FUELCELL ENERGY INC - Annual Report: 2020 (Form 10-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

For the fiscal year ended October 31, 2020

OR

For the transition period from                      to

Commission file number: 1-14204

FUELCELL ENERGY, INC.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (203) 825-6000

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐ No ☒

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 ☒ 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 ☒ 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.

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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of April 30, 2020, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $426,040,826 based on the closing sale price of $2.02 as reported on the NASDAQ Global Market.

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

DOCUMENT INCORPORATED BY REFERENCE

FUELCELL ENERGY, INC.

INDEX

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PART I

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Forward-Looking Statement Disclaimer

This Annual Report on Form 10-K contains statements that the Company believes to be “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “PSLRA”). All statements other than statements of historical fact included in this Form 10-K, including statements regarding the Company’s future financial condition, results of operations, plans, objectives, expectations, future performance, business operations and business prospects, are forward-looking statements. Words such as “expects,” “anticipates,” “estimates,” “goals,” “projects,” “intends,” “plans,” “believes,” “predicts,” “should,” “seeks,” “will,” “could,” “would,” “may,” “forecast,” and similar expressions and variations of such words are intended to identify forward-looking statements and are included, along with this statement, for purposes of complying with the safe harbor provisions of the PSLRA. Forward-looking statements are neither historical facts, nor assurances of future performance. Instead, such statements are based only on our beliefs, expectations and assumptions regarding the future. As such, the realization of matters expressed in forward looking statements involves inherent risks and uncertainties. Such statements relate to, among other things, the following:

The forward-looking statements contained in this report are subject to risks and uncertainties, known and unknown, that could cause actual results and future events to differ materially from those set forth in or contemplated by the forward-looking statements, including, without limitation, the risks described under Item 1A - Risk Factors of this report and the following factors:

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We cannot assure you that:

The forward-looking statements contained herein speak only as of the date of this report and readers are cautioned not to place undue reliance on these forward-looking statements. Except for ongoing obligations to disclose material information under the federal securities laws, we expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any such statement to reflect any change in our expectations or any change in events, conditions or circumstances on which any such statement is based.

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Risk Factor Summary

Our business is subject to numerous risks and uncertainties, including those described in Item 1A “Risk Factors”. These risks include, but are not limited to the following:

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Background

Information contained in this report concerning the electric power supply industry and the Distributed Generation market, the Distributed Hydrogen market, the energy storage market and the Carbon Capture market, our general expectations concerning these industries and markets, and our position within these industries and markets are based on market research, industry publications, other publicly available information and assumptions made by us based on this information and our knowledge of these industries and markets, which we believe to be reasonable. Although we believe that the market research, industry publications and other publicly available information, including the sources that we cite in this report, are reliable, they have not been independently verified by us and,

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accordingly, we cannot assure you that such information is accurate in all material respects. Our estimates, particularly as they relate to our general expectations concerning the electric power supply industry and the Distributed Generation market, the Distributed Hydrogen market, the energy storage market and the Carbon Capture market, involve risks and uncertainties and are subject to change based on various factors, including those discussed under Item 1A - Risk Factors of this report.

As used in this report, all degrees refer to Fahrenheit (“F”); kilowatt (“kW”) and megawatt (“MW”) numbers designate nominal or rated capacity of the referenced power plant; “efficiency” or “electrical efficiency” means the ratio of the electrical energy generated in the conversion of a fuel to the total energy contained in the fuel (lower heating value, the standard for power plant generation, assumes the water in the product is in vapor form; as opposed to higher heating value, which assumes the water in the product is in liquid form, net of parasitic load); kW means 1,000 watts; MW means 1,000,000 watts; “kilowatt hour” (“kWh”) is equal to 1kW of power supplied to or taken from an electric circuit steadily for one hour; and one British Thermal Unit (“Btu”) is equal to the amount of heat necessary to raise one pound of pure water from 59^oF to 60^oF at a specified constant pressure.

All dollar amounts are in U.S. dollars unless otherwise noted.

Additional Technical Terms and Definitions

Advanced Technologies - Advanced Technologies projects involve the development of new products or applications based on existing carbonate or solid oxide technologies or new electrochemical technologies. Examples are Carbon Capture, Distributed Hydrogen, Solid Oxide Fuel Cells and Solid Oxide Electrolysis Cell technologies. Advanced Technologies projects are typically externally funded by government or private sources and executed by our Advanced Technologies Group.

Availability - A measure of the amount of time a system is available to operate, as a fraction of total calendar time. For power generation equipment, an industry standard (IEEE (The Institute of Electrical and Electronics Engineers) 762, “Definitions for Use in Reporting Electric Generating Unit Reliability, Availability and Productivity”) is used to compute Availability. “Availability percentage” is calculated as total period hours since Commercial Operations Date less hours not producing electricity due to planned and unplanned maintenance divided by total period hours. Grid disturbances, force majeure events and site-specific issues such as a lack of available fuel supply or customer infrastructure repair do not penalize the calculation of Availability according to this standard.

Carbonate Fuel Cell - Carbonate Fuel Cells, such as the fuel cell power plants produced and sold by FuelCell Energy, are high-temperature fuel cells that use an electrolyte composed of a carbonate salt mixture suspended in a porous, chemically inert ceramic-based matrix. Carbonate Fuel Cells operate at high temperatures, enabling the use of a nickel-based catalyst, a lower cost alternative to precious metal catalysts used in some other fuel cell technologies.

Carbon Capture – The process of extracting dilute carbon dioxide from the flue gas exhaust of fossil or Biogas fueled power plants or thermal processes and purifying the carbon dioxide to the purity required for sequestration or utilization.  Carbon Capture is conventionally done using absorption systems that require energy to produce high purity carbon dioxide.  Carbon Capture can also be done with Carbonate Fuel Cell systems while they produce power.  To our knowledge, this ability to capture carbon dioxide from a power plant or boiler while producing additional power is unique to Carbonate Fuel Cell systems.

Carbon Separation – The process of extracting carbon dioxide from a Carbonate Fuel Cell system or Solid Oxide Fuel Cell system to reduce or eliminate carbon dioxide emissions.  Carbon Separation does not involve carbon dioxide from an external source, as in Carbon Capture, but is the extraction and purification of carbon dioxide produced internally by the fuel cell from a fossil or Biogas fuel. Extracted carbon dioxide can be sequestered or used in industrial or food and beverage applications.

Combined Heat & Power - A power plant configuration or mode of operation featuring simultaneous on-site generation from the same unit of fuel of both electricity and heat with the heat used to produce steam, hot water or heated air for both heating and cooling applications.

Commercial Operations Date - The date that testing and commissioning of a fuel cell project is completed, and the fuel cell power plant is operational with power being generated and sold to the end-user.

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Distributed Generation - Electric power that is generated where it is needed (distributed throughout the power grid) rather than from a central location. Centrally generated power requires extensive transmission networks that require maintenance and experience efficiency losses during transmission while Distributed Generation does not. Distributed Generation is typically classified as small to mid-size power plants, typically generating 75 MW or less. Central generation is typically classified as large power plants generating hundreds or even thousands of MW.

Distributed Hydrogen – Hydrogen that is produced near the end user or users of the hydrogen, rather than from a central location.  Large central hydrogen production plants create emissions in their operations and add cost and additional emissions by needing to deliver the gas over long distances to end users.  Distributed Hydrogen can be provided by Carbonate Fuel Cell based Trigeneration systems or Solid Oxide Electrolysis Cell based systems.

Hydrogen Based Long Duration Energy Storage – Energy storage involving the production of hydrogen from power by electrolysis, where hydrogen is stored to be used later to produce power.  The storage duration can be extended to long periods of time by providing sufficient hydrogen storage.  High round trip storage efficiency can be achieved if the electrolysis and power generation processes are each high efficiency processes, such as Solid Oxide Electrolysis Cell based systems and Solid Oxide Fuel Cell based systems, or systems using Reversible Solid Oxide Fuel Cell stacks that alternate between fuel cell and electrolysis mode.

Microgrids - Microgrids are localized electric grids that can disconnect from the traditional electric grid to operate autonomously and strengthen grid resiliency. Microgrids can be composed only of SureSource power plants due to their continual power output or combine a variety of power generation types such as fuel cells and solar arrays.

Nitrogen Oxides (“NOx”) - Generic term for a group of highly reactive gases, all of which contain nitrogen and oxygen in varying amounts. Many of the NOx are colorless and odorless; however, they are a major precursor to smog production and acid rain. One common pollutant, Nitrogen Dioxide, along with particles in the air, can often be seen as a reddish-brown layer over an urban area. NOx form when fuel is burned at high temperatures, as in a combustion process. The primary manmade sources of NOx are motor vehicles, traditional fossil fuel fired electric utility generation, and other industrial, commercial and residential sources that burn fuels.

