lease obligations | $ | 114,916 |
1 Sublease Payments primarily represents the fees received by the bank from our end customer for the electricity generated by our Energy Servers leased under our Managed Services and other similar arrangements, which also pay down our financing obligation to the bank.
Managed Services Financing Obligations - Our managed services arrangements are classified as capital leases and are recorded as financing transactions, while the sublease arrangements with the end customer are classified as operating leases. Payments received from the financier are recorded as financing obligations. 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 financing obligations were $443.4 million and $446.2 million as of March 31, 2020 and December 31, 2019, respectively. The difference between these obligations and the principal obligations in the table above will be offset against the carrying value of the related Energy Servers at the end of the lease and the remainder recognized as a gain at that point. We recognize revenue for the electricity generated by allocating the total proceeds of the sublease payments based on the relative standalone selling prices to electricity revenue and to service revenue.
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 its forecasts. We can generally give notice of order cancellation at least 90 days prior to the delivery date. However, we issue purchase orders to our component suppliers and third-party manufacturers that may not be cancelable. As of March 31, 2020 and December 31, 2019, 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 (see Note 13, Power Purchase Agreement Programs), 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 operating costs necessary to maintain, monitor and repair the 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 $5.7 million and $3.5 million for the quarter ended March 31, 2020 and 2019, respectively.
In June 2015, PPA V entered into a $131.2 million credit agreement to fund the purchase and installation of our Energy Servers. The lenders have commitments to a letter of credit ("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 March 31, 2020 and December 31, 2019 was $5.0 million.
In 2019, pursuant to the PPA II upgrade of Energy Servers, we agreed to indemnify SPDS for losses that may be incurred in the event of certain regulatory, legal or legislative development and established a cash-collateralized letter of credit for this purpose. As of March 31, 2020, the balance of this cash-collateralized letter of credit was $108.7 million.
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In 2019, pursuant to the PPA IIIb upgrade of Energy Servers, we have restricted cash of $20.0 million which has been pledged for a seven-year period to secure our operations and maintenance obligations with respect to the totality of our obligations to the financier. All or a portion of such funds would be released if we meet certain credit rating and/or market capitalization milestones prior to the end of the pledge period. If we do not meet the required criteria within the first five-year period, the funds would still be released to us over the following two years as long as the Energy Servers continue to perform in compliance with our warranty obligations.
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.
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 March 31, 2020, we had 346 full time workers in Delaware and paid $127.8 million in cumulative compensation. As of December 31, 2019, we had 323 full time workers in Delaware and paid $120.1 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, including up to $3.1 million on September 30, 2021 and up to an additional $2.5 million on September 30, 2023. As of March 31, 2020, we paid $1.5 million for recapture provisions and have 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. However, 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. Our purchase of Energy Servers were 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 assesses 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 our 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 (the
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“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. On September 27, 2019, we filed a motion to dismiss the Statement of Claim. On March 24, 2020, the Tribunal denied our motion to dismiss in part, and ordered that Claimant’s relief is limited to rescission of the Confidential Agreement or remedies consistent with rescission, and not expectation damages. We do not believe Claimant’s claims supporting rescission have merit nor that Claimants can remit to us the monetary benefits they already obtained under the Confidential Agreement. We have recorded no loss contingency related to this claim.
In June 2019, Messrs. Daubenspeck and Badger filed a complaint against our CEO 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. 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. On December 7, 2019, the Superior Court issued an order staying the action through resolution of the parallel federal litigation mentioned below. 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, 2019, 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. On April 21, 2020, plaintiffs filed a second amended complaint adding claims under the Securities Act of 1933. The Second Amended complaint also adds allegations pertaining to the Restatement and, as to claims under the Securities Exchange Act of 1934, extends the class period through February 12, 2020. 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. On December 11, 2019, a notice of voluntary dismissal was filed by the plaintiff and the case has now been dismissed.
In September 2019, we received a books and records demand from purported Company stockholder Dennis Jacob (“Jacob Demand”). The Jacob Demand cites allegations from the September 17, 2019 report prepared by admitted short seller Hindenburg Research. In November 2019, we received a substantially similar books and records demand from the same law firm on behalf of purported Company stockholder Michael Bolouri (“Bolouri Demand” and, together with the Jacob Demand, the “Demands”). On January 13, 2020, Messrs. Jacob and Bolouri filed a complaint in the Delaware Court of Chancery to enforce the Demands in the matter styled Jacob v. Bloom Energy Corp., C.A. No. 2020-0023-JRS. On March 9, 2020, Messrs. Jacob and Bolouri filed an amended complaint in the Delaware Court of Chancery to add allegations regarding the restatement. A trial date for this matter has been set for December 7, 2020. We believe the complaint to be without merit.
In March 2020, Francisco Sanchez filed a class action complaint in Santa Clara County Superior Court against us alleging certain wage and hour violations under the California Labor Code and Industrial Welfare Commission Wage Orders and that we engaged in unfair business practices under the California Business and Professions Code. We are still investigating the allegations but believe the complaint to be without merit and, as a result, we have recorded no loss contingency related to this claim.
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15. Segment Information
Segment and the Chief Operating Decision Maker
Our chief operating decision makers ("CODMs"), our 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. We are 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 operating unit structure and are a single reporting segment.
16. Related Party Transactions
Our operations included the following related party transactions (in thousands):
Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
Total revenue from related parties | $ | 1,049 | $ | 813 | ||||
Interest expense to related parties | 1,366 | 1,612 |
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 quarter ended March 31, 2020 and 2019, we recognized related party total revenue of $1.0 million and $0.8 million, respectively. Accounts receivable from this joint venture was $0.4 million as of March 31, 2020 and $2.7 million as of December 31, 2019.
Debt to Related Parties
The following is a summary of our debt and convertible notes from investors considered to be related parties as of March 31, 2020 (in thousands):
Unpaid Principal Balance | Net Carrying Value | |||||||||||||||
Current | Long- Term | Total | ||||||||||||||
Recourse debt from related parties: | ||||||||||||||||
10% convertible promissory notes due December 2021 from related parties | $ | 50,801 | $ | — | $ | 52,786 | $ | 52,786 | ||||||||
Non-recourse debt from related parties: | ||||||||||||||||
7.5% term loan due September 2028 from related parties | 36,232 | 2,439 | 30,597 | 33,036 | ||||||||||||
Total debt from related parties | $ | 87,033 | $ | 2,439 | $ | 83,383 | $ | 85,822 |
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The following is a summary of our debt and convertible notes from investors considered to be related parties as of December 31, 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 | $ | 20,801 | $ | 20,801 | $ | — | $ | 20,801 | ||||||||
Non-recourse debt from related parties: | ||||||||||||||||
7.5% term loan due September 2028 from related parties | 38,337 | 3,882 | 31,088 | 34,970 | ||||||||||||
Total debt from related parties | $ | 59,138 | $ | 24,683 | $ | 31,088 | $ | 55,771 |
In November 2019, one related party note holder exchanged $6.9 million of their 6% Convertible Notes at the conversion price of $11.25 per share into 616,302 shares of common stock. On March 31, 2020, we issued $30.0 million new 10% Convertible Notes to two related party note holders. We repaid $2.1 million and $0.8 million of the non-recourse 7.5% term loan principal balance in the quarters ended March 31, 2020 and 2019, respectively, and we paid $0.7 million and $0.8 million of interest in the quarters ended March 31, 2020 and December 31, 2019, respectively. See Note 7, Outstanding Loans and Security Agreements for additional information on our debt facilities.
17. Subsequent Events
Senior Secured Notes Private Placement
On May 1, 2020, we issued $70.0 million of 10.25% Senior Secured Notes due 2027 (the “10.25% Senior Secured Notes”) in a private placement (the “Senior Secured Notes Private Placement”). The 10.25% Senior Secured Notes are governed by an indenture (the “Senior Secured Notes Indenture”) entered into among us, the guarantors party thereto and U.S. Bank National Association, in its capacity as trustee and collateral agent. The 10.25% Senior Secured Notes are secured by certain of our operations and maintenance agreements that previously were part of the security for the 6% Convertible Notes. We used the proceeds of this issuance to repay $70.0 million of our 10% Convertible Notes on May 1, 2020. The 10.25% Senior Secured Notes are supported by a $150.0 million Indenture between us and US Bank National Association which contains an accordion feature under for an additional $80.0 million of notes that can be issued within the next eighteen months.
Interest on the 10.25% Senior Secured Notes is payable on March 31, June 30, September 30 and December 31 of each year, commencing June 30, 2020. The 10.25% Senior Secured Notes Indenture contains customary events of default and covenants relating to, among other things, the incurrence of debt, affiliate transactions, liens and restricted payments. On or after March 27, 2022, we may redeem all of the 10.25% Senior Secured Notes at a price equal to 108% of the principal amount of the 10.25% Senior Secured Note plus accrued and unpaid interest, with such optional redemption prices decreasing to 104% on and after March 27, 2023, 102% on and after March 27, 2024 and 100% on and after March 27, 2026. Before March 27, 2022, we may redeem the 10.25% Senior Secured Note upon repayment of a make-whole premium. If we experience a change of control, we must offer to purchase for cash all or any part of each holder’s 10.25% Senior Secured Note at a purchase price equal to 101% of the principal amount of the 10.25% Senior Secured Note, plus accrued and unpaid interest.
The amended 6% Convertible Notes and the $30.0 million new 10% Convertible Notes were all memorialized in the Amended and Restated Indenture between the Company and US National Bank dated April 20, 2020.
Other Events
There have been no other subsequent events that occurred during the period subsequent to the date of these financial statements that would require adjustment to our 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
Restatement of Previously Issued Consolidated Financial Statements
We have restated our previously reported financial information as of and for the three months ended March 31, 2019 in this Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations, including but not limited to information within Results of Operations and Liquidity and Capital Resources sections.
See Note 2, Restatement of Previously Issued Consolidated Financial Statements, in Item 1, Financial Statements, for additional information related to the restatement, including descriptions of the misstatements and the impacts on our consolidated financial statements.
Description of Bloom Energy
Our solution, the Bloom 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 Bloom Energy Server converts standard low-pressure natural gas, biogas or hydrogen 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. 250 kilowatts of power is roughly equivalent to the constant power requirement of a typical big box retail store. Any number of our Energy Server systems can be clustered together in various configurations to form solutions from hundreds of kilowatts to many tens of megawatts. We currently primarily target commercial and industrial customers.
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. Recognizing that deploying our solutions requires a material financial commitment, we have developed a number of financing options to support sales of our Energy Servers to customers who lack the financial capability to purchase our Energy Servers directly, 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 product and financing options to the below-investment-grade customers 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.
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COVID-19 Pandemic
General
We have been and will continue monitoring and adjusting as appropriate our operations in response to the COVID-19 pandemic. As a technology company that supplies resilient, reliable and clean energy, we have been able to conduct the majority of operations as an “essential business” in California and Delaware, notwithstanding government “shelter in place” orders, although we have closed our headquarters building in Santa Clara County, California, and directed employees - unless they are directly supporting essential manufacturing production operations, installation work or service and maintenance activities - to work from their homes. For more information regarding the risks posed to our company by the COVID-19 pandemic, refer to Risk Factors - Risks Relating to Our Products and Manufacturing, Our business has been and will continue to be adversely affected by the COVID-19 pandemic.
Sales
In some markets, we have experienced an increase in time to close new business as our customers deal with the impact of the COVID-19 pandemic. Decision makers in organizations, such as education and entertainment, have shifted their focus to the immediate needs of the pandemic thus delaying their purchase decisions and capital outlays. While there may ultimately be a reduction in electricity needs due to decrease in economic activity, the current impact is more aligned with a longer signature cycle.
Our ability to continue to expand our business both domestically and internationally and develop customer relationships also has been negatively impacted by current travel restrictions. Our marketing efforts historically have often involved customer visits to our manufacturing centers in California or Delaware, which we have suspended.
On the other hand, a significant portion of our customers are hospitals, healthcare companies, retailers and data centers. These industries are composed of essential businesses that still need the resiliency and reliability offered by our products. We have seen an increase in demand for our products in these sectors where the COVID-19 pandemic has highlighted the benefits of always-on, on-site power in times of disaster and uncertainty. In addition, the pandemic has had no effect on our business in the Republic of Korea.
We have also had some unique opportunities to deploy our systems on an emergency basis to support temporary hospitals. We believe deploying clean electrical power with no oxides of nitrogen (NOx) or sulfur (SOx) emissions, especially as atmospheric pollutants, is important for facilities preparing to treat a respiratory disease like COVID-19. As a result of this opportunity to introduce our products to more healthcare providers, demand for our products at some permanent hospitals has also increased.