Particulate Matter (“PM”) - Solid or liquid particles emitted into the air that are generally caused by the combustion of materials or dust generating activities. Particulate Matter caused by combustion can be harmful to humans as the fine particles of chemicals, acids and metals may get lodged in lung tissue.

Power Purchase Agreement (“PPA”) - A Power Purchase Agreement is a contract that enables a power user to purchase energy under a long-term contract where the user agrees to pay a predetermined rate for the kilowatt-hours delivered from a power generating asset while avoiding the need to own the equipment and pay the upfront capital cost. The PPA rate is typically fixed (with an escalation clause tied to a consumer price index or similar index) or pegged to a floating index that is on par with or below the current electricity rate being charged by the local utility company. A PPA is typically for a term of 10 to 20 years.

Reformer / Electrolyzer / Purifier (“REP”) – A system which uses a Carbonate Fuel Cell stack (or stacks) in reverse mode (consuming power instead of producing power) to produce hydrogen by electrolysis simultaneous with production of hydrogen from a hydrocarbon fuel by reforming.  The Carbonate Fuel Cell reactions also purify the hydrogen by transferring carbon dioxide from the hydrogen stream.

Renewable Biogas or Biogas - Renewable Biogas is fuel produced by biological breakdown of organic material. Biogas is commonly produced in biomass digesters employing bacteria in a heated and controlled oxygen environment. These digesters are typically used at wastewater treatment facilities or food processors to break down solid waste and the Biogas produced is a byproduct of the waste digestion. Biogas can be used as a renewable fuel source for SureSource fuel cell plants located on site where the Biogas is produced with gas cleanup, or it can be processed further to meet pipeline fuel standards and injected into a gas pipeline network, which is termed “Directed Biogas”. Directed Biogas requires additional processing to increase the Btu content of the gas, which increases cost and consumes power. Use of Biogas at the point of production (on-site) is more efficient and more economical.

Reversible Solid Oxide Fuel Cell (“RSOFC”) – Reversible Solid Oxide Fuel Cell systems use solid oxide cell stacks that alternate between operation in electrolysis mode (as SOEC stacks) or power generation mode (as SOFC stacks).  The ability to use one stack set for both processes reduces cost in Hydrogen Based Long Duration Energy Storage systems.

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Solid Oxide Electrolysis Cell (“SOEC”) - Solid Oxide Electrolysis Cells are electrochemical cells with the same cell and stack structure as Solid Oxide Fuel Cells, but are operated in reverse – instead of producing power from fuel and oxygen, SOEC cells produce hydrogen and oxygen from steam when supplied with power.

Solid Oxide Fuel Cell (“SOFC”) - Solid Oxide Fuel Cells are electrochemical cells with a non-porous ceramic material as the electrolyte. SOFCs operate at high temperatures (slightly higher than Carbonate Fuel Cells) eliminating the need for costly precious-metal catalysts, thereby reducing cost. Like Carbonate Fuel Cells, the high operating temperature enables internal reforming of the hydrogen rich fuel source. The Solid Oxide Fuel Cell platform can be operated in fuel cell mode (producing power from fuel) or electrolysis mode (producing hydrogen from power) and can alternate between the two.

Sulfur Oxide (“SOx”) - Sulfur oxide refers to any one of the following: sulfur monoxide, sulfur dioxide (“SO₂”) and sulfur trioxide. SO₂ is a byproduct of various industrial processes. Coal and petroleum contain sulfur compounds and generate SO₂ when burned. SOx compounds are particulate and acid rain precursors.

At a Glance

Today, FuelCell Energy is a global leader in sustainable clean energy technologies that address some of the world’s most critical challenges around energy, safety and global urbanization.  In the future, FuelCell Energy plans to commercialize our hydrogen and carbon capture technologies intended to drive next generation solutions as the world strives for a smaller carbon footprint.

Overview

As a leading global manufacturer of proprietary fuel cell technology platforms, we are uniquely positioned to serve customers worldwide with sustainable products and solutions for businesses, utilities, governments, and municipalities. FuelCell Energy’s solutions are designed to enable a world empowered by clean energy, enhancing the quality of life for people around the globe. We target large-scale power users with our megawatt-class installations globally, and currently offer sub-megawatt solutions for smaller power consumers in Europe.  To provide a frame of reference, one megawatt is adequate to continually power approximately 1,000 average sized U.S. homes. Our customer base includes utility companies, municipalities, universities, hospitals, government entities/military bases and a variety of industrial and commercial enterprises.  Our leading geographic markets are currently the United States and South Korea, and we are pursuing opportunities in other countries around the world.

History

FuelCell Energy, based in Connecticut, was founded in 1969 as a New York corporation to provide applied research and development services on a contract basis. We completed our initial public offering in 1992 and reincorporated in Delaware in 1999. We began selling stationary fuel cell power plants commercially in 2003.

Leadership

We believe our leadership in clean energy has significant benefits for our customers and the sustainability of our planet.

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Our Team

Our senior leadership team is comprised of industry veterans, representing over 200 years of collective experience in the power industry, alternative energy, advanced manufacturing and disruptive technologies.

Business Model, Strategy and Competitive Advantages

Our Business Model

Our business model is based on multiple revenue streams, including power platform and component sales; recurring service revenue, mainly through long-term service agreements; recurring electricity, capacity and renewable attribute sales under PPAs and tariffs for projects we retain in our generation portfolio; and revenue from public and private industry research contracts under Advanced Technologies.

We are a complete solutions provider, controlling the design, manufacturing, sales, installation, operations and maintenance of our patented fuel cell technology under long-term power purchase and service agreements. When utilizing long-term PPAs, the end-user of the power or utility hosts the installation and only pays for power as it is delivered, avoiding up-front capital investment. We also develop projects and sell equipment directly to customers, providing a complete solution of engineering, installing and servicing the fuel cell power plant under an engineering, procurement and construction agreement (“EPC”) and a long-term maintenance and service agreement. FuelCell Energy maintains the long-term recurring service obligation and associated revenues running conterminous with the life of such projects.

Our Product Offerings and Opportunities

FuelCell Energy is focused on using our proprietary technology to pursue four significant energy opportunities, each of which we believe is important to the achievement of the global energy transition currently underway, and which promote desired sustainability and environmental stewardship outcomes.

b. Carbonate Electrolysis with Reforming and Purification

c. Carbon free power generation

d. Unlimited storage opportunity

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a. Capture carbon while simultaneously producing power to offset the costs of Carbon Capture

b. Climate mitigation — reduce CO2 emissions

c. Enables the continued use of abundant fossil fuels

FuelCell Energy’s technology across these four opportunities creates significant optionality for the Company.  

To date, the Company has delivered commercial Distributed Generation solutions to our customers. As further described below, we are in the process of commercializing solutions for Distributed Hydrogen, Hydrogen Energy Storage, Hydrogen Power Generation and Carbon Capture.

We market different configurations and applications of our SureSource platform to meet specific market needs, including:

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Consistent with our overall strategy, our engineers and scientists focus our innovation on developing sophisticated technical solutions that meet customer needs. Our sales and marketing teams focus on presenting solutions that we expect will lead to long term and repeatable sales opportunities. We have structured our sales efforts along our differentiated capabilities and major end-user market offerings.

Our Long-Term Strategy

In 2019, we launched our “Powerhouse” strategy to strengthen our business, maximize operational efficiencies and position us for future growth. Looking ahead, we have updated and may continue to update the pillars of our Powerhouse Strategy to reflect our future focus and to affirm our commitment to leadership in sustainability.

Transform — Build a Durable Financial Foundation and Enhance Financial Results

Continuing from the transformational groundwork originally laid out in 2019, building balance sheet strength (including enhancing liquidity) is an ongoing focus as FuelCell Energy grows:

Strengthen — Drive Operational Excellence

Grow — Penetrate Significant Market Opportunities Where We Can Win

The pillars and goals of our Powerhouse Strategy will continue to evolve over time as goals are met and the Company and market dynamics change.

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Our Durable Competitive Advantages

Given the long history of investment in and deployment of our solutions, we believe the Company has competitive advantages including:

Products

Our core fuel cell products offer clean, highly efficient and affordable power generation for customers.  The plants are scalable for multi-megawatt utility applications, Microgrid applications, Distributed Hydrogen, or use of the ‘platforms’ thermal attributes for on-site heat and chilling applications for a broad range of applications.

Our commercial product line includes:

Our proprietary, patented Carbonate Fuel Cell technology generates electricity directly from a hydrogen-rich fuel, such as natural gas or Renewable Biogas, by reforming the fuel inside the fuel cell to produce the needed hydrogen.  This internal, proprietary “one-step” reforming process results in a simpler, more efficient, and cost-effective energy conversion system compared with external reforming fuel cells.  Additionally, we benefit from multi-fuel capability,

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which enables the SureSource platform to leverage the established natural gas infrastructure that is readily available in our existing and target markets, compared to some types of fuel cells that can only operate on high purity hydrogen. In addition, our proprietary gas clean-up skid technology allows us to utilize on-site Biogas as production of on-site Biogas is rapidly growing around the world.  Our fuel-flexible platforms mainly utilize clean natural gas and Renewable Biogas generated by the customer on-site or Directed Biogas generated at a distant location and transported via the existing common carrier gas pipeline networks.  

Our global SureSource product line is uniformly based on the same Carbonate Fuel Cell technology, and offers the following advantages:  

How Our Patented Fuel Cell Works

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Schematic of Carbonate Fuel Cell Chemical Reactions

Advantages of Carbonate Fuel Cells

Fuel cell technologies are generally classified according to the electrolyte used by each fuel cell type. Our SureSource technology utilizes a carbonate electrolyte. Carbonate-based fuel cells are well-suited for megawatt-class applications, offering a number of advantages over other types of fuel cells in our target markets.

These advantages include:

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SureSource Attributes, Benefits and Emissions Profile

Fuel cells are non-combustion devices that directly convert chemical energy in fuel into electricity.  Because fuel cells generate power electrochemically rather than by burning fuels, they are more efficient than combustion-based power sources (and as a result they produce less CO₂ per kWh of power generated because they use less fuel), and they produce only trace levels of criteria pollutants (e.g., NO_X, SO_X, and Particulate Matter).  In addition to the low emissions profile, FuelCell Energy’s fuel cell platforms offer additional benefits such as ease of siting, cogeneration heat, fuel flexibility, and compact footprint.  The following table illustrates our view of some of the key attributes and benefits of our SureSource power plants:

Intermittent renewables, such as solar- and wind-based power, offer near zero emissions, but only for a small percentage of time and not reliably. To address capacity needs, solar and wind need to be backed up with conventional power generation, battery storage or, ideally, clean baseload fuel cells.

The high efficiency of our products results in significantly less CO₂ per unit of power production compared to the average U.S. fossil fuel power plant, and carbon emissions are reduced even further when configured for CHP applications or biofuels.  When our power platforms are operating on Renewable Biogas, government agencies and regulatory bodies generally classify them as carbon neutral due to the renewable nature of the fuel source.  In addition, we have developed the Carbon Separation feature which can be added to a SureSource power plant, allowing CO_2, which would otherwise be emitted to be captured and purified for on site use or sequestration.  

The low CO₂ emissions and low criteria pollutants from SureSource power plants have a significant impact on sustainability and air quality because they avoid emissions 24 hours a day. The high capacity factor of baseload SureSource platforms maximizes the impact of their environmental benefits. While wind and solar renewable power sources may completely avoid these emissions while operating, they avoid fewer emissions than fuel cells because they operate for fewer hours per day. When wind and solar renewable power sources are not operating, higher emission resources may be required to operate, thus diluting the benefits. Additionally, all renewable power sources have life cycle emissions associated with manufacture and disposal.

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The following table and figures illustrate how the high capacity factor of our SureSource solutions, combined with their low emissions, result in more avoided emissions on an annual basis than wind and solar per MW of installed capacity. Avoided emissions are calculated based on how much lower in emissions each source is relative to the grid, and the percentage of time the source operates.

Sources for the above tables and figures include:

We are also actively developing other technologies, which are discussed below in the “Advanced Technologies Programs” section.  

Advanced Technologies Programs

Our Advanced Technologies programs, including our Carbon Separation, Carbon Capture, Solid Oxide Fuel Cells, and Solid Oxide Electrolysis Cells for hydrogen production and energy storage represent future market, product and revenue opportunities for the Company beyond our current product line. We undertake both privately funded and publicly funded research and development to develop these opportunities, reduce costs, and expand our technology portfolio. One of our Advanced Technologies programs, Distributed Hydrogen, is transitioning from being categorized as Advanced Technologies to being categorized as a commercial product as we execute our first commercial project with Toyota at the Port of Long Beach, California, which will produce hydrogen for the fueling of passenger vehicles and heavy duty trucks while providing power to Toyota’s facilities and the local grid.

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Our multi-featured power plant platforms can be configured to provide a number of value streams, including clean electricity, high quality usable heat, water and hydrogen suitable for vehicle fueling, industrial purposes or power generation, and to concentrate and separate CO₂ from coal, biomass and natural gas fired power plants and industrial applications.  

Our Advanced Technologies programs are currently focused on commercializing solutions within four strategic areas:

Distributed Hydrogen Production - On-site or distributed hydrogen generation, produced cleanly, represents an attractive and expansive market.  Our high temperature fuel cells generate electricity directly from a fuel by reforming the fuel inside the fuel cell to supply hydrogen for the electrical generation process.  We have developed a process by which gas separation technology can be added to our core fuel cell to capture hydrogen that is not used by the electrical generation process, and we refer to this configuration as SureSource Hydrogen^TM.

The SureSource Hydrogen product has the potential to be a compelling solution for industrial users of hydrogen and in transportation fueling applications. The 2.3 MW SureSource Hydrogen plant is expected to have a hydrogen output of approximately 1,200 kg per day, in addition to the electricity, thermal energy and water generated by the fuel cell. Hydrogen is typically made from natural gas in large central steam methane reforming (“SMR”) plants. The conventional SMR reforming process involves burning fossil fuel to produce steam and to heat a fuel/steam mixture to a high temperature, which is then passed over a catalyst that converts the methane/water mixture to carbon dioxide and hydrogen.  The need to burn fossil fuel to provide thermal energy for the SMR process produces additional carbon dioxide and criteria pollutant emissions, and SMRs are significant water consumers.  A similar, but environmentally sustainable, process happens in SureSource internal reforming: methane (from natural gas or Biogas) reacts with water to produce hydrogen, but, in the internal reforming process, the water and the heat are byproducts of the fuel cell reaction.  There is no need to burn fuel to supply heat, and there is no need to supply water. In fact, a SureSource Hydrogen plant is designed to be a net water producer, not a water consumer.  When operated on Biogas, SureSource Hydrogen systems produce renewable hydrogen, also known as Green Hydrogen, but, even when fueled with natural gas, they produce hydrogen with a lower carbon and criteria pollutant impact than conventional SMR because of the use of internal heat instead of burning fuel. Adding Carbon Separation or Carbon Capture to the SureSource Hydrogen platform when fueled with natural gas will deliver Blue Hydrogen (i.e., hydrogen produced with Carbon Capture). The following figure illustrates the concept of the SureSource Hydrogen platform and identifies typical applications for Distributed Hydrogen.

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Trigeneration Distributed Hydrogen Platform

SOFC/SOEC/RSOFC and Hydrogen Based Long Duration Energy Storage – We are developing a solution for long duration energy storage using our proprietary solid oxide technology.  Our solid oxide stacks are designed to be capable of alternating between electrolysis and power generation mode.  Instead of producing power from fuel and air, a Solid Oxide Fuel Cell stack in electrolysis mode splits water into hydrogen and oxygen using supplied electricity.  A storage system based on SOFC/SOEC/RSOFC technology will start with stored water, which will be converted to hydrogen during charging by electrolysis in the solid oxide stacks.  The hydrogen will be stored as compressed gas in cylinders, pipelines, or underground, creating the ability to produce a virtually limitless supply.  When discharge power is needed, the stored hydrogen will be sent back to the solid oxide stacks, which react it with air to produce power and to regenerate the water, which will be stored for the next cycle.

The key aspect of this approach is that the reactant (water) is inexpensive and plentiful, consisting of an initial charge of water that will be regenerated with each discharge cycle.  Except for a small amount of makeup water, the system will operate in closed loop mode without continuous water consumption during electrolysis.  Long duration storage can be achieved by adding water and hydrogen storage capacity, without the need to add excessive amounts of conventional battery reactants (e.g. Lithium, Cobalt, etc.), which have supply constraints for broad adoption and which present disposal challenges.  Long duration energy storage is expected to be required at large scale during time periods ranging from hourly to seasonal in order to manage the forecasted high penetration of intermittent renewable resources globally, and this water/hydrogen based approach of our SOFC/SOEC/RSOFC technology has the potential to be a key enabler of long duration storage.