Customer Financing
COVID-19 has not yet impacted our ability to obtain financing for our customers’ use of our products, but we believe that the economic downturn associated with the pandemic could have a negative impact on the sources of capital we have historically utilized. A majority of the installations we have planned in the United States in 2020 remain contingent on securing financing for our customers’ use of our Energy Servers at their sites, which may be increasingly difficult to obtain. Our general recent experience has been that financing parties have capital to deploy and are interested in financing our Energy Servers and, at present, revenue and cash have not been impacted by our inability to obtain financing for customer installations.
Our ability to obtain financing for our Energy Servers partly depends on the creditworthiness of our customers. Some of our customers’ credit ratings have recently fallen, which may make it difficult for us to obtain financing for their use of an Energy Server. Although the impact of the COVID-19 pandemic on our ability to obtain financing for our customers’ use of our Energy Servers has not yet had a significant impact on our business, delays in obtaining financing for our Energy Servers would lead to a decrease in our revenue and cash. Furthermore, in cases where the inability to obtain financing only becomes apparent after we have installed an Energy Server, there would be no offsetting decrease in our expenses.
We have actively been working with new sources of capital that could finance projects. We believe the current environment may increase the time to solidify new relationships, and thus negatively impact the time required to achieve funding.
Liquidity and Capital Resources
We have implemented measures to preserve cash and enhance liquidity, including suspending salary increases and bonuses, instituting a company-wide hiring freeze, eliminating business travel, reducing capital expenditures, and delaying or eliminating discretionary spending. We are also focused on managing our working capital needs, maintaining as much
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flexibility as possible around timing of taking and paying for inventory and manufacturing our product while managing potential changes or delays in installations. However, there could be some impact to near-term working capital needs over the next two quarters as we have already committed to certain items with long lead-times.
While we do not expect that it will be necessary to access capital markets for cash to operate our business for the next 12 months and have extended the terms of the 10% Convertible Notes and 10% Constellation Note to December 2021, if the impact of COVID-19 to our business and financial position is more extensive than expected, we may need additional capital to enhance liquidity. Capital markets have been volatile and there is no assurance that we would have access to capital markets at a reasonable cost, or at all, at times when capital is needed. In addition, our existing debt has restrictive covenants that limit our ability to raise new debt or to sell assets, which would limit our ability to access liquidity by those means without obtaining consent from existing noteholders. The redemption penalty on our 10% Convertible Notes starting in October 2020 could also adversely affect our financial position if we are unable to access capital markets to refinance into reasonable terms. Refer to Note 7, Outstanding Loans and Security Agreements and Note 17, Subsequent Events - Senior Secured Notes Private Placement in Item 1, Financial Statements; Management’s Discussion and Analysis of Financial Condition and Results of Operations, Liquidity and Capital Resources; and Risk Factors - Risks Relating to Our Liquidity, 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 and We may not be able to generate sufficient cash to meet our debt service obligations, for more information regarding the terms of and risks associated with our debt.
Operations and maintenance cash flows for certain PPAs, direct purchases and leases are pledged to the 10% Senior Secured Notes and 10.25% Senior Secured Notes. If there is delay in payment from customers, or if a customer does not renew a contract with us that we expected to be renewed, either event could adversely affect our ability to service existing debt, which could trigger a default if non-payment extends beyond the grace period. Even if we are able to sustain debt service payments, if we could not meet certain minimum debt service coverage ratio levels specified in our debt agreements, excess cash after the debt has been serviced could not be released to support our operations and would negatively affect our liquidity position.
Installations of Energy Servers
The COVID-19 pandemic has caused delays in some of our installations. Since we do not recognize revenue on the sales of our products until installation and acceptance, installation delays have a negative impact on our operating results. Our installations have been deemed “essential business” and allowed to proceed in many jurisdictions, which has allowed us to continue to install our Energy Servers to date. However, restrictions in some jurisdictions, such as New York and New Jersey, have required us to suspend our installations there.
In addition, we have experienced delays and interruptions to our installations where customers have shut down or otherwise limited access to their facilities. Diminished access to utilities has also contributed to installation delays, as our installations require both gas and electrical hook ups. In some states, utilities are currently refusing to work on our installations or issue permits, thereby delaying completion of the affected projects indefinitely.
Some of our backlog can only be deployed when the customer brings on sufficient load for our systems. Facility closings and diminished economic activity delay that load coming online, leading customers to postpone the completion of installations.
We use general contractors and sub-contractors, and need supplies of various types of ancillary equipment, for our installations. Some of our suppliers have had COVID-19 outbreaks among their workforces, which have caused installation delays. In addition, the availability and productivity of contractors, sub-contractors, and suppliers has generally been negatively impacted by social distancing requirements and other safety measures.
None of our installations in the quarter ended March 31, 2020 were impacted by COVID-19. Several installations scheduled for the next two quarters are currently impacted as the customer sites are closed, and either we are not being allowed on site or the local utility is refusing to come to our site to perform the required work so we can power up our Energy Server.
Manufacturing
As an essential business, we have continued to manufacture Energy Servers, but have adopted strict measures to keep our employees safe. These measures have decreased productivity to an extent, but our deployments, maintenance and installations have not yet been constrained by our current pace of manufacturing.
If we become aware of any cases of COVID-19 among our manufacturing employees, we would be required to shut down the applicable facility until it could be sanitized, which we believe would take anywhere from one to four days. Although
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this has not yet occurred, we believe there is a reasonable likelihood that it will in the future, which may cause delays in deployments of our Energy Servers.
Purchase and Lease Options
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 (including customers who are unable to monetize the tax credits available to purchasers of our Energy Servers) 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 ("Traditional Lease"), Managed Services, and power purchase agreement programs ("PPA Programs").
Our capacity to offer our Energy Servers through any of these financed arrangements depends in large part on the ability of the financing party or parties involved to monetize the related investment tax credits, accelerated tax depreciation and other incentives. Interest rate fluctuations may 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 and PPA Program options are limited by the creditworthiness of the customer. Additionally, the Managed Services and Traditional Lease 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.
In each of our purchase options, we typically perform the functions of a project developer, including identifying end customers and financiers, leading the negotiations of the customer agreements and financing agreements, securing all necessary permitting and interconnections approvals, and overseeing the design and construction of the project up to and including commissioning the Energy Servers.
Under each purchase option, we provide warranties and performance guaranties for the Energy Servers’ efficiency and output. We refer to a “warranty” as a commitment where the failure of the Energy Servers to satisfy the stated performance level obligates us to repair or replace the Energy Servers as necessary to improve performance. If we fail to complete such repair or replacement, or if repair or replacement is impossible, we may be obligated to repurchase the Energy Servers from the customer or financier. We refer to a “guaranty” as a commitment where the failure of the Energy Servers to satisfy the stated performance level obligates us to make a payment to compensate the beneficiary of such guaranty for the resulting increased cost or diminution in benefits resulting from such failure. Our obligation to make payments under the guaranty is always contractually capped and represents a contingency linked to our services obligation with no economic incentive for us to default and force an exercise of the payment obligation.
Under direct purchase and Traditional Lease, the warranties and guaranties are typically included in the price of our Energy Server for the first year. The warranties and guaranties 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 and financiers have almost always exercised their option to renew the warranties and guaranties under these operations and maintenance services agreements.
Under the Managed Services Program, the warranties and guaranties are included for the fixed period specified in the customer agreement. This period is typically 10 years, which may be extended at the option of the parties for additional years.
Under the PPA Programs, we typically provide warranties and guaranties regarding our Energy Servers’ efficiency to the customer (i.e., the end user of the electricity generated by our Energy Servers, who is also responsible for the purchase of the fuel required for our Energy Servers’ operations), and we provide warranties and guaranties regarding our Energy Servers’ output to the financier(s) that purchases our Energy Servers. The warranties and guaranties are typically included in the price of our Energy Server for the first year and may be renewed annually at the financier’s option, as an operations and maintenance services agreement, at predetermined prices for a period of up to 30 years. Historically, our financiers have almost always exercised their option to renew the warranties and guaranties under these operations and maintenance services agreements. We also provide a fixed schedule of prices for each year of the term of our agreements with our Customers and none of our Customers have failed to renew our operations and maintenance agreements.
The substantial majority of bookings made in recent periods are pursuant to the PPA and the Managed Services Programs.
Each of our financing structures is described in further detail below.
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Traditional Lease
![traditionalleasecroppedanddo.jpg](https://www.sec.gov/Archives/edgar/data/0001664703/000166470320000037/traditionalleasecroppedanddo.jpg)
Under the Traditional Lease arrangement, the customer enters into a lease directly with a financier, which pays us for our Energy Servers purchased pursuant to a sales agreement (see the description of the Financing Agreement below). We recognize product and installation revenue upon acceptance. After the standard one-year warranty period, our customers have almost always exercised the option to enter into operations and maintenance services agreements with us, under which we receive annual service payments from the customer. The price for the annual operations and maintenance services is set at the time we enter into the Financing Agreement. The term of a lease in a Traditional Lease ranges from 5 to 8 years.
Under a Financing Agreement, we are generally paid the full price of our Energy Servers as if sold as a purchase by the customer based on four milestones. The four payment milestones are typically as follows: (i) 15% upon execution of the financier's entry into the lease with a customer, (ii) 25% on the day that is 180 days prior to delivery of the Energy Servers, (iii) 40% upon shipment of the Energy Servers, and (iv) 20% upon acceptance of the Energy Servers. The financier receives title to the Energy Servers upon installation at the customer site and the financier has risk of loss while our Energy Server is in operation on the customer’s site.
The Financing Agreement provides for the installation of our Energy Servers and includes a standard one-year warranty, to the financier, which includes the performance guaranties described below, with the warranty offered on an annually renewing basis at the discretion of, and to, the customer. The customer must provide fuel for the Bloom Energy Servers to operate.
Our direct lease deployments typically provide for warranties and guaranties of both the efficiency and output of our Energy Servers, all of which are written in favor of the customer and contained in the operations and maintenance services agreement. These warranties and guaranties may be measured on a monthly, annual, cumulative or other basis. As of December 31, 2019, we had incurred no liabilities due to failure to repair or replace our Energy Servers pursuant to these warranties. Our obligation to make payments for underperformance against the performance guaranties for Traditional Lease projects was capped contractually under the sales agreements between us and each customer at an aggregate total of approximately $6.0 million (including payments both for low output and for low efficiency), and, our aggregate remaining potential liability under this cap was approximately $4.8 million.
Remarketing at Termination of Lease
In the event the customer does not renew or purchase our Energy Servers to the end of any customer lease, we may remarket any such Energy Servers to a third party. Any proceeds of such sale would be allocated between us and the applicable financing partner as agreed between them at the time of such sale.
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Managed Services Financing
![a10kmstransactionsart.jpg](https://www.sec.gov/Archives/edgar/data/0001664703/000166470320000037/a10kmstransactionsart.jpg)
In a Managed Services financing, we enter into a Managed Services Agreement with a customer, pursuant to which the customer is able to use the Energy Server for a certain term. Under the Managed Services Agreement, the customer makes a monthly payment for the use of the Energy Server. The customer payment typically has two components: (i) a fixed monthly capacity-based payment and (ii) a performance-based payment based on the output of electricity that month from the Energy Server. The fixed capacity-based payments made by the customer under the Managed Services Agreement are applied toward our obligation to pay down our liability under the master lease with the financier. The performance payment is transferred to us as compensation for operations and maintenance services and recorded as services revenue within the consolidated statements of operations. In some cases, the customer’s monthly payment consists solely of the first component, a fixed monthly capacity-based payment.
Once a financier is identified and the Energy Server’s installation is complete, we sell the Energy Server contemplated by the Managed Services Agreement directly to a financier and the financier, as lessor, leases it back to us, as lessee, pursuant to a master lease in a sale-leaseback transaction. The proceeds from the sale are recorded as a financing obligation within the consolidated balance sheets. Any ongoing operations and maintenance service payments are scheduled in the Managed Services Agreement in the form of the performance-based payment described above. The financier typically pays the financing proceeds for the Energy Server contemplated by the Managed Services Agreement on or shortly after acceptance.
The fixed capacity payments made by the customer under the Managed Services Agreement are recognized as electricity revenue when billed and applied toward our obligation to pay the financing obligation under the master lease. Our Managed Services financings have historically shifted customer credit risk to the financier, as lessor, by providing in the master lease agreement that we have no liability for payment of rent except in certain enumerated circumstances, including in the event we are in breach of the Managed Services Agreement between us and the customer.
The duration of the master lease in a Managed Services financing is typically 10 years. The term of the master lease is typically the same as the term of the related Managed Services Agreement, but in some cases the term of the master lease is shorter than that of the Managed Services Agreement.