SOFC power platform design and manufacturing will be complementary to our carbonate-based megawatt-scale platforms and will afford us the opportunity to leverage our field operating history, our existing expertise in power platform design, fuel processing and high volume manufacturing capabilities, and our existing installation and service infrastructure.  Additionally, the primary market for storage applications is electric utilities, which is a market in which we are already active.  

The following figure shows the basic reactions of a solid oxide cell in fuel cell power generation mode.  Hydrogen is reacted with oxygen ions at the anode electrodes to produce water and electrons, which flow to the cathode to produce the electrical circuit.  The cathode reaction consumes the electrons and oxygen (from air) and produces oxygen ions which migrate to the anode to complete the circuit.

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Schematic of Solid Oxide Fuel Cell Reactions

We perform SOFC/SOEC/RSOFC research and development at our Danbury, Connecticut headquarters, as well as at our dedicated SOFC/SOEC/RSOFC facility in Calgary, Alberta, Canada.  We are working under a variety of awards from the DOE for development and commercialization of both SOFC and SOEC.  Our solid oxide development activities are focused on three applications: power generation from hydrogen or other fuels (SOFC), electrolysis-hydrogen production (SOEC), and Hydrogen Based Long Duration Energy Storage (which is a combination of the first two).  During fiscal year 2019, we conducted our first prototype field test of a 250kW natural gas fueled SOFC power plant at the Clearway Energy Center in downtown Pittsburgh, Pennsylvania.  We are currently operating an advanced electrolysis system in our Danbury, Connecticut headquarters, and during fiscal year 2020, we were awarded funding from the DOE to convert the electrolysis system to a reversible storage facility after the electrolysis testing is complete in late 2021.

FuelCell Energy Hydrogen Technologies – Our Distributed Hydrogen Trigeneration platform produces clean power, heat, and hydrogen from natural gas or Biogas near the point of use without water consumption.  We are building the first full scale commercial system for Toyota at the Port of Long Beach for onsite vehicle fueling. Our Solid Oxide Electrolysis technology is expected to produce hydrogen from water and power with high electrical efficiency and have the ability to increase efficiency further by using waste heat. We are currently commissioning a sub scale demonstration of this technology in our Danbury test facility and have been awarded a project to provide a packaged 150 kg/day system for demonstration at Idaho National Laboratory. We have also been developing a hybrid reforming/electrolysis technology which uses Carbonate Fuel Cell stacks in electrolysis mode, combined with in-stack reforming of natural gas or Biogas to produce hydrogen while extracting CO₂ from the hydrogen stream. This technology, called Reformer / Electrolysis / Purification, or REP, is particularly amenable to Blue Hydrogen production.  This portfolio of technologies addresses a broad range of applications with the ability to maximize value depending on factors such as fuel availability and cost, power cost, and water consumption concerns.  In addition to these approaches to hydrogen production, our Solid Oxide Fuel Cell platform is capable of power generation with pure hydrogen fuel, and our Carbonate Fuel Cell platforms are capable of operation with a blend of hydrogen and natural gas or Biogas.

Carbon Capture – Power generation and industrial applications are the source of two-thirds of the world’s carbon emissions. Coal and natural gas are abundant, low-cost resources that are widely used to generate electricity in developed and developing countries, but burning these fuels, as well as burning biomass, results in the emission of criteria pollutants and CO₂. Cost effective and efficient Carbon Capture from power generation and industrial applications globally represents a large market because it could enable clean use of all available fuels. The SureSource Capture^TM system is being designed to separate and concentrate CO₂ from the flue gases of natural gas,

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biomass or coal-fired power plants or industrial facilities as a side reaction that extracts and purifies the CO₂ in the flue gas during the power generation process and destroys approximately 70% of NOx emissions during the power generation process.

The production of additional power during the Carbon Capture process, as opposed to consuming power, differentiates the SureSource Capture system from other forms of Carbon Capture. This could make the SureSource Capture system more cost effective than other systems which are being considered for Carbon Capture. SureSource Capture systems can be implemented in increments, managing capital outlay to match decarbonization objectives and regulatory requirements.  Since our solution generates a return on capital resulting from the fuel cell's production of electricity rather than an increase in operating expense required by other Carbon Capture technologies, it can extend the life of existing power plants and be economically applied to industrial thermal systems. We have a joint development agreement with EMRE, which was effective as of October 31, 2019, to develop and commercialize this application of our core technology. See additional discussion concerning our relationship with EMRE under the section below entitled “License Agreements and Royalty Income; Relationship with POSCO Energy”. During fiscal year 2020, we completed a Carbon Capture project study with Drax Power Station, the largest single-site renewable power generator in the United Kingdom.

We believe there are significant market opportunities for Distributed Hydrogen production, Carbon Capture, Solid Oxide Fuel Cell solutions and energy storage that represent potential future revenue opportunities for the Company. The projects described above allow us to leverage third-party resources and funding to accelerate the commercialization and realize the market potential of each of these solutions and virtually eliminate the need to rely on and use limited supply minerals.

Carbon Separation – In addition to the ability to capture carbon dioxide from an external source, our platforms have the ability to extract and purify carbon dioxide produced by the fuel cell power generation process. Because the fuel is not pre-mixed with air, the depleted fuel gas leaving the fuel electrode chambers contains the carbon dioxide reaction product before it is diluted with large amounts of air. Our Carbon Separation technology allows carbon dioxide to be easily extracted from this stream and purified to the appropriate level for utilization or sequestration, significantly reducing the carbon footprint of the generated power. This requires a simple modification to the fuel cell module which can be provided with new systems and retrofitted for existing systems.

One attractive application for this technology is the on-site production of carbon dioxide for use in beverage and food production, in addition to industrial uses. A 1.8 MW SureSource system can produce 20 tons high purity carbon dioxide per day, and the power and carbon dioxide production levels can be optimized (e.g., to produce more power and less carbon dioxide) depending on the needs of the application. The system can also provide more than 2 million Btu/hour of useful thermal energy, offsetting fuel consumption in on-site boilers (if not eliminating the need for on-site boilers) and further avoiding carbon dioxide emissions. Additional beverage, food, and/or industrial carbon can be produced by capturing the carbon emissions from on-site boilers through the carbon concentration and capture capabilities of our platform, reducing the carbon footprint of onsite boilers even further.

The ability to provide clean power, heat, and useable carbon dioxide is a unique feature profile that we believe is only available with our SureSource platform.  Our systems are modular and scalable, so they can be deployed in a wide variety of applications where on-site carbon dioxide is consumed as a product solution, or carbon dioxide is delivered to multiple nearby consumers. Distributed power and heat generation combined with carbon dioxide production, which has the potential to drive significant reductions in carbon emissions, is a compelling product offering built on our current Carbonate Fuel Cell platform. An illustration of the Carbon Separation application is shown in the following figure, which also shows potential applications for locally produced carbon dioxide.

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SureSource Platform with Carbon Separation

We believe there are significant market opportunities for Distributed Hydrogen production, Solid Oxide Fuel Cell solutions and energy storage, Carbon Capture and Carbon Separation. With Distributed Generation and Carbon Separation available now, and Carbon Capture and Solid Oxide Fuel Cell solutions in advanced stages of development, these platforms represent potential future revenue opportunities for the Company.

We have historically worked on technology development with various U.S. government departments and agencies, including the DOE, the Department of Defense (“DOD”), the Environmental Protection Agency (“EPA”), the Defense Advanced Research Projects Agency (“DARPA”), the Office of Naval Research (“ONR”), and the National Aeronautics and Space Administration (“NASA”). Government funding, principally from the DOE, provided 9%, 6% and 8% of our revenue for the fiscal years ended October 31, 2020, 2019, and 2018, respectively. Beyond the DOE programs, the Company intends to prudently invest capital to accelerate SOFC/SOEC/RSOFC commercialization.  

Markets

Vertical Markets

Access to clean, affordable and reliable power has transformed how most of the world lives today. The ability to provide power cleanly and efficiently is taking on greater importance and urgency in many regions of the world. FuelCell Energy’s products and services are specifically designed to deliver such clean, efficient power globally.  

Central generation and its associated transmission requirements and distribution grid are difficult to site, costly, prone to interruption and generally take many years to permit and build.  Some types of power generation that were widely adopted in the past, such as nuclear and coal power, are no longer welcome in certain regions of the world.  The cost and impact to public health and the environment of pollutants and greenhouse gas emissions impact the siting of new power generation.  The attributes of our SureSource power platforms address these challenges by providing virtually Particulate Matter-free baseload power and, where desired, thermal energy at the point of use in a highly efficient process that is affordable to consumers.

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We target distinct markets, including:

The utilities and independent power producers market is our largest vertical market with customers that include utilities on the East and West coasts of the United States, such as UIL Holdings Corporation, Inc. (owned by Avangrid, Inc.), the Long Island Power Authority (“LIPA”), Southern California Edison and Pacific Gas & Electric. In Europe, utility customers include E.ON Connecting Energies, one of the largest utilities in the world.  In South Korea, we are contracted to operate and maintain a 20 MW power plant project (comprised of five SureSource 3000 plants) for Korea Southern Power Company (“KOSPO”).

Our SureSource power platforms are producing power for a variety of industrial, commercial, municipal and government customers, including manufacturing facilities, pharmaceutical processing facilities, universities, healthcare facilities and wastewater treatment facilities. These institutions desire efficient, clean and continuous power to reduce operating expenses, reduce greenhouse gas emissions and avoid pollutant emissions to meet their sustainability goals, while boosting resiliency and limiting dependence on the distribution grid.  CHP applications further support economic and sustainability initiatives by minimizing or avoiding the use of combustion-based boilers for heat. Our SureSource power platforms are unique in their ability to run on Biogas.

With the growing market for anaerobic digestion (the production of Biogas from the breakdown of biodegradable materials in the absence of oxygen) and increasingly stringent regulations regarding air quality, we see a growing market opportunity that is perfectly suited for our fuel cell design. SureSource power platforms operating on Renewable Biogas are an especially compelling value proposition as they convert a waste product into clean electricity and heat, while reducing or eliminating flaring, which addresses certain economic, environmental justice, and sustainability challenges faced by our customers and the communities in which they operate. Biogas is generated by the decay of organic material (i.e., biomass). This decaying organic material releases methane, or Biogas. As a harmful greenhouse gas, Biogas cannot be released directly into the atmosphere. Flaring creates pollutants and wastes this potential fuel source. Capturing and using Biogas as a fuel addresses these challenges and provides a carbon-neutral renewable fuel source. Our patented, proprietary clean-up skid, SureSource Treatment^TM, provides an economical and reliable system for treating Biogas for use on-site at the Biogas production facility.

Wastewater treatment facilities, food and beverage processors and agricultural operations produce Biogas as a byproduct of their operations. Disposing of this greenhouse gas can be harmful to the environment if released into the atmosphere or flared. Our SureSource power platforms convert this Biogas into electricity and heat efficiently and economically. Wastewater facilities with anaerobic digesters are an attractive market for our SureSource solution including the power platform as well as treatment of the Biogas. Many wastewater treatment plants currently flare Biogas produced in the anaerobic digestion process, emitting NOx, SOx and Particulate Matter into the atmosphere, which does not meet many air quality regulations. Since our fuel cells operate on the Renewable Biogas produced by the wastewater treatment process and the heat is used to support daily operations at the wastewater treatment facility, the overall thermal efficiency of these installations is high, supporting economics and sustainability. In addition, the fuel cell does not emit the harmful NOx, SOx and Particulate Matter that come out of a flare or that would result from the use of traditional combustion-based power generation. On-site Biogas projects are more efficient and more economical than Directed Biogas projects because less gas processing is required compared to the processing needed to get the on-site Biogas to pipeline quality. Also, on-site Biogas projects avoid the potential cost of constructing pipelines if the source of the Biogas is not located near an existing natural gas pipeline.  The unique chemistry of Carbonate Fuel Cells allows them to use low Btu on-site Biogas with no reduction in output or efficiency compared

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to operation on natural gas.  We have developed proprietary Biogas cleanup and contaminant monitoring equipment which, combined with the inherent suitability of the Carbonate Fuel Cell chemistry, gives us an advantage in on-site Biogas applications.  Our SureSource 1500 and SureSource 3000 power platforms are the only systems certified to CARB emissions standards under the Distributed Generation Certification Program for operation with on-site Biogas.

Our fuel cell solutions are also well suited for Microgrid applications, either as the sole source of power generation or integrated with other forms of power generation.  We have fuel cells operating as Microgrids at universities and municipalities, including one university Microgrid owned by Clearway Energy and a municipal-based Microgrid owned by UIL Holdings Corporation, in addition to the Microgrids at the University of California, San Diego and the Santa Rita Jail (as discussed below).  For the municipal-based system owned by UIL Holdings Corporation, under normal operation, the fuel cell supplies power to the grid.  If the grid is disrupted, the fuel cell plant will automatically disconnect from the grid and power a number of critical municipal buildings. Heat from this municipal-based fuel cell platform is used by the local high school. As mentioned below, our fuel cell based Microgrids have continued operating during Public Safety Power Shutoffs events in California.

Growth and Market Adoption Targets

We target for expansion and development vertical markets and geographic regions that:

Our business model focuses on providing these vertical markets and geographic regions with highly efficient and affordable Distributed Generation that delivers de-centralized power in a low-carbon, virtually pollutant-free manner. Geographic markets that meet these criteria and where we are already well established include the Northeastern United States and California.  We have also installed and are operating plants in Europe and Asia, mainly South Korea, in addition to North America.

The Company has made significant progress with reducing costs and creating markets since the commercialization of our products in 2003, with more than 255 MW of our SureSource technology currently installed and operating.

We believe that we can accelerate and expand the adoption of our distributed power generation solutions through:

Fuel Cell Power Plant Ownership Structures

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Historically, in the United States, customers or developers typically purchased our fuel cell power plants outright.  As the size of our fuel cell projects has grown and the availability of project capital has improved, project structures in the U.S. have transitioned to predominantly PPAs.  

Under a PPA, the utility or end-user of the power commits to purchase power as it is produced for an extended period of time, typically 10-to-20 years.  Examples of customers that have previously entered into PPAs include universities, a pharmaceutical company, hospitals and utilities.  A primary advantage for the customer under a PPA structure is that it does not need to commit its own capital or own a power generating asset, yet it enjoys the benefits of fuel cell power generation.

The project may be sold to a project investor or retained by the Company.  If the project is sold, revenue from the product sale is recognized, and the Company recognizes revenue separately for the long-term maintenance and service agreement over the term of that agreement.  If the project is retained, electricity, capacity and/or renewable energy credits are recognized monthly over the term of the PPA. We report the financial performance of retained projects as generation revenue and cost of generation revenues.

Our decision to retain certain projects is based in part on the recurring, predictable cash flows these projects can offer us, the proliferation of PPAs in the industry and the potential access to capital.  Retaining PPAs affords the Company the full benefit of future cash flows under the PPAs, which are higher than if we sell the projects, although it requires more upfront capital investment and financing.  As of October 31, 2020, our operating portfolio of retained projects totaled 32.6 MW with an additional 40.7 MW under development or construction.  

The Company plans to continue to grow this portfolio prudently and in a balanced manner, while also selling projects to investors when selling presents the best value and opportunity for the Company’s capital or meets the customer’s desired ownership structure.

Levelized Cost of Energy

Our fuel cell projects deliver power at a rate comparable to pricing from the grid in our targeted markets.  Policy programs that help to support adoption of clean distributed power generation often lead to below-grid pricing.  We measure power costs by calculating the Levelized Cost of Energy (“LCOE”) over the life of the project.  

There are several primary elements to LCOE for our fuel cell projects, including:

Given the level of integration in our business model of manufacturing, installing and operating fuel cell power plants, there are multiple areas and opportunities for cost reductions. We are actively managing and reducing costs in all three LCOE areas as follows:

Each model of our SureSource power platforms has a design life of 25 to 30 years. There are two major components of our platforms:

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The price for planned periodic fuel cell stack replacements is included in our long-term service agreements or in the per kWh price of the PPA.

We expect to continually drive down the cost of O&M with an expanding fleet, which will leverage our investments in this area.  Additionally, we are continuing to develop fuel cells that have longer useful lives, which is intended to reduce O&M costs by increasing our scheduled module replacement period to greater than seven years.

An important and differentiating factor that benefits fuel cells when comparing LCOE to other forms of power generation is that our solutions provide delivered electricity that minimizes or even avoids the costs of high voltage and distributed transmission.

Energy can be produced right at the point of use.

When comparing LCOE across different forms of power generation, transmission should be considered.  Power generation far from where the power is used requires transmission, which is a cost to ratepayers, creates risk of system outages, increases cybersecurity attack risk, and is inefficient due to line losses of power in the transmission process. Events, including hurricanes along the Gulf Coast and Puerto Rico, wildfires in California, and significant snow and ice storms in the Northeastern U.S., prove that transmission systems are more vulnerable to storm-related and other interruptions than locally generated energy.  