Our Managed Services deployments typically provide only for warranties of both the efficiency and output of the Energy Server(s), all of which are written in favor of the customer and contained in the operations and maintenance services agreement. These warranties may be measured on a monthly, annual, cumulative or other basis. Managed Services projects typically do not include guaranties above the warranty commitments, but in projects where the customer agreement includes a service payment for our operations and maintenance, that payment is typically proportionate to the output generated by the Energy Server(s) and our pricing assumes service revenues at the 95% output level. This means that our service revenues may be lower than expected if output is less than 95% and higher if output exceeds 95%. As of December 31, 2019, we had incurred no liabilities due to failure to repair or replace our Energy Servers pursuant to these warranties and the fleet of our
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Energy Servers deployed pursuant to the Managed Services Program was performing at a lifetime average output of approximately 88%.
Power Purchase Agreement Programs
![investmentcompanygraph.jpg](https://www.sec.gov/Archives/edgar/data/0001664703/000166470320000037/investmentcompanygraph.jpg)
*Under the Third Party PPA arrangements, there is no link with an investment company, as we do not have an equity investment in these arrangements.
In each Power Purchase Agreement, we sell our Energy Servers to an Operating Company which sells the electricity generated by the Energy Servers to the ultimate end customers pursuant to a Power Purchase Agreement, energy services agreement, or similar contract. Because the end customer's payment is stated on a dollar-per-kilowatt-hour basis, we refer to these agreements as Power Purchase Agreements ("PPAs"). Currently, our offerings for PPA Programs primarily include our Third-Party PPA Programs pursuant to which we recognize revenue on acceptance. Through 2017, as part of our PPA Programs, we had also offered the Bloom Electrons Program which included an equity investment by us in the Operating Company and in which we recognized revenue as the electricity was produced. For further discussion on our Bloom Electrons Programs, see Note 13, Power Purchase Agreement Programs, in Item 1, Financial Statements.
In our Power Purchase Agreement Program, we enter into an Energy Server sales, operations and maintenance agreement ("EPC and O&M Agreement") with the Operating Company that will own the Energy Servers. The Operating Company then enters into the PPA with the end customer which purchases electricity generated by the Energy Servers. The Operating Company receives all cash flows generated under the PPA(s), in addition to all investment tax credits, all accelerated tax depreciation benefits, and any other cash flows generated by the operation of the Energy Servers not allocated to the end customer under the PPA.
The sales of our Energy Servers to the Operating Company in connection with the various Power Purchase Agreement Programs have many of the same terms and conditions as a direct sale. Payment of the purchase price is generally broken down into multiple installments, which may include payments prior to shipment, upon shipment or delivery of the Energy Server, and upon acceptance of the Energy Server. Acceptance typically occurs when the Energy Server is installed and running at full power as defined in the applicable EPC and O&M Agreement. A one-year service warranty is provided with the initial sale. After the expiration of the initial standard one-year warranty, the Operating Company has the option to extend our operations and maintenance services under the EPC and O&M Agreement on an annual basis at a price determined at the time of purchase of our Energy Server, which may be renewed annually for each Energy Server for up to 30 years. After the
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standard one-year warranty period, the Operating Company has almost always exercised the option to renew our operations and maintenance obligations under the EPC and O&M Agreement.
We typically provide output warranties and output guaranties to the Operating Company pursuant to the applicable EPC and O&M Agreement with the Operating Company. The end customer agreement between the Operating Company and the end customer also provides efficiency warranties and efficiency guaranties to the end user, and we provide a backstop of all of the Operating Company’s obligations under those agreements, including both the repair or replacement obligations pursuant to the warranties and any payment liabilities under the guaranties.
As of December 31, 2019, we had incurred no liabilities due to failure to repair or replace Energy Servers pursuant to these warranties. Our obligation to make payments for underperformance against the performance guaranties for Power Purchase Agreement projects was capped at an aggregate total of approximately $75.4 million (including payments both for low output and for low efficiency) and our aggregate remaining potential liability under this cap was approximately $59.8 million.
Obligations to Operating Companies
In addition to our obligations to the end customers, our Power Purchase Agreement Programs involve many obligations to the Operating Company that purchases our Energy Servers. These obligations are set forth in the applicable EPC and O&M Agreement(s), and may include some or all of the following obligations:
• | designing, manufacturing, and installing the Energy Servers, and selling such Energy Servers to the Operating Company, |
• | obtaining all necessary permits and other governmental approvals necessary for the installation and operation of the Bloom Energy Servers, and maintaining such permits and approvals throughout the term of the EPC and O&M Agreements, |
• | operating and maintaining the Bloom Energy Servers in compliance with all applicable laws, permits and regulations, |
• | satisfying the efficiency and output warranties set forth in such EPC and O&M Agreements and the PPAs ("performance warranties"), and |
• | complying with any specific requirements contained in the PPAs with individual end-customers. |
The EPC and O&M Agreements obligate us to repurchase the Energy Servers in the event the Energy Servers fail to comply with the performance warranties and in the event we otherwise breach the terms of the applicable EPC and O&M Agreements and we fail to remedy such failure or breach after a cure period, or in the event that a PPA terminates as a result of any failure by us to comply with the applicable EPC and O&M Agreements. In some PPA Program projects, our obligation to repurchase Energy Servers extends to the entire fleet of Energy Servers sold pursuant to the applicable EPC and O&M Agreements in the event such failure affects more than a specified number of Energy Servers.
In some PPA Programs, we have also agreed to pay liquidated damages to the applicable Operating Company in the event of delays in the manufacture and installation of our Energy Servers, either in the form of a cash payment or a reduction in the purchase price for the applicable Energy Servers.
Both the upfront purchase price for the Energy Servers and the ongoing fees for our operations and maintenance are paid on a fixed dollar-per-kilowatt basis.
Indemnification of Performance Warranty Expenses Under PPAs - In addition to the performance warranties and guaranties in the EPC and O&M Agreements, we also have agreed to indemnify certain Operating Companies for any expenses they incur to any of the end customers resulting from failures of the applicable Energy Servers to satisfy any of the performance warranties and guaranties set forth in the applicable PPAs.
Administration of Operating Companies - In each of the Bloom Electrons programs, we perform certain administrative services on behalf of the applicable Operating Company, including invoicing the end customers for amounts owed under the PPAs, administering the cash receipts of the Operating Company in accordance with the requirements of the financing arrangements, interfacing with applicable regulatory agencies, and other similar obligations. We are compensated for these services on a fixed dollar-per-kilowatt basis.
The Operating Company in each of the Bloom Electrons Programs (other than PPA I) has incurred debt in order to finance the acquisition of Energy Servers. The lenders for these projects are a combination of banks and/or institutional investors. In each case, the debt is secured by all of the assets of the applicable Operating Company, such assets being primarily comprised of the Energy Servers and a collateral assignment of each of the contracts to which the Operating Company is a party, including the O&M Agreement entered into with us and the offtake agreements entered into with the Operating Company’s customers, and is senior to all other debt obligations of the Operating Company. As further collateral,
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the lenders receive a security interest in 100% of the membership interest of the Operating Company. However, as is typical in structured finance transactions of this nature, although the project debt is secured by all of the Operating Company’s assets, the lenders have no recourse to us or to any of the other equity investors in the project. The applicable debt agreements include provisions that implement a customary “payment waterfall” that dictates the priority in which the Operating Company will use its available funds to satisfy its payment obligations to us, the lenders, the tax equity investors and other third parties.
We have determined that we are the primary beneficiary in the PPA Entities, subject to reassessments performed as a result of upgrade transactions (see Note 13, Power Purchase Agreement Programs, in Item 1, Financial Statements. Accordingly, we consolidate 100% of the assets, liabilities and operating results of these entities, including the Energy Servers and lease income, in our consolidated financial statements. We recognize the tax equity investors’ share of the net assets of the investment entities as noncontrolling interests in subsidiaries in our consolidated balance sheet. We recognize the amounts that are contractually payable to these investors in each period as distributions to noncontrolling interests in our consolidated statements of convertible redeemable preferred stock, redeemable noncontrolling interest, stockholders' deficit and noncontrolling interest. Our consolidated statements of cash flows reflect cash received from these investors as proceeds from investments by noncontrolling interests in subsidiaries. Our consolidated statements of cash flows also reflect cash paid to these investors as distributions paid to noncontrolling interests in subsidiaries. We reflect any unpaid distributions to these investors as distributions payable to noncontrolling interests in subsidiaries on our consolidated balance sheets. However, the PPA Entities are separate and distinct legal entities, and Bloom Energy Corporation may not receive cash or other distributions from the PPA Entities except in certain limited circumstances and upon the satisfaction of certain conditions, such as compliance with applicable debt service coverage ratios and the achievement of a targeted internal rate of return to the tax equity investors, or otherwise.
For further information about our Power Purchase Agreement Programs, see Note 13, Power Purchase Agreement Programs, in Item 1, Financial Statements.
Delivery and Installation
The timing of delivery and installations of our products have a significant impact on the timing of the recognition of product revenue. Many factors can cause a lag between the time that a customer signs a purchase order and our recognition of product revenue. These factors include the number of Energy Servers installed per site, local permitting and utility requirements, environmental, health and safety requirements, weather, and customer facility construction schedules. Many of these factors are unpredictable and their resolution is often outside of our or our customers’ control. Customers may also ask us to delay an installation for reasons unrelated to the foregoing, including delays in their obtaining financing. Further, due to unexpected delays, deployments may require unanticipated expenses to expedite delivery of materials or labor to ensure the installation meets the timing objectives. These unexpected delays and expenses can be exacerbated in periods in which we deliver and install a larger number of smaller projects. In addition, if even relatively short delays occur, there may be a significant shortfall between the revenue we expect to generate in a particular period and the revenue that we are able to recognize. For our installations, revenue and cost of revenue can fluctuate significantly on a periodic basis depending on the timing of acceptance and the type of financing used by the customer. As described in the Power Purchase Agreement Programs section above, we offered the Bloom Electrons purchase program through the end of 2016 and no longer offer this financing structure to potential customers.
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.
Japan. 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 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.
The Republic of Korea. In 2018, Bloom Energy Japan consummated a sale of Energy Servers in the Republic of Korea to Korea South-East Power Company. Following this sale, we entered into a Preferred Distributor Agreement with SK Engineering & Construction Co., Ltd. ("SK E&C") to enable us to sell directly into the Republic of Korea.
Under our agreement with SK E&C, SK E&C has a right of first refusal during the term of the agreement, with certain exceptions, to serve as distributor of Energy Servers for any fuel cell generation project in the Republic of Korea, and we have the right of first refusal to serve as SK E&C’s supplier of generation equipment for any Bloom Energy fuel cell project in the Republic of Korea. Under the terms of each purchase order, title, risk of loss and acceptance of the Energy Servers pass from
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us to SK E&C upon delivery at the named port of lading for shipment in the United States for the Energy Servers shipped in 2018 and thereafter upon delivery at the named port of unlading in the Republic of Korea, prior to unloading subject to final purchase order terms. The Preferred Distributor Agreement has an initial term expiring on December 31, 2021, and thereafter will automatically be renewed for three-year renewal terms unless either party terminates the Preferred Distributor Agreement by written notice under certain circumstances.
Under the terms of the Preferred Distributor Agreement, we (or our subsidiary) contract directly with the customer to provide operations and maintenance services for the Energy Servers. We have established a subsidiary in the Republic of Korea, Bloom Energy Korea, LLC, to which we subcontract such operations and maintenance services. The terms of the operations and maintenance are negotiated on a case-by-case basis with each customer, but are generally expected to provide the customer with the option to receive services for at least 10 years, and for up to the life of the Energy Servers.
SK E&C Joint Venture Agreement. In September 2019, we entered into a joint venture agreement with SK E&C to establish a light-assembly facility in the Republic of Korea for sales of certain portions of the Bloom Server for the stationary utility and commercial and industrial market in the Republic of Korea. The joint venture is majority controlled and managed by us. 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, who currently acts as a distributor for Bloom Servers for the stationary utility and commercial and industrial market in the Republic of Korea, will be the primary customer for the products assembled by the joint venture.
Community Distributed Generation Programs
In July 2015, the state of New York introduced its Community Distributed Generation program, which extends New York’s net metering program in order to allow utility customers to receive net metering credits for electricity generated by distributed generation assets located on the utility’s grid but not physically connected to the customer’s facility. This program allows for the use of multiple generation technologies, including fuel cells.
In December 2019, we entered into fuel cell sales, installation, operations and maintenance agreements with two developers for the deployment of fuel cells pursuant to this Community Distributed Generation program. These agreements have many of the same terms and conditions as a direct sale. Payment of the purchase price is generally broken down into multiple installments, which may include payments prior to shipment, upon shipment or delivery of the Energy Server, and upon acceptance of the Energy Server. Acceptance typically occurs when the Energy Server is installed and running at full power as defined in each contract. A one-year service warranty is provided with the initial sale. After the expiration of the initial standard one-year warranty, the owner has the option to renew our operations and maintenance services for subsequent quarterly or annual periods for up to 30 years. We provide warranties and guaranties regarding both efficiency and output to the owners of the Energy Servers pursuant to the operations and maintenance services agreement with the Operating Company.