California has been affected by Public Safety Power Shutoffs (“PSPS”), a preemptive effort by utility companies in the state to prevent wildfires from being started by electrical equipment during strong and dry wind conditions by shutting off the power to targeted neighborhoods and substations. Two FuelCell Energy platforms, installed in Microgrids and operated by FuelCell Energy, remained operational as part of their respective Microgrids in areas impacted by PSPS. These platforms provided steady, reliable power to the University of California, San Diego and the Santa Rita Jail during a time when over 3 million people were generally without power due to PSPS, demonstrating the value of FuelCell Energy’s Distributed Generation platforms.

Producing power near the point of use also facilitates the development of CHP applications, since it is easier to find a user for fuel cell waste heat in distributed applications.  Using waste heat to avoid burning fuel for thermal applications reduces LCOE (by avoiding fuel cost) and avoids additional carbon emissions and criteria pollutants.

Manufacturing and Service Facilities

We operate a 167,000 square-foot manufacturing facility in Torrington, Connecticut where we produce the individual cell packages and assemble the fuel cell modules. This facility also houses our global service center. Our completed modules are conditioned in Torrington and shipped directly to customer sites.  Annual capacity (module

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manufacturing, final assembly, testing and conditioning) is 100 MW per year under the Torrington facility’s current configuration when being fully utilized.  The Torrington facility is sized to accommodate eventual annual production capacity of 200 MW per year.

We design and manufacture the core SureSource fuel cell components that are stacked on top of each other to build a fuel cell stack.  For megawatt-scale power plants, four fuel cell stacks are combined to build a fuel cell module.  To complete the power platform, the fuel cell module or modules are combined with the BOP.  The mechanical BOP processes the incoming fuel such as natural gas or Renewable Biogas and includes various fuel handling and processing equipment such as pipes and blowers. The electrical BOP processes the power generated for use by the customer and includes electrical interface equipment such as an inverter.  The BOP components are either purchased directly from suppliers or the manufacturing is outsourced based on our designs and specifications.  This strategy allows us to leverage our manufacturing capacity, focusing on the critical aspects of the power plant where we have specialized knowledge and expertise and possess extensive intellectual property.  BOP components are shipped directly to a project site and are then assembled with the fuel cell module into a complete power plant.

The Torrington production and service facility and the Danbury corporate headquarters and research and development facility are ISO 9001:2015 and ISO 14001:2015 certified and our Field Service operation (which maintains the installed fleet of our platforms) is ISO 9001:2015 certified, reinforcing the tenets of FuelCell Energy’s quality management system and our core values of continual improvement and commitment to quality, environmental stewardship, and customer satisfaction. Sustainability is promoted throughout our organization. We manufacture SureSource products and manage them through end-of-life using environmentally friendly business processes and practices, certified to ISO 14001:2015. We continually strive to improve how we plan and execute across the entire product life cycle. We strive for “cradle-to-cradle” sustainable business practices, incorporating sustainability in our corporate culture. We utilize “Design for Environment” principles in the design, manufacture, installation and servicing of our power platforms. “Design for Environment” principles aim to reduce the overall human health and environmental impact of a product, process or service, when such impacts are considered across the product’s lifecycle. We maintain a chain of custody and responsibility of our SureSource products throughout the product life cycle. When our platforms reach the end of their useful lives, we can refurbish and re-use certain parts and then recycle most of what we cannot re-use. By weight, approximately 93% of the entire power plant can be re-used or recycled at the end of its useful life.

We have a manufacturing and service facility in Taufkirchen, Germany that has the capability to perform final module assembly for up to 20 MW per year of sub-megawatt fuel cell power platforms to service the fuel cell demand in the European market. Our European service activities are also operated out of this location. Our operations in Europe are certified under both ISO 9001:2015 and ISO 14001:2015.

We have a research and development facility in Calgary, Alberta, Canada that is focused on the engineering and development of the Company’s SOFC and SOEC technology. This facility includes equipment for the manufacturing of solid oxide cells and stacks, including advanced automated stack manufacturing processes which have been developed to ensure that the low material cost of the stack is matched with low labor and overhead cost.  The images below show our automated printing line used for solid oxide cells and our robotic cell-stack assembly facility.  The automated system performs the stack build at ~12 seconds per repeat layer, including optical part inspection, cell leak test and thickness measurement, interconnect spot weld and leak test, and part-marking for stack quality assurance.

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Automated Screen Printing and Stack Assembly Facilities

Part inspection, leak test, thickness measurements, and stacking are done in this robot-based system

Raw Materials and Supplier Relationships

We use various commercially available raw materials and components to construct a fuel cell module, including nickel and stainless steel, which are key inputs in our manufacturing process. Our fuel cell stack raw materials are sourced from multiple vendors and are not considered precious metals. We have a global integrated supply chain with qualified sources of supply, many of which are located locally in the regions in which we have established manufacturing and service operations including Europe and Asia. While we manufacture the fuel cells in our Torrington facility, the electrical and mechanical BOPs are assembled by and procured from several suppliers. All of our suppliers must undergo a stringent and rigorous qualification process. We continually evaluate and qualify new suppliers as we diversify our supplier base in our pursuit of lower costs and consistent quality. We purchase mechanical and electrical BOP components from third party vendors, based on our own proprietary designs.

Engineering, Procurement and Construction (“EPC”)

We provide customers with complete turn-key solutions, including development, engineering, procurement, construction, interconnection and operations for our fuel cell projects.  From an EPC standpoint, we have an extensive history of safe and timely delivery of turn-key projects.  We have developed relationships with many design firms and licensed general contractors and have a repeatable, safe, and efficient execution philosophy that has been successfully demonstrated in numerous jurisdictions, both domestically and abroad, all with an exemplary safety record.  The ability to rapidly and safely execute installations minimizes high-cost construction period financing and can assist customers in certain situations when the Commercial Operations Date is time sensitive.

Services and Warranty Agreements

We offer a comprehensive portfolio of services, including engineering, project management and installation, and long-term operating and maintenance programs, including trained technicians that remotely monitor and operate our platforms around the world, 24 hours a day and 365 days a year.  We directly employ field technicians to service the power platforms and maintain service centers near our customers to support the high Availability of our platforms.  

For all operating fuel cell platforms not under a PPA, customers purchase long-term service agreements, some of which have terms of up to 20 years. Pricing for service contracts is based upon the value of service assurance and the markets in which we compete and includes all future maintenance and fuel cell module exchanges.  Each model of our SureSource power platform has a design life of 25-to-30 years. The fuel cell modules, with legacy modules having a 5-year cell design life and current production modules having a 7-year cell design life, go through periodic replacement, while the BOP systems, which consist of conventional mechanical and electrical equipment, are maintained over the life of the project.

Under the typical provisions of both our service agreements and PPAs, we provide services to monitor, operate and maintain power platforms to meet specified performance levels. Operations and maintenance is a key driver for power platforms to deliver their projected revenue and cash flows.  The service aspects of our business model provide a recurring and predictable revenue stream for the Company.  We have committed future production for scheduled fuel cell module exchanges under service agreements and PPAs through the year 2038.  The pricing structure of the service agreements incorporates these scheduled fuel cell module exchanges and the committed nature of this production facilitates our production planning. Many of our PPAs and service agreements include guarantees for system performance, including electrical output and heat rate. Should the power platform not meet the minimum performance levels, we may be required to replace the fuel cell module with a new or used replacement module and/or pay performance penalties.  Our goal is to optimize the power platforms to meet expected operating parameters throughout their contracted service term.

In addition to our service agreements, we provide a warranty for our products against manufacturing or performance defects for a specific period of time. The warranty term in the U.S. is typically 15 months after shipment or 12 months after acceptance of our products.  We accrue for estimated future warranty costs based on historical experience.

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License Agreements and Royalty Income; Relationship with POSCO Energy

License Agreement with ExxonMobil Research and Engineering Company

EMRE and FuelCell Energy began working together in 2016 under an initial joint development agreement with a focus on better understanding the fundamental science behind Carbonate Fuel Cells for use in advanced applications and specifically how to increase efficiency in separating and concentrating carbon dioxide from the exhaust of natural gas-fueled power generation.