As of March 31, 2020, we had not yet completed the sale of any Energy Servers in connection with the New York Community Distributed Generation program.
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. |
• | Billings for product accepted in the period - the total contracted dollar amount of the product component of all Energy Servers that are accepted in a period. We use this metric to gauge the dollar value of the product acceptances and to evaluate the change in dollar amount of acceptances between periods. |
• | Billings for installation on product accepted in the period - the total contracted dollar amount billable with respect to the installation component of all Energy Servers that are accepted. We use this metric to gauge the dollar value of the installations of our product acceptances and to evaluate the change in dollar value associated with the installation of our product acceptances between periods. |
• | Billings for annual maintenance service agreements - the dollar amount billable for one-year service contracts that have been initiated or renewed. We use this metric to measure the cumulative billings for all service contracts in any given period. As our installation base grows, we expect our billings for annual maintenance service agreements to grow, as well. |
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• | 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, such as stock-based compensation) into inventory and therefore, expensed to our consolidated statement of operations in the period that they are incurred. |
• | 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 Months Ended March 31, 2020 and 2019
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 periods were as follows:
Three Months Ended March 31, | Change | |||||||||||
2020 | 2019 | Amount | % | |||||||||
Product accepted during the period (in 100 kilowatt systems) | 256 | 235 | 21 | 8.9 | % |
Product accepted increased by approximately 21 systems, or 8.9%, for the three months ended March 31, 2020 compared to the three months ended March 31, 2019. Acceptance volume increased as we installed more systems from backlog as demand increased for our Bloom Energy servers, in addition to enhancing 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 months ended March 31, 2020 and 2019 was as follows:
Three Months Ended March 31, | ||||||
2020 | 2019 | |||||
Direct Purchase (including Third Party PPAs and International Channels) | 98 | % | 95 | % | ||
Managed Services | 2 | % | 5 | % | ||
100 | % | 100 | % |
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As discussed in the Purchase and Lease Programs above, our customers have several purchase options for our Energy Servers. The portion of total revenue attributable to each purchase option in the period was as follows:
Three Months Ended March 31, | ||||||
2020 | 2019 | |||||
Direct Purchase (including Third Party PPAs and International Channels) | 85 | % | 81 | % | ||
Traditional Lease | 1 | % | 1 | % | ||
Managed Services | 7 | % | 6 | % | ||
Bloom Electrons | 7 | % | 12 | % | ||
100 | % | 100 | % |
Billings Related to Our Products
Three Months Ended March 31, | Change | ||||||||||||||
2020 | 2019 | Amount | % | ||||||||||||
(dollars in thousands) | |||||||||||||||
Billings for product accepted in the period | $ | 111,771 | $ | 106,729 | $ | 5,042 | 4.7 | % | |||||||
Billings for installation on product accepted in the period | 14,611 | 14,463 | 148 | 1.0 | % | ||||||||||
Billings for annual maintenance services agreements | 20,219 | 17,620 | 2,599 | 14.8 | % |
Billings for product accepted increased by approximately $5.0 million, or 4.7%, for the three months ended March 31, 2020, as compared to the three months ended March 31, 2019. The increase was primarily driven by the increase in product accepted. Product accepted increased by approximately 21 systems, or 8.9%, for the three months ended March 31, 2020 compared to the three months ended March 31, 2019. Billings for installation on product accepted increased $0.1 million for the three months ended March 31, 2020, as compared to the three months ended March 31, 2019. Although product acceptances in the period increased 8.9%, billings for installation on product accepted increased 1.0% due to the mix in installation billings driven by site complexity, site size, customer financing option, personalized applications and customer option to complete the installation of our Energy Servers themselves. Billings for annual maintenance service agreements increased $2.6 million for the three months ended March 31, 2020, as compared to the three months ended March 31, 2019. This increase was driven primarily by the increase in our installed base.
Costs Related to Our Products
Three Months Ended March 31, | Change | ||||||||
2020 | 2019 | Amount | % | ||||||
Product costs of product accepted in the period | $2,514/kW | $3,206/kW | $(692)/kW | (21.6 | )% | ||||
Period costs of manufacturing related expenses not included in product costs (in thousands) | $6,354 | $6,937 | $(583) | (8.4 | )% | ||||
Installation costs on product accepted in the period | $784/kW | $676/kW | $108/kW | 16.0 | % |
Product costs of product accepted decreased by approximately $692 per kilowatt, or 21.6%, for the three months ended March 31, 2020, as compared to the three months ended March 31, 2019. 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 by approximately $0.6 million, or 8.4%, for the three months ended March 31, 2020, as compared to the three months ended March 31, 2019. 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.
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Installation costs on product accepted increased by approximately $108 per kilowatt, or 16.0%, for the three months ended March 31, 2020, as compared to the three months ended March 31, 2019. Each customer site is different and installation costs can vary due to a number of factors, including site complexity, size, location of gas, personalized applications, customer option to complete the installation of our Energy Servers themselves. As such, installation on a per kilowatt basis can vary significantly from period-to-period.
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Results of Operations
A discussion regarding the comparison of our financial condition and results of operations for the three months ended March 31, 2020 and 2019 is presented below.
Comparison of the Three Months Ended March 31, 2020 and 2019
Revenue
Three Months Ended March 31, | Change | ||||||||||||||
2020 | 2019 | Amount | % | ||||||||||||
As Restated | |||||||||||||||
(dollars in thousands) | |||||||||||||||
Product | $ | 99,559 | $ | 90,926 | $ | 8,633 | 9.5 | % | |||||||
Installation | 16,618 | 12,219 | 4,399 | 36.0 | % | ||||||||||
Service | 25,147 | 23,467 | 1,680 | 7.2 | % | ||||||||||
Electricity | 15,375 | 20,389 | (5,014 | ) | (24.6 | )% | |||||||||
Total revenue | $ | 156,699 | $ | 147,001 | $ | 9,698 | 6.6 | % |
Total Revenue
Total revenue increased by approximately $9.7 million, or 6.6%, for the three months ended March 31, 2020, as compared to the three months ended March 31, 2019. This increase was driven primarily by the increase in product acceptances of approximately 21 systems, or 8.9%, for the three months ended March 31, 2020, as compared to the three months ended March 31, 2019, offset partially by the decrease in electricity revenue which was a result of the decommissioning and deconsolidation of the existing Energy Servers during the PPA II upgrade of Energy Servers. Electricity revenue is driven from our former Bloom Electrons program, which included PPA II. When these PPAs were decommissioned, we no longer recognized electricity revenue for them.
Product Revenue
Product revenue increased by approximately $8.6 million, or 9.5%, for the three months ended March 31, 2020, as compared to the three months ended March 31, 2019. This increase was driven by the increase in product acceptances of approximately 21 systems, or 8.9%, for the three months ended March 31, 2020.
Installation Revenue
Installation revenue increased by approximately $4.4 million, or 36.0%, for the three months ended March 31, 2020, as compared to the three months ended March 31, 2019. This increase was driven by the increase in product acceptances of approximately 21 systems, or 8.9%, for the three months ended March 31, 2020 and due to the change in mix of installations driven by international sales, where our partners perform the installation, as well as site complexity, site size, customer financing option, and customer option to complete the installation of our Energy Servers themselves.
Service Revenue
Service revenue increased by approximately $1.7 million, or 7.2% for the three months ended March 31, 2020, as compared to the three months ended March 31, 2019. 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 by approximately $5.0 million, or 24.6%, for the three months ended March 31, 2020, as compared to the three months ended March 31, 2019, due to a reduction in electricity revenues resulting from the decommissioning and deconsolidation of the existing Energy Servers during the PPA II upgrade of Energy Servers. Electricity revenue is driven from our former Bloom Electrons program, which included PPA II, as well as from our Managed Services agreements. When PPAs are decommissioned, we no longer recognize electricity revenue for them.
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Cost of Revenue
Three Months Ended March 31, | Change | ||||||||||||||
2020 | 2019 | Amount | % | ||||||||||||
As Restated | |||||||||||||||
(dollars in thousands) | |||||||||||||||
Cost of revenue: | |||||||||||||||
Product | $ | 72,489 | $ | 88,772 | $ | (16,283 | ) | (18.3 | )% | ||||||
Installation | 20,779 | 15,760 | 5,019 | 31.8 | % | ||||||||||
Service | 30,970 | 27,921 | 3,049 | 10.9 | % | ||||||||||
Electricity | 12,530 | 12,984 | (454 | ) | (3.5 | )% | |||||||||
Total cost of revenue | $ | 136,768 | $ | 145,437 | $ | (8,669 | ) | (6.0 | )% |
Total Cost of Revenue
Total cost of revenue decreased by approximately $8.7 million, or 6.0%, for the three months ended March 31, 2020, as compared to the three months ended March 31, 2019. Included as a component of total cost of revenue, stock-based compensation decreased approximately $12.8 million for the three months ended March 31, 2020, as compared to the three months ended March 31, 2019. Total cost of revenue, excluding stock-based compensation, increased approximately $4.1 million, or 3.3%, for the three months ended March 31, 2020, as compared to the three months ended March 31, 2019 driven by the increase in product acceptances of approximately 21 systems, and due to the increase in service cost of revenue from an increased installed base.
Cost of Product Revenue
Cost of product revenue decreased by approximately $16.3 million, or 18.3%, for the three months ended March 31, 2020, as compared to the three months ended March 31, 2019. Included as a component of cost of product revenue, stock-based compensation decreased approximately $11.9 million for the three months ended March 31, 2020, as compared to the three months ended March 31, 2019. Cost of product revenue, excluding stock-based compensation, decreased approximately $4.4 million, or 5.9%, for the three months ended March 31, 2020, as compared to the three months ended March 31, 2019 despite an increase in product acceptances due to ongoing cost reduction efforts to reduce material, labor and overhead costs.
Cost of Installation Revenue
Cost of installation revenue increased by approximately $5.0 million, or 31.8%, for the three months ended March 31, 2020, as compared to the three months ended March 31, 2019, primarily due to the increase in product acceptances of approximately 21 systems, or 8.9%, for the three months ended March 31, 2020 and due to the change in mix of installations driven by site complexity, size, location of gas, and customer option to complete the installation of our Energy Servers themselves.
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Cost of Service Revenue
Cost of service revenue increased by approximately $3.0 million, or 10.9%, for the three months ended March 31, 2020, as compared to the three months ended March 31, 2019. 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 and renewed.
Cost of Electricity Revenue
Cost of electricity revenue decreased by approximately $0.5 million, or 3.5%, for the three months ended March 31, 2020, as compared to the three months ended March 31, 2019, mainly due to the decommissioning and deconsolidation of Energy Servers associated with the PPA II upgrade of Energy Servers in 2019 , offset by the increase in MSA acceptances which result in costs of electricity revenue recognized over the period of the related agreement.
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Gross Profit (Loss)
Three Months Ended March 31, | Change | |||||||||||
2020 | 2019 | |||||||||||
As Restated | ||||||||||||
(dollars in thousands) | ||||||||||||
Gross profit: | ||||||||||||
Product | $ | 27,070 | $ | 2,154 | $ | 24,916 | ||||||
Installation | (4,161 | ) | (3,541 | ) | (620 | ) | ||||||
Service | (5,823 | ) | (4,454 | ) | (1,369 | ) | ||||||
Electricity | 2,845 | 7,405 | (4,560 | ) | ||||||||
Total gross profit | $ | 19,931 | $ | 1,564 | $ | 18,367 | ||||||
Gross margin: | ||||||||||||
Product | 27 | % | 2 | % | ||||||||
Installation | (25 | )% | (29 | )% | ||||||||
Service | (23 | )% | (19 | )% | ||||||||
Electricity | 19 | % | 36 | % | ||||||||
Total gross margin | 13 | % | 1 | % |
Total Gross Profit
Gross profit improved $18.4 million in the three months ended March 31, 2020, as compared to the three months ended March 31, 2019. Included as a component of total cost of revenue, stock-based compensation decreased approximately $12.8 million for the three months ended March 31, 2020, as compared to the three months ended March 31, 2019. Total gross profit, excluding stock-based compensation, increased approximately $5.6 million, or 28.0%, for the three months ended March 31, 2020, as compared to the three months ended March 31, 2019 due to the increase in product acceptances and lower product cost driven by ongoing cost reduction activities.
Product Gross Profit
Product gross profit increased $24.9 million in the three months ended March 31, 2020, as compared to the three months ended March 31, 2019. Excluding stock-based compensation, product gross profit increased $13.0 million, or 76.3% in the three months ended March 31, 2020, as compared to the three months ended March 31, 2019. This increase was generally due to the increase in product acceptances and lower product cost driven by ongoing cost reduction activities.
Installation Gross Loss
Installation gross loss decreased $0.6 million in the three months ended March 31, 2020, as compared to the three months ended March 31, 2019. Excluding stock-based compensation, install gross loss increased $1.7 million, or 103.6% in the three months ended March 31, 2020, as compared to the three months ended March 31, 2019 driven by the increase in acceptances.
Service Gross Loss
Service gross loss increased $1.4 million in the three months ended March 31, 2020, as compared to the three months ended March 31, 2019. This increase was primarily due to an increase in service cost driven primarily by the timing of our service schedule for power module replacements required in our fleet of installed Energy Servers.
Electricity Gross Profit
Electricity gross profit decreased $4.6 million, or 61.6% in the three months ended March 31, 2020, as compared to the three months ended March 31, 2019, mainly due to the decommissioning of Energy Servers associated with the PPA II upgrade in 2019.
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Operating Expenses
Three Months Ended March 31, | Change | ||||||||||||||
2020 | 2019 | Amount | % | ||||||||||||
As Restated | |||||||||||||||
(dollars in thousands) | |||||||||||||||
Research and development | $ | 23,279 | $ | 28,859 | $ | (5,580 | ) | (19.3 | )% | ||||||
Sales and marketing | 13,949 | 20,373 | (6,424 | ) | (31.5 | )% | |||||||||
General and administrative | 29,098 | 39,074 | (9,976 | ) | (25.5 | )% | |||||||||
Total operating expenses | $ | 66,326 | $ | 88,306 | $ | (21,980 | ) | (24.9 | )% |
Total Operating Expenses
Total operating expenses decreased $22.0 million, or 24.9%, in the three months ended March 31, 2020, as compared to the three months ended March 31, 2019. Included as a component of total operating expenses, stock-based compensation expenses decreased approximately $32.0 million for the three months ended March 31, 2020, as compared to the three months ended March 31, 2019. The decrease in stock-based compensation expense is primarily attributable to a lower stock-based compensation charge attributed to a one-time employee grant of restricted stock units ("RSUs") awarded prior to IPO with a performance condition of an IPO of the Company's securities. These RSUs have a two-year vesting period starting on the day of IPO and were issued as an employee retention vehicle to bring our stock-based compensation in line with our peer group. These RSUs will complete their vesting in July of 2020, and the stock-based compensation charge associated with these RSUs decreases quarter-over-quarter until the final vesting date. In addition to the one-time grant, the stock-based compensation includes some previously granted RSUs with vesting beginning upon the completion of our IPO. Total operating expenses, excluding stock-based compensation, increased approximately $10.0 million, or 25.8%, in the three months ended March 31, 2020, as compared to the three months ended March 31, 2019. 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. The increase also includes one-time expenses associated with restatement related expenses.
Research and Development
Research and development expenses decreased by approximately $5.6 million, or 19.3%, in the three months ended March 31, 2020, as compared to the three months ended March 31, 2019. Included as a component of research and development expenses, stock-based compensation expenses decreased by approximately $8.1 million for the three months ended March 31, 2020, as compared to the three months ended March 31, 2019. Total research and development expenses, excluding stock-based compensation, increased by approximately $2.6 million, or 17.5%, for the three months ended March 31, 2020, as compared to the three months ended March 31, 2019. 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 by approximately $6.4 million, or 31.5%, in the three months ended March 31, 2020, as compared to the three months ended March 31, 2019. Included as a component of sales and marketing expenses, stock-based compensation expenses decreased by approximately $7.6 million for the three months ended March 31, 2020, as compared to the three months ended March 31, 2019. Total sales and marketing expenses, excluding stock-based compensation, increased by approximately $1.2 million, or 13.5%, for the three months ended March 31, 2020, as compared to the three months ended March 31, 2019. 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 attract new customer financing partners.
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General and Administrative
General and administrative expenses decreased by approximately $10.0 million, or 25.5%, in the three months ended March 31, 2020, as compared to the three months ended March 31, 2019. Included as a component of general and administrative expenses, stock-based compensation expenses decreased by approximately $16.2 million for the three months ended March 31, 2020, as compared to the three months ended March 31, 2019. Total general and administrative expenses, excluding stock-based compensation, increased by approximately $6.3 million, or 40.9% for the three months ended March 31, 2020, as compared to the three months ended March 31, 2019. The increase in general and administrative expenses was mainly due to increased personnel costs and fees for restatement related expenses.
Stock-Based Compensation
Three Months Ended March 31, | Change | ||||||||||||||
2020 | 2019 | Amount | % | ||||||||||||
As Restated | |||||||||||||||
(dollars in thousands) | |||||||||||||||
Cost of revenue | $ | 5,507 | $ | 18,312 | $ | (12,805 | ) | (69.9 | )% | ||||||
Research and development | 6,096 | 14,230 | (8,134 | ) | (57.2 | )% | |||||||||
Sales and marketing | 3,890 | 11,512 | (7,622 | ) | (66.2 | )% | |||||||||
General and administrative | 7,526 | 23,768 | (16,242 | ) | (68.3 | )% | |||||||||
Total stock-based compensation | $ | 23,019 | $ | 67,822 | $ | (44,803 | ) | (66.1 | )% |
Total stock-based compensation decreased $44.8 million, or 66.1%, in the three months ended March 31, 2020, as compared to the three months ended March 31, 2019. Of the $23.0 million in stock-based compensation for the three months ended March 31, 2020, approximately $6.7 million was related to one-time employee grants of RSUs that were issued at the time of our IPO and that have a two-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 March 31, | Change | |||||||||||
2020 | 2019 | |||||||||||
As Restated | ||||||||||||
(in thousands) | ||||||||||||
Interest income | $ | 819 | $ | 1,885 | $ | (1,066 | ) | |||||
Interest expense | (20,754 | ) | (21,800 | ) | 1,046 | |||||||
Interest expense, related parties | (1,366 | ) | (1,612 | ) | 246 | |||||||
Other income (expense), net | (8 | ) | 265 | (273 | ) | |||||||
Loss on extinguishment of debt | (14,098 | ) | — | (14,098 | ) | |||||||
Gain (loss) on revaluation of embedded derivatives | 284 | (540 | ) | 824 | ||||||||
Total | $ | (35,123 | ) | $ | (21,802 | ) | $ | (13,321 | ) |
Total Other Expense
Total other expense increased $13.3 million in the three months ended March 31, 2020, as compared to the three months ended March 31, 2019. This increase was primarily due to the loss on extinguishment of debt of $14.1 million.
Interest Income
Interest income decreased $1.1 million in the three months ended March 31, 2020, as compared to the three months ended March 31, 2019. This decrease was primarily due to the decrease in cash balances.
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Interest Expense
Interest expense decreased $1.0 million in the three months ended March 31, 2020, as compared to the three months ended March 31, 2019. This decrease was primarily due to lower amortization expense of our debt derivatives and a decrease in interest expense with the debt buy-out due to the PPA II and PPA IIIb upgrades.
Interest Expense, Related Parties
Interest expense, related parties decreased $0.2 million the three months ended March 31, 2020, as compared to the three months ended March 31, 2019 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 increased $0.3 million in the three months ended March 31, 2020, as compared to the three months ended March 31, 2019, due to changes in foreign currency translation expense.
Loss on Extinguishment of Debt
Loss on extinguishment of debt of $14.1 million was recorded in the three months ended March 31, 2020. There was no debt extinguishment in the three months ended March 31, 2019.
Gain (Loss) on Revaluation of Embedded Derivatives
Gain on revaluation of embedded derivatives increased $0.8 million in the three months ended March 31, 2020, as compared to the three months ended March 31, 2019. This increase was primarily due to the change in fair value of our sales contracts EPP derivatives valued using historical grid prices and available forecasts of future electricity prices to estimate future electricity prices.
Provision for Income Taxes
Three Months Ended March 31, | Change | ||||||||||||||
2020 | 2019 | Amount | % | ||||||||||||
(dollars in thousands) | |||||||||||||||
Income tax provision | $ | 124 | $ | 208 | $ | (84 | ) | (40.4 | )% |
Income tax provision decreased in the three months ended March 31, 2020, as compared to the three months ended March 31, 2019, and was primarily due to fluctuations in the effective tax rates on income earned by international entities.
Net Loss Attributable to Noncontrolling Interests and Redeemable Noncontrolling Interests
Three Months Ended March 31, | Change | ||||||||||||||
2020 | 2019 | Amount | % | ||||||||||||
(dollars in thousands) | |||||||||||||||
Less: net loss attributable to noncontrolling interests and redeemable noncontrolling interests | $ | (5,693 | ) | $ | (3,832 | ) | $ | (1,861 | ) | (48.6 | )% |
Total loss attributable to noncontrolling interests increased $1.9 million, or 48.6%, in the three months ended March 31, 2020, as compared to the three months ended March 31, 2019. The net loss increased due to increased losses in our PPA Entities which are allocated to our noncontrolling interests.
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Liquidity and Capital Resources
As of March 31, 2020, we had an accumulated deficit of approximately $3.0 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 common stock, debt financings and cash generated from our operations. As of March 31, 2020, we had $443.4 million of total outstanding recourse debt, $237.3 million of non-recourse debt and $28.5 million of other long-term liabilities. See Note 7, Outstanding Loans and Security Agreements, in Item 1, Financial Statements for a complete description of our outstanding debt. As of March 31, 2020 and December 31, 2019, we had cash and cash equivalents of $180.3 million and $202.8 million, respectively.
In March 2020, we successfully extended the maturity of our outstanding 10% Convertible Notes, our 10% Constellation Note and additionally entered into a note purchase agreement to issue $70.0 million of 10.25% Senior Secured Notes due 2027 in a private placement that was subsequently completed on May 1, 2020. The combination of our existing cash and cash equivalents, the extension of the 10% Convertible Notes and 10% Constellation Note modification to December 2021, and the proceeds from the 10.25% Senior Secured Notes are expected to be sufficient to meet our operational and capital cash flow requirements and other cash flow needs for at least the next 12 months from the date of issuance of this Quarterly Report on Form 10-Q. As of March 31, 2020, the current portion of our total debt is $26.2 million.
For additional information refer to Note 7, Outstanding Loans and Security Agreements, in Item 1, Financial Statements.
Our future cash flow 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 including the impact of COVID-19 on our future operations, as described in the COVID-19 Pandemic section above. We do not expect to receive significant cash distributions from our PPA Entities. For additional information refer to Note 13, Power Purchase Agreement Programs, in Item 1, Financial Statements.
Cash Flows
A summary of our sources and uses of cash, cash equivalents and restricted cash is as follows (in thousands):
Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
As Restated | ||||||||
Net cash provided by (used in): | ||||||||
Operating activities | $ | (27,948 | ) | $ | (9,845 | ) | ||
Investing activities | (12,360 | ) | 91,706 | |||||
Financing activities | 16,839 | 7,588 |
Net cash provided by (used in) our variable interest entities (the PPA Entities) which are incorporated into the consolidated statements of cash flows for the three months ended March 31, 2020 and 2019 is as follows (in thousands):
Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
PPA Entities ¹ | ||||||||
Net cash provided by PPA operating activities | $ | 10,258 | $ | 15,490 | ||||
Net cash used in PPA financing activities | (8,957 | ) | (9,595 | ) | ||||
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 noncontrolling partnership interests. We believe this presentation of net cash provided by
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(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 used by operating activities for the three months ended March 31, 2020 was $27.9 million and was primarily the result of net cash loss of $26.5 million plus the net increase in working capital of $1.5 million. Net cash loss is primarily comprised of a net loss of $81.6 million, adjusted for non-cash benefit items including: (i) depreciation and amortization of $13.0 million; (ii) a loss on revaluation of derivative contracts of $0.2 million; (iii) stock-based compensation of $23.0 million; (iv) net loss on extinguishment of debt of $14.1 million; and (v) amortization of debt issuance cost of $4.8 million. Net cash used by changes in working capital consisted primarily of increases in: (i) deferred cost of revenue of $19.5 million; and (ii) other long-term assets of $2.9 million. These uses of cash from working capital were mostly offset by decreases in: (i) accounts receivable of $2.1 million; (ii) inventories of $2.1 million; (iii) customer financing receivable of $1.2 million; (iv) prepaid expenses and other current assets of $3.1 million; plus increases in: (vi) accounts payable of $4.8 million; accrued warranty of $0.7; (vii) accrued expenses and other current liabilities of $0.5 million; (viii) deferred revenue and customer deposits of $5.3 million, and (ix) other long-term liabilities of $1.2 million.