In June 2019, we entered into a license agreement with EMRE, a wholly-owned subsidiary of ExxonMobil Corporation, to facilitate the further development of our SureSource Capture^TM product (the “EMRE License Agreement”). Pursuant to the EMRE License Agreement, the Company granted EMRE and its affiliates a non-exclusive, worldwide, fully-paid, perpetual, irrevocable, non-transferable license and right to use our patents, data, know-how, improvements, equipment designs, methods, processes and the like to the extent it is useful to research, develop and commercially exploit Carbonate Fuel Cells in applications in which the fuel cells concentrate carbon dioxide from industrial and power sources and for any other purpose attendant thereto or associated therewith, in exchange for a $10 million payment. Such right and license is sublicenseable to third parties performing work for or with EMRE or its affiliates, but shall not otherwise be sublicenseable.

The EMRE License Agreement facilitated the execution of a new Joint Development Agreement with EMRE, effective October 31, 2019 and executed in fiscal year 2020 (the “EMRE Joint Development Agreement”), pursuant to which we are continuing exclusive research and development efforts with EMRE to evaluate and develop new and/or improved Carbonate Fuel Cells to reduce carbon dioxide emissions from industrial and power sources, in exchange for (a) payment of (i) an exclusivity and technology access fee of $5.0 million, (ii) up to $45.0 million for research and development efforts, and (iii) milestone-based payments of up to $10.0 million after certain technological milestones are met, and (b) certain licenses.  As a result of the execution of the EMRE Joint Development Agreement in fiscal year 2020, the associated backlog was recorded in fiscal year 2020 and the related revenue is expected to be recognized through fiscal year 2021.

License Agreements with POSCO Energy

From approximately 2007 through 2015, we relied on POSCO Energy to develop and grow the South Korean and Asian markets for our products and services.  

Through June of 2020, we recorded license fees and were entitled to receive royalty income from POSCO Energy pursuant to manufacturing and technology transfer agreements entered into with POSCO Energy, including the Alliance Agreement dated February 7, 2007 (and amendments thereto), the Technology Transfer, License and Distribution Agreement dated February 7, 2007 (and amendments thereto), the Stack Technology Transfer and License Agreement dated October 27, 2009 (and amendments thereto), and the Cell Technology Transfer and License Agreement dated October 31, 2012 (and amendments thereto) (collectively, the “License Agreements”). The Cell Technology Transfer and License Agreement (“CTTA”) provided POSCO Energy with the exclusive technology rights to manufacture, sell, distribute and service our SureSource 300, SureSource 1500 and SureSource 3000 fuel cell technology in the South Korean and broader Asian markets. POSCO Energy built a cell manufacturing facility in Pohang, South Korea which became operational in late 2015, but is no longer operating.

In October 2016, the Company and POSCO Energy extended the terms of certain of the License Agreements to be consistent with the term of the CTTA, which was to expire on October 31, 2027. The CTTA required POSCO Energy to pay us a 3.0% royalty on POSCO Energy net product sales, as well as a royalty on scheduled fuel cell module replacements under service agreements for modules that were built by POSCO Energy and installed at plants in Asia under the terms of long-term service agreements between POSCO Energy and its customers. Due to certain actions and inactions of POSCO Energy, the Company has not realized any new material revenues, royalties or new projects developed by POSCO Energy since late 2015.

In March 2017, we entered into a memorandum of understanding (“MOU”) with POSCO Energy to permit us to directly develop the Asian fuel cell business, including the right for us to sell SureSource solutions in South Korea and the broader Asian market. In June 2018, POSCO Energy advised us in writing that it was terminating the MOU effective July 15, 2018.  Pursuant to the terms of the MOU, notwithstanding its termination, we continued to execute on sales commitments in Asia secured in writing prior to July 15, 2018, including the 20 MW power plant installed for KOSPO.

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In November 2019, POSCO Energy spun-off its fuel cell business into a new entity, Korea Fuel Cell Co., Ltd. (“KFC”), without our consent. As part of the spin-off, POSCO Energy transferred manufacturing and service rights under the License Agreements to KFC, but retained distribution rights and severed its own liability under the License Agreements. We formally objected to POSCO Energy’s spin-off, and POSCO Energy posted a bond to secure any liabilities to FuelCell Energy arising out of the spin-off. In September 2020, the Korean Electricity Regulatory Committee found that POSCO Energy’s spin-off of the fuel cell business to KFC may have been done in violation of South Korean law.

On February 19, 2020, we notified POSCO Energy in writing that it was in material breach of the License Agreements by (i) its actions in connection with the spin-off of the fuel cell business to KFC, (ii) its suspension of performance through its cessation of all sales activities since late 2015 and its abandonment of its fuel cell business in Asia, and (iii) its disclosure of material nonpublic information to third parties and its public pronouncements about the fuel cell business on television and in print media that have caused reputational damage to the fuel cell business, the Company and its products. We also notified POSCO Energy that, under the terms of the License Agreements, it had 60 days to fully cure its breaches to our satisfaction and that failure to so cure would lead to termination of the License Agreements. Further, on March 27, 2020, we notified POSCO Energy of additional instances of its material breach of the License Agreements based on POSCO Energy’s failure to pay royalties required to be paid in connection with certain module replacements.

On April 27, 2020, POSCO Energy initiated a series of three arbitration demands against us at the International Court of Arbitration of the International Chamber of Commerce seated in Singapore alleging certain warranty defects in a sub-megawatt conditioning facility at its facility in Pohang, South Korea and seeking combined damages of approximately $3.3 million. Prior to filing the arbitrations, POSCO Energy obtained provisional attachments from the Seoul Central District Court attaching certain revenues owed to us by KOSPO as part of such warranty claims, which has delayed receipt of certain payments owed to us. POSCO Energy subsequently sought additional provisional attachments on KOSPO revenues from the Seoul Central District Court based on unspecified warranty claims not yet filed in an additional amount of approximately $7 million, and additional provisional attachments on KOSPO revenues from the Seoul Central District Court based on its alleged counterclaims in the license termination arbitration described below in an additional amount of approximately $110 million. As of October 31, 2020, outstanding accounts receivable due from KOSPO were $4.8 million.

On June 28, 2020, we terminated the License Agreements with POSCO Energy and filed a demand for arbitration against POSCO Energy and KFC in the International Court of Arbitration of the International Chamber of Commerce based on POSCO Energy’s (i) failure to exercise commercially reasonable efforts to sell our technology in the South Korean and Asian markets, (ii) disclosure of our proprietary information to third parties, (iii) attack on our stock price and (iv) spin-off of POSCO Energy’s fuel cell business into KFC without our consent. We have requested that the arbitral tribunal (a) confirm through declaration that POSCO Energy’s exclusive license to market our technology and products in South Korea and Asia is null and void as a result of the breaches of the License Agreements and that we have the right to pursue direct sales in these markets, (b) order POSCO Energy and KFC to compensate us for losses and damages suffered in the amount of more than $200 million, and (c) order POSCO Energy and KFC to pay our arbitration costs, including counsel fees and expenses. We have retained outside counsel on a contingency basis to pursue our claims, and outside counsel has entered into an agreement with a litigation finance provider to fund the legal fees and expenses of the arbitration. In October 2020, POSCO Energy filed a counterclaim in the arbitration (x) seeking approximately $880 million in damages based on allegations that we misrepresented the capabilities of our fuel cell technology to induce POSCO Energy to enter into the License Agreements and failed to turn over know-how sufficient for POSCO Energy to successfully operate its business; (y) seeking a declaration that the License Agreements remain in full force and effect and requesting the arbitral tribunal enjoin us from interfering in POSCO Energy’s exclusive rights under the License Agreements and (z) seeking an order that we pay POSCO Energy’s arbitration costs, including counsel fees and expenses.

On August 28, 2020, POSCO Energy filed a complaint in the Court of Chancery of the State of Delaware (the “Court”) purportedly seeking to enforce its rights as a stockholder of the Company to inspect and make copies and extracts of certain books and records of the Company and/or the Company’s subsidiaries pursuant to Section 220 of the Delaware General Corporation Law and/or Delaware common law. POSCO Energy alleges that it is seeking to inspect these documents for a proper purpose reasonably related to its interests as a stockholder of the Company, including investigating whether the Company’s Board of Directors and its management breached their fiduciary duties of loyalty, due care, and good faith. POSCO Energy seeks an order of the Court permitting POSCO Energy to inspect and copy the demanded books and records, awarding POSCO Energy reasonable costs and expenses,

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including reasonable attorney’s fees incurred in connection with the matter, and granting such other and further relief as the Court deems just and proper.

On September 14, 2020, POSCO Energy filed a complaint in the United States District Court for the Southern District of New York alleging that the Company delayed the removal of restrictive legends on certain share certificates held by POSCO Energy in 2018, thus precluding POSCO Energy from selling the shares and resulting in claimed losses in excess of $1,000,000.