Net cash used in operating activities for the three months ended March 31, 2019 was $9.8 million and was the result of net cash loss of $21.4 million partially offset by the net increase in working capital of $11.6 million. Net cash loss is primarily comprised of a net loss of $108.8 million, adjusted for non-cash benefit items including: (i) depreciation and amortization of approximately $14.2 million; (ii) stock-based compensation of $67.8 million; and (iii) amortization of debt issuance cost of $5.2 million. Net cash provided from changes in working capital consisted primarily of decreases in: (i) accounts receivable of $4.1 million; (ii) inventory of $11.1 million; and (iii) customer financing receivable and other of $1.3 million; (iv) prepaid expenses and other current assets of $6.6 million; plus an increase in: (v) deferred revenue and customer deposits of $1.2 million; and (vi) other long term liabilities of $4.2 million. These sources of cash from working capital were partially offset by increases in: (i) deferred cost of revenue of $11.1 million; and (ii) other long-term assets of $0.4 million; plus decreases in: (iv) accounts payable of $2.5 million; (v) accrued warranty of $2.7 million; and (vi) accrued expenses and other current liabilities of $0.4 million.
Investing Activities
Net cash used by investing activities in the three March 31, 2020 was $12.4 million entirely related to the purchase of long-lived assets.
Net cash provided by investing activities in the three March 31, 2019 was $91.7 million which was primarily the result of net proceeds from maturities of marketable securities of $104.5 million, partially offset by $12.8 million used for the purchase of long-lived assets.
Financing Activities
Net cash provided by financing activities in the three March 31, 2020 was $16.8 million which included borrowings from issuance of debt to related parties of $30.0 million and proceeds from issuance of common stock of $4.8 million. This was partially offset by distributions paid to our PPA Equity Investors of $4.3 million, repayments of debt of $11.2 million, and repayment of financing obligation of $2.5 million.
Net cash provided by financing activities in the three March 31, 2019 was $7.6 million and resulted primarily from proceeds from the issuance of common stock of $7.5 million and the net proceeds from financing obligations of $9.1 million, partially offset by distributions paid to our PPA Equity Investors of $3.2 million, and repayments of long-term debt of $5.8 million.
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Outstanding Loans and Security Agreements
The following is a summary of our debt as of March 31, 2020 (in thousands):
Unpaid Principal Balance | Net Carrying Value | Unused Borrowing Capacity | ||||||||||||||||||
Current | Long- Term | Total | ||||||||||||||||||
LIBOR + 4% term loan due November 2020 | $ | 1,143 | $ | 1,117 | $ | — | $ | 1,117 | $ | — | ||||||||||
10% convertible promissory Constellation note due December 2021 | 36,940 | — | 40,709 | 40,709 | — | |||||||||||||||
10% convertible promissory notes due December 2021 * | 319,299 | — | 338,944 | 338,944 | — | |||||||||||||||
10% notes due July 2024 | 86,000 | 14,000 | 69,230 | 83,230 | — | |||||||||||||||
Total recourse debt | 443,382 | 15,117 | 448,883 | 464,000 | — | |||||||||||||||
7.5% term loan due September 2028 | 36,232 | 2,439 | 30,597 | 33,036 | — | |||||||||||||||
6.07% senior secured notes due March 2030 | 80,255 | 3,330 | 75,989 | 79,319 | — | |||||||||||||||
LIBOR + 2.5% term loan due December 2021 | 120,818 | 5,340 | 114,306 | 119,646 | — | |||||||||||||||
Letters of Credit due December 2021 | — | — | — | — | 1,220 | |||||||||||||||
Total non-recourse debt | 237,305 | 11,109 | 220,892 | 232,001 | 1,220 | |||||||||||||||
Total debt | $ | 680,687 | $ | 26,226 | $ | 669,775 | $ | 696,001 | $ | 1,220 |
* Note that $70.0 million of this amount was due on or before September 1, 2020, but as it was repaid on May 1, 2020 with the proceeds from long-term debt, as described below, this amount has also been classified as long-term in the condensed consolidated balance sheet as of March 31, 2020. See Note 17, Subsequent Events for additional information.
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 March 31, 2020 and December 31, 2019.
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 March 31, 2020 and December 31, 2019 was 5.7% and 6.3%, 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 March 31, 2020 and December 31, 2019, the unpaid principal balance of debt outstanding was $1.1 million and $1.6 million, respectively.
10% Constellation Convertible Promissory Note due 2021 (originally 8% Convertible Promissory Notes) - 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 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 per share. In July 2018, upon our IPO, the $221.6 million of principal and accrued interest of outstanding 5% Notes automatically converted into additional paid-in capital, the conversion of which included all the related-party noteholders. The 5% 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 our IPO, conversions of 5,734,440 shares of
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Class B common stock were issued and the 5% Notes were retired. Constellation, the holder of the 5% Notes ("5% Constellation Note"), has not elected to convert as of March 31, 2020.
On March 31, 2020, we entered into an Amended and Restated Subordinated Secured Convertible Note Modification Agreement (the “Constellation Note Modification Agreement”) which amended the terms of the 5% Constellation Note to extend the maturity date to December 31, 2021 and increased the interest rate from 5% to 10% ("10% Constellation Note"). Additionally, the debt is convertible at the option of Constellation into common stock at any time through the maturity date. We further amended the 10% Constellation Note by reducing the strike price on the conversion feature from $38.64 per share to $8.00 per share. If we fail to meet certain conditions under the Constellation Note Modification Agreement, including obtaining stockholder approval prior to September 1, 2020, the interest rate will be increased to 18% per year. At any time, we may redeem the 10% Constellation Note, at our option, at a redemption price equal to the principal amount of the 10% Constellation Note outstanding, plus a certain percentage, determined based on the time of redemption of accrued and unpaid interest as of the redemption date, plus the aggregate sum of all discounted remaining scheduled interest payments. The discount rate that shall be applied to all remaining scheduled interest payments shall be determined based on the Treasury Rate in effect as of the redemption date, plus 50 basis points, multiplied by the applicable percentage in effect as of the redemption date.
We evaluated the Constellation Note Modification Agreement in accordance with ASC 470-60, Debt - Troubled Debt Restructurings by Debtors, and 470-50, Debt - Modifications and Extinguishments, and concluded that the amendment did not constitute a troubled debt restructuring and, furthermore, the amendment qualified as a substantial modification as a result of the increase in the fair value of the conversion feature due to the reduced strike price. As a result, on March 31, 2020, the 10% Constellation Note, which consisted of $33.1 million in principal and $3.8 million in accrued and unpaid interest, was extinguished and the 10% Constellation Note was recorded at their fair market value which equaled $40.7 million. The difference between the fair market value of the 10% Constellation Note and the carrying value of the 5% Constellation Note of $3.8 million has been recorded, as of March 31, 2020, as a loss on extinguishment of debt in the Condensed Consolidated Statement of Operations.
The new carrying amount of the 10% Constellation Note of $40.7 million, which consists of the $36.9 million principal amount of the 10% Constellation Note and a $3.8 million deemed premium paid for the 10% Constellation Note, was classified as non-current as of March 31, 2020. Furthermore, the $3.8 million deemed premium shall be amortized over the term of the 10% Constellation Note using the effective interest method.
10% Convertible Promissory Notes due December 2021 (Originally 5% Convertible Promissory Notes) - Between December 2015 and September 2016, we issued $260.0 million convertible promissory notes due December 2020, ("5% Convertible Notes") to certain investors (each a "Noteholder" and collectively, the "Noteholders"). The 5% Convertible Notes bore a 5.0% fixed interest rate, payable monthly either in cash or in kind, at our election. We amended the terms of the 5% Convertible Notes in June 2017 to increase the interest rate from 5% to 6% and to reduce the collateral securing the notes ("6% Convertible Notes"). In November 2019, one Noteholder exchanged a portion of their 6% Convertible Notes at the conversion price of $11.25 per share into 616,302 shares of common stock.
The 6% Convertible Notes contained a conversion feature in which the strike price was determined by applying a specified discount to the price of our stock upon a qualified initial public offering. Until the occurrence of a qualified public offering, the number of shares required to settle this conversion feature could not be determined. Accordingly, this conversion feature was bifurcated from the 6% Convertible Notes and accounted for as a derivative liability in accordance with ASC 815, Derivatives and Hedging. Since the amendments to the 6% Convertible Notes were accounted for as a modification of terms, the derivative liability remained as a separate financial instrument from the 6% Convertible Notes that was separately accounted for with changes in fair value being recognized in earnings. Upon our initial public offering in July 2018, the conversion terms became fixed and met all of the requirements for equity classification. Accordingly, we reclassified the conversion feature from a derivative liability to additional paid in capital. The fair value of the embedded derivative was $178.0 million upon classification.
On March 31, 2020, we entered into an Amendment Support Agreement (the “Amendment Support Agreement”) with the Noteholders of our outstanding 6% Convertible Notes pursuant to which such Noteholders agreed to extend the maturity date of the outstanding 6% Convertible Notes to December 1, 2021 and increase the interest rate from 6% to 10%, ("10% Convertible Notes"). Additionally, the debt is convertible at the option of the Noteholders into common stock at any time through the maturity date and we further amended the 10% Convertible Notes by reducing the strike price on the conversion feature from $11.25 to $8.00 per share. In conjunction with entering into the Amendment Support Agreement, on March 31, 2020, we also entered into a Convertible Note Purchase Agreement (the “10% Convertible Note Purchase Agreement”) and issued an additional $30.0 million aggregate principal amount of 10% Convertible Notes to Foris Ventures, LLC, a new Noteholder, and New Enterprise Associates 10, Limited Partnership, an existing Noteholder. The Amendment Support Agreement required that we repay at least $70.0 million of the 10% Convertible Notes on or before September 1, 2020. In return, collateral would
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be released to support the collateral required under the 10.25% Senior Secured Notes. In addition, 50% of the proceeds from the consummation of certain transactions, including equity offerings or additional indebtedness, will be applied to redeem the 10% Convertible Notes at a redemption price equal to (i) 100% of the principal amount of the 10% Convertible Notes, plus (ii) accrued and unpaid interest, plus (iii) a certain percentage, determined based on the time of redemption of aggregate sum of all discounted remaining scheduled interest payments. The discount rate to determine the present value decreases, creating a redemption penalty, if redemption occurs after October 21, 2020. The Amended Convertible Notes and the $30.0 million in New Convertible Notes are all reflected in the Amended and Restated Indenture between the Company and US Bank National Association dated April 20, 2020.
We evaluated the Amendment Support Agreement in accordance with ASC 470-60, Debt - Troubled Debt Restructurings by Debtors, and 470-50, Debt - Modifications and Extinguishments, and concluded that the amendment did not constitute a troubled debt restructuring and, furthermore, the amendment qualified as a substantial modification as a result of the increase in the fair value of the conversion feature due to the reduced strike price. As a result, on March 31, 2020, we recorded a $10.3 million loss on extinguishment of debt in the condensed consolidated statement of operations, which was calculated as the difference between the reacquisition price of the 6% Convertible Notes and the carrying value of the 6% Convertible Notes. The total carrying value of the 6% Convertible Notes equaled $279.0 million which consisted of $289.3 million in principal and $1.4 million in accrued and unpaid interest reduced by $10.7 million in unamortized discount and $1.0 million in unamortized debt issuance costs. The total reacquisition price of the 6% Convertible Notes equaled $289.3 million which consisted of the $340.7 million fair value of the 10% Convertible Notes, $1.4 million in accrued and unpaid interest, and $1.2 million of fees paid to Noteholders as part of the amendment, reduced by $24.0 million, the fair value at March 31, 2020 of the embedded derivative relating to the equity classified conversion feature that is reclassified from additional paid in capital, $20.0 million cash received from the additional 10% Convertible Notes that were issued to New Enterprise Associates 10, Limited Partnership, and the $10.0 million issuance to Foris Ventures, LLC.
The new net carrying amount of the 10% Convertible Notes of $338.9 million, which consists of the $319.3 million principal of the10% Convertible Notes, a $21.4 million premium paid for the 10% Convertible Notes less $1.8 million debt issuance costs was classified as non-current as of March 31, 2020. Furthermore, the $21.4 million deemed premium shall be amortized over the term of the 10% Convertible Notes using the effective interest method.
10% Notes due July 2024 - In June 2017, we issued $100.0 million of senior secured notes ("10% Notes"). The 10% Notes mature in 2024 and bear a 10.0% fixed rate of interest and with principal amortization started July 2019, 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 certain 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 debt service coverage ratio test does restrict our access to the excess cash escrowed in a collection account which would otherwise be released to us on a bi-annual basis after principal amortization and interest payment. The outstanding unpaid principal and accrued interest debt balance of the 10% Notes of $14.0 million and $14.0 million were classified as current as of March 31, 2020 and December 31, 2019, respectively and the outstanding unpaid principal and accrued interest debt balances of the 10% Notes of $69.2 million and $76.0 million were classified as non-current as of March 31, 2020 and December 31, 2019 respectively.
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. In June 2019, as part of the PPA II upgrade of Energy Servers, we paid off the outstanding debt and interest of these notes for the outstanding amount of $77.6 million.
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 our 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
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was $3.8 million and $3.8 million as of March 31, 2020 and 2019, 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 our 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 was $32.5 million. In December 2019, as part of the PPA IIIa upgrade of Energy Servers, we paid off the outstanding debt and interest of these notes for the outstanding amount of $24.2 million and expensed the balance of the related debt service reserve for all funded systems.
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 our 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 $8.1 million as of March 31, 2020 and $8.0 million as of December 31, 2019, 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 our 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. 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 June 2015, PPA V entered into a $131.2 million term loan due December 2021. The agreement also included 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 letter of credit as of March 31, 2020 and 2019 was $5.0 million. The unused capacity as of March 31, 2020 and 2019 was and $1.2 million and $1.2 million, respectively.
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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 Bloom as of March 31, 2020:
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 debt1, 2 | $ | 443,382 | $ | 85,143 | $ | 322,239 | $ | 36,000 | $ | — | ||||||||||
Non-recourse debt3 | 237,306 | 11,109 | 128,658 | 20,391 | 77,148 | |||||||||||||||
Operating leases | 41,619 | 6,712 | 9,465 | 8,651 | 16,791 | |||||||||||||||
Service arrangements | 2,914 | 1,343 | 1,571 | — | — | |||||||||||||||
Financing obligations | 303,509 | 38,071 | 78,862 | 78,273 | 108,303 | |||||||||||||||
Natural gas fixed price forward contracts | 7,316 | 4,489 | 2,827 | — | — | |||||||||||||||
Grant for Delaware facility | 10,469 | — | 10,469 | — | — | |||||||||||||||
Interest rate swap | 17,415 | 1,945 | 4,856 | 4,405 | 6,209 | |||||||||||||||
Supplier purchase commitments | 2,324 | 1,225 | 1,099 | — | — | |||||||||||||||
Renewable energy credit obligations | 1,109 | 761 | 348 | — | — | |||||||||||||||
Asset retirement obligations | 500 | 500 | — | — | — | |||||||||||||||
Total | $ | 1,067,863 | $ | 151,298 | $ | 560,394 | $ | 147,720 | $ | 208,451 |
1 | Our 10% Convertible Notes and our credit agreements related to the building of our facility in Newark, Delaware each contain cross-default or cross-acceleration provisions. See “Recourse Debt Facilities” above for more details. |
2 | Note that $70.0 million of this amount was due on or before September 1, 2020, but as it was repaid on May 1, 2020 with the proceeds from long-term debt, as described below, this amount has also been classified as long-term in the condensed consolidated balance sheet as of March 31, 2020. See Note 17, Subsequent Events for additional information. |
3 | Each of the debt facilities entered into by PPA IIIa, PPA IV and PPA V contain cross-default provisions. See “Non-recourse Debt Facilities” above for more details. |
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 13, Power Purchase Agreement Programs, in Item 1, Financial Statements.
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 March 31, 2020 and 2019, we had no off-balance sheet arrangements.
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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 three months of fiscal year ended December 31, 2020. 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, 2019 for a more complete discussion of the market risks we encounter.
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 that we file or submit 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 (our principal executive officer) and Chief Financial Officer (our principal financial officer) as appropriate, to allow for timely decisions regarding required disclosure.
Our management, with the participation of our Chief Executive Officer and 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 March 31, 2020. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of March 31, 2020, our disclosure controls and procedures were not effective because of the material weakness described below.
Material Weakness
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. We identified a material weakness, whereby we did not design and maintain an effective control environment with a sufficient complement of resources with an appropriate level of accounting knowledge, expertise and training to evaluate the accounting for and disclosure of complex or non-routine transactions commensurate with our financial reporting requirements. This material weakness resulted in errors in the accounting for certain transactions, which resulted in a restatement of our consolidated financial statements as of and for the year ended December 31, 2018, as of and for the three month period ended March 31, 2019, as of and for the three and six month periods ended June 30, 2019 and 2018 and as of and for the three and nine month periods ended September 30, 2019 and 2018, and revisions to our consolidated financial statements as of and for the year ended December 31, 2017 and as of and for the three month period ended March 31, 2018. This material weakness will also result in revisions to our consolidated financial statements as of and for the years ended December 31, 2019 and 2018, when those periods are next reported.
Additionally, this material weakness could result in a misstatement of substantially all account balances or disclosures that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.
Remediation Activities
We are currently in the process of remediating the material weakness and have taken and continue to take steps that we believe will address the underlying causes of the material weakness which resulted from an insufficient complement of resources with an appropriate level of accounting knowledge, expertise and training to evaluate the accounting for and disclosure of complex or non-routine transactions commensurate with our financial reporting requirements. Steps we are taking include increasing the use of qualified internal or third-party technical resources with accounting expertise on complex or non-routine transactions who will provide accounting interpretation guidance to assist us in identifying and addressing any issues that affect our consolidated financial statements.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended March 31, 2020 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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Part II
ITEM 1 - LEGAL PROCEEDINGS
For a discussion of legal proceedings, see "Legal Matters" under Note 14 - Commitments and Contingencies, in Part I, Item 1, 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
Investing in our securities involves a high degree of risk. 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” before you decide to purchase our securities. Many of these risks and uncertainties are beyond our control, and 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 part of your investment.
This Risk Factor section is divided by topic for ease of reference as follows: Risks Relating to Our Business, Industry and Sales; Risks Related to Our Products and Manufacturing; Risks Relating to Government Incentive Programs; Risks Related to Legal Matters and Regulations; Risks Relating to Our Intellectual Property; Risks Relating to Our Financial Condition and Operating Results; Risks Related to Our Liquidity; Risks Related to Our Operations; and Risks Related to Ownership of Our Common Stock.
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
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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.
These lengthy sales and installation cycles increase the risk that an installation may be delayed and/or 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, delays or unanticipated costs in securing interconnection approvals or necessary utility infrastructure, 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 entity that owns the Energy Servers (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, interest rate and/or currency exchange fluctuations, 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. Additionally, the Managed Services and Traditional Lease 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.
Further, our sales process for transactions that require financing require that we make certain assumptions regarding the cost of financing capital. Actual financing costs may vary from our estimates due to factors outside of our control, including changes in customer creditworthiness, macroeconomic factors, the returns offered by other investment opportunities available to our financing partners, and other factors. If the cost of financing ultimately exceeds our estimates, we may be unable to proceed with some or all of the impacted projects or our revenue from such projects may be less than our estimates.
If we are unable to procure financing partners willing to finance such deployments or if the cost of such financing exceeds our estimates, our business would be negatively impacted.
The economic benefits of our Energy Servers to our customers depend 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,
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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 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 (e.g., as a consequence or physical limitations or adverse regulatory conditions for the delivery of production of natural gas) or the inability to obtain natural gas service could make our Energy Servers less economically attractive to potential customers and reduce demand.
We rely on interconnection requirements and 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 and fees, interconnection agreements and net metering requirements are subject to changes in availability and terms and some jurisdictions do not allow interconnections or export at all. At times in the past, such changes have 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 on in which we anticipate expanding into in the future 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 year ended December 31, 2019, two customers, The Southern Company and SK (Korea) accounted for approximately 34% and 23% of our total revenue, respectively. A unit of The Southern Company wholly owns a Third-Party PPA, and that entity purchases Energy Servers which 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 would materially and adversely affect our business results.
Risks Relating to Our Products and Manufacturing
Our business has been and will continue to be adversely affected by the COVID-19 pandemic.
We have been and will continue monitoring and adjusting as appropriate our operations in response to the COVID-19 pandemic. Although we have been able to maintain some of our operations as an “essential business” in California and Delaware, notwithstanding government “shelter in place” orders, we have closed our headquarters building in Santa Clara
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County, California, and directed employees - unless they are directly supporting essential manufacturing production operations, installation work or service and maintenance activities - to work from their homes. This has caused and may continue to cause disruptions in certain of our operations, including our research and development, sales and marketing activities.
We are experiencing COVID 19-related delays from certain vendors and suppliers, which, in turn, could cause delays in the manufacturing and installation of our Energy Servers. To date, we have been able to offset any issues with alternative suppliers although in the future, it may not be possible to find replacement products or supplies, and ongoing delays could affect our business and growth. For example, some of our international suppliers have been disrupted by the COVID-19 pandemic and by governmental orders in response to the pandemic. These orders have had the effect of disrupting the supply chain on which we rely for certain parts critical to our manufacturing and maintenance capabilities, which impacts both our sale and installation of new products and our operations and maintenance of previously-sold Energy Servers. For example, particular suppliers on which we rely were shut down, and we were not able to obtain the needed parts. While we have identified and qualified alternative suppliers for these parts, we may experience future disruptions in the availability or price of these or other parts, and we cannot guarantee that we will succeed in finding alternate suppliers that are able to meet our needs. In addition, international air and sea logistics systems have been heavily impacted by the COVID-19 pandemic. Air carriers have significantly reduced their passenger and air freight capacity, and many ports are either temporarily closed or have reduced their hours of operation. Actions by government agencies may further restrict the operations of freight carriers, which would negatively impact our ability to receive the parts and supplies we need to manufacture our Energy Servers or to deliver them to our customers.
We also rely on third party financing for our customer’s purchases of our Energy Servers. A majority of the installations we have planned in the United States in 2020 remain contingent on securing financing for our customers’ use of our Energy Servers at their sites. If third party financiers experience liquidity problems or elect to suspend or cancel investments in our projects, we may be unable to secure financing for our customer purchases, which in turn impacts our ability to deploy our Energy Servers and receive cash and recognize revenue. We believe the current environment may also increase the time to solidify new relationships which could impact the time required to achieve funding. We have already experienced one delayed closing due to a financier’s inability to close in light of its own liquidity concerns, and we may experience more. Our ability to obtain financing for our Energy Servers partly depends on the creditworthiness of our customers. Some of our current and prospective customers’ credit ratings have recently fallen, which may make it difficult for us to obtain financing for their use of an Energy Server. For current customers whose Energy Servers are not yet installed, an inability to obtain financing may impact our revenue and cash. For prospective customers, it may decrease demand for our Energy Servers if financing is not available in light of their credit. If our customers cannot obtain financing to purchase our Energy Servers, our revenues and results of operations will be adversely affected. We have actively been working with new sources of capital that could finance projects.
Our installation and maintenance operations have also been adversely impacted by the COVID-19 pandemic. For example, our installation projects have experienced delays and may continue to experience delays relating to, among other things, shortages in available labor for design, installation and other work; the inability or delay in our ability to access customer facilities due to shutdowns or other restrictions; the decreased productivity of our general contractors, their sub-contractors, medium-voltage electrical gear suppliers, and the wide range of engineering and construction related specialist suppliers on whom we rely for successful and timely installations; the stoppage of work by gas and electric utilities on which we are critically dependent for hook ups; and the unavailability of necessary civil and utility inspections as well as the review of our permit submissions and issuance of permits by multiple authorities that have jurisdiction over our activities. As to maintenance, if we are delayed in or unable to perform scheduled or unscheduled maintenance, our previously-installed Energy Servers will likely experience adverse performance impacts including reduced output and/or efficiency, which could result in warranty and/or guaranty claims by our customers. Further, due to the nature of our Energy Servers, if we are unable to replace worn parts in accordance with our standard maintenance schedule, we may be subject to increased costs in the future. These adverse impacts may increase in severity or continue indefinitely, including following the lifting of “shelter in place” orders.
We are not the only business impacted by these shortages and delays, which means that we may in the future face increased competition for scarce resources, which may result in continuing delays or increases in the cost of obtaining such services, including increased labor costs and/or fees to expedite permitting. In addition, while construction activities have to date been deemed “essential business” and allowed to proceed in many jurisdictions, we have experienced interruptions and delays caused by confusion related to exemptions for “essential business” among our suppliers and their sub-contractors. Future changes in applicable government orders or regulations, or changes in the interpretation of existing orders or regulations, could result in reductions in the scope of permitted construction activities or prohibitions on such activities. An inability to install our Energy Servers would negatively impact our acceptances, our cash and our revenue.
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We cannot predict with certainty at this time the full extent to which COVID-19 will impact our business, results and financial condition, which will depend on many factors. These include, among others, the extent of harm to public health, the willingness of our employees to travel and work in our manufacturing facilities and at installation sites even if permitted to do so, the disruption to the global economy and to our potential customer base, and impacts on liquidity and the availability of capital. We are staying in close communication with our manufacturing facilities, employees, customers, suppliers and partners, and acting to mitigate the impact of this dynamic and evolving situation, but there is no guarantee that we will be able to do so.
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. |
• | In order for us to expand internationally, we have entered into joint venture agreements that have allowed us to add manufacturing capability outside of 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 introduce defects into our products. Also, as we grow our manufacturing volume, the chance of manufacturing defects could increase. In addition, design changes made for the purpose of cost reduction, performance improvement, fulfilling new customer
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requirements or improved reliability could introduce new design defects that may impact Energy Server performance and life. Any design or manufacturing defects or other failures of our Energy Servers to perform as expected could cause us to incur significant service and 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 service and 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.
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 is 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 30 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 useful life of our Energy Servers and their components, including assumptions regarding improvements in power module 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.
As of December 31, 2019, we had a total of 35 megawatts in total deployed early generation servers, including our first and second generation servers, out of our total installed base of 456 megawatts. None of these early generation servers are recognized as our property, plant and equipment. We expect that our deployed early generation Energy Servers, if not upgraded with our more current generation power modules, 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 with respect to those servers. Further, the Energy Servers held on our consolidated financial statements, including those acquired through our Managed Services and PPA programs, could be impaired or have their useful life shortened in the future if adequate maintenance services are not performed or if a determination is made to upgrade the Energy 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 except where a third party is responsible for installation (such as in our sales in South Korea), our financial results depend 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.
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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 depends on the availability of and timely connection to the natural gas grid and the local electric grid. In some jurisdictions, local utility companies or the municipality have denied our request for connection or have required us to reduce the size of certain projects. In addition, some municipalities have recently adopted restrictions that prohibit any new construction that allows for the use of natural gas. For more information regarding these restrictions, please see the risk factor entitled "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." 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.
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 may not meet our expectations and standards in the future.
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, public health emergencies 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 are 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
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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 have in the past and may in the future 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, public health emergencies such as the recent COVID-19 pandemic, 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 time frames, 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.
Our ability to develop new products and enter into new markets could be negatively impacted if we are unable to identify suppliers to deliver new materials and components on a timely basis.
We continue to develop products for emerging markets and, as we move into those markets, must qualify new suppliers to manufacture and deliver the necessary components required to build and install those new products. Identifying new manufacturing partners is a lengthy process and is subject to significant risks and uncertainties. If we are unable to identify reliable manufacturing partners in a new market, our ability to expand our business could be limited and our financial conditions and results of operations could be harmed.
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.
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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.
To the extent practicable, given the limitations in supply chain previously discussed, 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 (or to comply properly) 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 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.
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For example, the previous federal 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 commenced construction before January 1, 2020 were 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. In the case of Energy Servers purchased by PPA Entities, 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. For example, our customer sites accepted benefiting from the SGIP represented approximately 3% and 4% of total sites accepted for the years ended December 31, 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.
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.
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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 the delivery and installation of our Energy Servers.
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. 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. Additionally, in many cases we contractually commit to performing all necessary installation work on a fixed-price basis, and unanticipated costs associated with environmental remediation and/or compliance expenses may cause the cost of performing such work to exceed our revenue. 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 at the time (i.e., 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 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 relying upon 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 ("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
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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.
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
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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 facility ("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 Appeal and the opposition to the Delaware Project are examples of potentially material risks associated with electric power regulation.
At the federal level, 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 an Energy Server is 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
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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 Item 1, Legal Proceedings and Note 14 - Commitments and Contingencies, in Part I, Item 1, Financial Statements. 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 development 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.
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.
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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.
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 March 31, 2020, we had an accumulated deficit of $3.0 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; |
• | expanding into new geographical markets and industry market sectors; |
• | 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.
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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, the geographical mix of customer sales, 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 upfront at acceptance; |
• | delays or cancellations of Energy Server installations; |
• | fluctuations in our service costs, particularly due to unexpected 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; |
• | 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.
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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.
The accounting treatment related to our revenue-generating transactions is complex, and if we are unable to attract and retain highly qualified accounting personnel to evaluate the accounting implications of our complex or non-routine transactions, our ability to accurately report our financial results may be harmed.
Our revenue-generating transactions include traditional leases, Managed Services Agreements, sales to international channel partners and PPA transactions, all of which are accounted for differently in our financial statements. Many of the accounting rules related to our financing transactions are complex and require experienced and highly skilled personnel to review and interpret the proper accounting treatment with respect thereto. Competition for senior finance and accounting personnel in the San Francisco Bay Area who have public company reporting experience is intense, and if we are unable to recruit and retain personnel with the required level of expertise to evaluate and accurately classify our revenue-producing transactions, our ability to accurately report our financial results may be harmed.
We reached a determination to restate certain of our previously issued consolidated financial statements as a result of the identification of material misstatements in previously issued financial statements, which resulted in unanticipated costs and may affect investor confidence and raise reputational issues.
As discussed in Note 2, Restatement of Previously Issued Financial Statements, in Part I, Item 1, Financial Statements, we reached a determination to restate our consolidated financial statements for the periods disclosed in that note after misstatements in our accounting treatment of some of our complex or non-routine transactions were identified. The restatement also included corrections for previously identified immaterial uncorrected misstatements in the impacted periods. As a result, we have incurred unanticipated costs for accounting and legal fees in connection with or related to the restatement, and have become subject to a number of additional risks and uncertainties, which may affect investor confidence in the accuracy of our financial disclosures and may raise reputational risks for our business, both of which could harm our business and financial results.
We recently identified a material weakness in our internal control over financial reporting related to the accounting for and disclosure of complex or non-routine transactions. If we do not effectively remediate the material weakness or if we 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. While we have not yet adopted the requirements under Section 404B of the Sarbanes-Oxley Act, we did identify a material weakness in internal control over financial reporting at December 31, 2019, as we did not design and maintain an effective control environment with a sufficient complement of resources with an appropriate level of accounting knowledge, expertise and training to evaluate the accounting for and disclosure of complex or non-routine transactions commensurate with our financial reporting requirements. Please see Part I, Item 4, Controls and Procedures, in this Quarterly Report on Form 10-Q for additional information regarding the identified material weakness and our actions to date to remediate the material weakness. 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 additional deficiencies in our internal control over financial reporting that are deemed to be material weaknesses.
To comply with Section 404B, we may incur substantial costs, 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 404B 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 SEC or other
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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 404 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 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, including in our ability to timely service our debt obligations, 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; |
• | the size of our debt obligations; |
• | 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.
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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 March 31, 2020, we and our subsidiaries had approximately $696.0 million of total consolidated indebtedness, of which an aggregate of $464.0 million represented indebtedness that is recourse to us, of which $15.1 million is classified as current and $448.9 million is classified as non-current. Of this $448.9 million debt, $69.2 million represented debt under our 10% Notes, $338.9 million represented debt under our 10% Convertible Notes, and $40.7 million represented debt under our 10% Constellation Note. In addition, our PPA Entities’ outstanding indebtedness of $232.0 million represented indebtedness that is non-recourse to us. 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:
• | 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; |
• | 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 10% Convertible 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 10% Constellation Note and our 10% Convertible 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
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ability to react to adverse market developments.
As of March 31, 2020, we and our subsidiaries have approximately $696.0 million of total consolidated indebtedness, including $26.2 million in short-term debt and $669.8 million in long-term debt. In addition, our 10% Convertible Notes contain restrictions on our ability to issue additional debt and both the 10% Convertible Notes and 10% Constellation Note 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% Convertible 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.
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.
We finance a significant volume of Energy Servers and receive equity distributions from certain of the PPA Entities that purchase the Energy Servers and other project intangibles through a series of milestone payments. The milestone payments and equity distributions contribute to our cash flow. These PPA Entities are separate and distinct legal entities, do not guarantee our debt obligations, and 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. It is possible that the PPA Entities may not contribute significant cash to us.
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 or restructuring 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 available or 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.
Certain of our outstanding convertible debt securities may be required to be settled in cash, which could have a material effect on our financial position.
Certain listing standards of The New York Stock Exchange limit the number of shares we may deliver upon conversion of our outstanding convertible notes that we amended in March of 2020 unless we first obtain the approval of our stockholders to issue shares in excess of that amount. We may never obtain such stockholder approval. To comply with these listing standards, the number of shares that we may issue upon conversion of our outstanding convertible notes will be limited to an amount that does not exceed these limitations, until we have obtained stockholder approval to issue additional shares. Any shares that would otherwise have been deliverable upon conversion in the absence of this limitation will instead be settled in cash based on the applicable daily conversion values during the relevant period. We may not have the funds available to settle such conversions in cash. Our inability to settle such conversions in cash by the required conversion date would be a default under the agreements that govern our convertible notes.
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.
Three 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. All of our PPA Entities that operate Energy Servers for end customers have significant restrictions on their ability to incur increased operating costs, or
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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. In three cases, 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 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 March 31, 2020.
Risks Relating to Our Operations
We may have conflicts of interest with our PPA Entities.
In most 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 our 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 March 31, 2020, 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,
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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, including public safety power shut-offs that have occurred and will continue to occur in California, 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, fire, localized extended outages of critical utilities (such as California's public safety power shut-offs) or transportation systems, or any critical resource shortages could cause a 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
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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 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 Risk Factors section, 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 90,283,024 shares of our Class A common stock and 34,867,666 shares of our Class B common stock outstanding as of March
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31, 2020. 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 March 31, 2020, we had an aggregate of $319.3 million in convertible debt, our 10% Convertible Notes, under which the outstanding principal and interest may be converted, at the option of the holders, into an aggregate of 39,857,796 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.
In addition, as of March 31, 2020, we had options and RSUs outstanding that, if fully exercised or settled, would result in the issuance of 8,853,089 shares of Class A common stock and 15,665,983 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 March 31, 2020, 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 10% Convertible Promissory Note could result in a significant stockholder with substantial voting control.
The holders of the 10% Convertible Promissory Notes have the option to convert the outstanding principal under the 10% Convertible Promissory Notes to Class B common stock at a conversion price of $8.00 per share at any time and prior to maturity of the 10% Convertible Promissory Notes in December 2021. As of March 31, 2020, an aggregate of 29,982,796 shares of Class B common stock is issuable to the Canada Pension Plan Investment Board (“CPPIB”) upon the conversion of the outstanding principal under the 10% Convertible Promissory Notes. This, along with 312,575 shares of Class B common stock which CPPIB acquired from the exercise of a warrant at IPO, would result, as of March 31, 2020, in CPPIB having approximately 41% of the total voting power with respect to all shares of our Class A common stock (which has one vote per share) and Class B common stock (which has ten votes per share), voting as a single class, and would provide CPPIB
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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 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:
• | require that our board of directors is 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 are 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; |
• | establish 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 |
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as a merger or other sale of our Company or substantially all of our assets;
• | expressly authorize the board of directors 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 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.
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
None.
ITEM 6 - EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES
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 | ||
Amended and Restated Indenture by and among the Registrant, certain guarantors party thereto and U.S. Bank National Association, as trustee, dated as of April 20, 2020 | Filed herewith | |||||
Form of 10% Convertible Senior Secured Note due 2021 | Filed herewith | |||||
Third Amendment to Security Agreement by and among the Registrant, certain guarantors party thereto and U.S. Bank National Association, as collateral agent, dated as of April 20, 2020 | Filed herewith |
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Form of Indenture for Senior Secured Notes due 2027 | Filed herewith | |||||
Form of 10.25% Senior Secured Notes due 2027 | Filed herewith | |||||
Form of Security Agreement for Senior Secured Notes due 2027 | Filed herewith | |||||
Amended and Restated Subordinated Secured Convertible Note Modification Agreement by and between the Registrant and Constellation NewEnergy, Inc., dated as of March 31, 2020 | Filed herewith | |||||
Convertible Note Purchase Agreement among the Registrant, Rye Creek, LLC, and the purchasers listed therein, dated as of March 31, 2020 | Filed herewith | |||||
Support Agreement among KR Sridhar and the investors named therein, dated as of March 31, 2020 | Filed herewith | |||||
Note Purchase Agreement among the Registrant, the guarantor named therein, and the purchasers listed therein, dated as of March 30, 2020 | Filed herewith | |||||
Amendment Support Agreement by and among the Registrant and the investors named therein, dated as of March 31, 2020 | Filed herewith | |||||
Offer Letter between the Company and Gregory Cameron, dated March 20, 2020 | 8-K | 001-38598 | 10.1 | 4/2/2020 | ||
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 | Filed herewith | |||||
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 | Filed herewith | |||||
** | 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 | Filed herewith | ||||
101.INS | XBRL Instance Document | Filed herewith | ||||
101.SCH | XBRL Taxonomy Extension Schema Document | Filed herewith | ||||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | Filed herewith | ||||
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | Filed herewith | ||||
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | Filed herewith | ||||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | Filed herewith |
^ | Management contracts or compensation plans or arrangements in which directors or executive officers are eligible to participate. |
** | 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. |
† | Confidential treatment requested with respect to portions of this exhibit. |
x | Portions of this exhibit are redacted as permitted under Regulation S-K, Rule 601. |
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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: | May 11, 2020 | By: | /s/ KR Sridhar | |
KR Sridhar | ||||
Founder, President, Chief Executive Officer and Director | ||||
(Principal Executive Officer) | ||||
Date: | May 11, 2020 | By: | /s/ Gregory Cameron | |
Gregory Cameron | ||||
Executive Vice President and | ||||
Chief Financial Officer | ||||
(Principal Financial and Accounting Officer) | ||||
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