The Company does not believe that any of the arbitrations or legal proceedings brought against the Company by POSCO Energy are for a proper purpose. Further, the Company believes that all such arbitrations and legal proceedings are in fact simply fulfillment of POSCO Energy’s prior threats to file a series of actions against the Company and are attempts to obtain leverage over the Company and, in certain proceedings, gain advantage in the pending arbitration filed by the Company against POSCO Energy. The Company will vigorously defend itself against POSCO Energy’s claims in all forums and believes it will be apparent at the conclusion of each matter that each action was filed for an improper purpose.

Company Funded Research and Development

In addition to research and development performed under research contracts, including as described under the heading “Advanced Technologies Programs” above, we also fund our own research and development activities to support the commercial fleet with product enhancements and improvements. During fiscal year 2018, we launched our seven-year life stacks, which extended our stack life from five years to seven years. Greater power output and improved longevity are expected to lead to improved gross margin profitability on a per-unit basis for each power plant sold and improved profitability of service contracts, which are expected to support expanding gross margins for the Company.

In addition to output and life enhancements, we designed and introduced the 3.7 MW SureSource 4000 configuration with increased electrical efficiency, and we continually invest in cost reduction and improving the performance, quality and serviceability of our plants. These efforts are intended to improve our value proposition.

Company-funded research and development is included in Research and development expenses (operating expenses) in our consolidated financial statements.  The total research and development expenditures in the consolidated statement of operations, including third party and Company-funded expenditures, are as follows:

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Backlog

Backlog represents definitive agreements executed by the Company and our customers.

Backlog as of October 31, 2020 and 2019 consisted of the following (in thousands):

Service and generation backlog as of October 31, 2020 had a weighted average term of approximately 18 years, with weighting based on dollar backlog and utility service contracts of up to 20 years in duration at inception.  Generally, our government funded and privately funded research and development contracts are subject to the risk of termination at the convenience of the contract counterparty.

Our backlog amount outstanding is not indicative of amounts to be earned in the upcoming fiscal year.  The specific elements of backlog may vary in terms of timing and revenue recognition from less than one year to up to 20 years.  

The Company may choose to sell or retain operating power plants on the balance sheet, thus creating variability in timing of revenue recognition.  Accordingly, the timing and the nature of our business makes it difficult to predict what portion of our backlog will be filled in the next fiscal year. 

Competition 

Our platforms are based on a range of technologies and target a variety of applications, each of which have incumbent and developing competitors.

Our SureSource Carbonate Fuel Cell power plants compete in the marketplace for stationary Distributed Generation fueled by natural gas or Biogas. Several companies in the U.S. are engaged in fuel cell development, although, to our knowledge, we are the only domestic company engaged in manufacturing and deployment of stationary natural gas or Biogas fueled Carbonate Fuel Cells. Other suppliers of stationary fuel cell systems include Doosan Fuel Cell Co. Ltd, which manufactures medium-temperature phosphoric acid fuel cell systems and is developing solid oxide systems, and Bloom Energy, a supplier of solid oxide based systems. Other companies are developing solid oxide systems and other hydrogen-based fuel cell systems for small residential or vehicle auxiliary power units, which are applications we are not pursing. Examples of these developers include Ceres Power Holdings, Ceramic Fuel Cells Ltd, SOLIDPower, Aris Energy, Plug Power, Altergy and Cummins, Inc.  

In addition to different types of stationary fuel cells, some other technologies that compete in the Distributed Generation marketplace include micro-turbines, turbines, and reciprocating gas engines. Companies we may compete with that offer this type of equipment include Caterpillar, Cummins, Wartsila, MTU/Rolls Royce, and Detroit Diesel, which manufacture combustion-based distributed power generation equipment, including various engines and turbines, and have established manufacturing and distribution operations along with product operating and cost features. Competition on larger MW projects may also come from gas turbine companies like General Electric, Caterpillar Solar Turbines and Kawasaki.

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We also compete against the electric grid, which is readily available to prospective customers. The electric grid is supplied by traditional centralized power plants, including coal, gas and nuclear, with transmission lines used to transport the electricity to the point of use. 

Our stationary fuel cell power plants also compete against large scale solar and wind technologies, although we complement the unreliable intermittent nature of solar and wind power with the continuous, reliable power output of the fuel cells. Solar and wind power require specific geographies and weather profiles, require transmission for utility-scale applications, and require a source of back up capacity for when the sun or wind is not available. They also require a significant amount of land compared to our fuel cell power plants, making it difficult to site megawatt-class solar and wind projects in urban areas, unlike our solutions. While fuel cells emit negligible amounts of NOx, SOx and Particulate Matter, fuel cells do emit some carbon dioxide when fueled with natural gas, but less per kWh compared to other less-efficient systems. In many markets, baseload fuel cells avoid more emissions than wind or solar systems of similar capacity because they operate for many more hours of the day compared to these intermittent resources.

We are also developing distributed power generation systems based on our Solid Oxide Fuel Cell technology, and these systems will have the same competition described above.

Our solid oxide systems can operate on pure hydrogen, but we are not developers of hydrogen fueled systems for mobility or material handling applications, such as the PEM-based systems developed by Ballard Power Systems, Plug Power, Toyota, Hyundai, Honda and GM, so we do not compete with these companies for those applications. However, Ballard Power Systems and Plug Power have developed stationary hydrogen fueled systems in the past, and we could compete against some of these developers in the future if a market for hydrogen fueled stationary power generation systems develops.

In addition to distributed power generation, we are also developing systems for hydrogen production. Our Distributed Hydrogen solution, with co-production of power and hydrogen from natural gas or Biogas, competes against traditional centralized hydrogen generation as well as conventional electrolyzers used for distributed applications. Hydrogen is typically generated at a central location in large quantities by combustion-based steam reforming and is then distributed to end users by diesel truck. As such, centralized hydrogen production systems produce more emissions per kg of hydrogen than our Distributed Hydrogen platform and have added transportation costs and emissions.

Electrolysis can compete with our Distributed Hydrogen solution if the cost of power is low. Low-cost power reduces the cost of hydrogen produced by electrolysis, and it reduces the revenue from power sales for a Distributed Hydrogen system. In areas with high power cost, the added revenue for the power sales from a Trigeneration Distributed Hydrogen platform reduces the price of hydrogen. Companies providing electrolysis systems for hydrogen production include NEL, ITM Power, Plug Power and Cummins, Inc.

We are also developing advance electrolysis systems based on our Solid Oxide Electrolysis platform, which can operate at higher electrical efficiency than currently available electrolysis technologies. Applications for this technology include hydrogen for production for mobility or industrial users as well as large scale hydrogen production from curtailed renewable or nuclear power. We will compete with conventional electrolysis providers in these applications but will have the advantage of the higher electrical efficiency and the ability to increase electrical efficiency even higher by using waste heat from industrial systems or nuclear plants. Other companies are also developing solid oxide-based electrolysis systems, including Bloom Energy and Sunfire GmbH.

Our Reversible Solid Oxide Fuel Cell technology can also be used in energy storage applications, since our fuel cell stacks can alternate between electrolysis mode (using power to produce hydrogen which is stored) and fuel cell mode (producing power from stored hydrogen). Our competition in this application will be conventional battery energy storage (e.g., lead-acid or lithium) or developing storage systems such as flow batteries. Hydrogen based energy storage offers an advantage for long duration applications because the cost of the reactant (an initial fill of water) is very low. Sunfire GmbH is also developing reversible solid oxide systems, and Bloom Energy has recently discussed hydrogen storage concepts with separate systems for hydrogen production and consumption (i.e., not with reversible stacks).

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Our Carbonate Fuel Cell based Carbon Capture solution is unique in that it is the only Carbon Capture approach that, to our knowledge, can capture CO2 from a power plant or boiler while simultaneously producing power. Our competition in this application will be conventional Amine-based absorption systems, and systems under development using solid adsorbents or membrane CO2 separation. All these alternatives have power requirements that will decrease the output of a host power plant or add cost to capture from industrial boilers.  Our co-production of power provides a revenue stream that reduces the cost of Carbon Capture and is unique among the technologies being considered for this application. 

Regulatory and Legislative Environment

Distributed Generation addresses certain power generation issues that central generation does not and legal, government and regulatory policy can impact deployment of Distributed Generation. The policies that affect our products are not always the same as those imposed on our competitors, and while some policies can make our products less competitive, others may provide an advantage. Certain utility policies may also pose barriers to our installation or interconnection with the utility grid, such as backup, standby or departing load charges that make installation of our products not economically attractive for our customers. Regulatory and legislative support encompasses policy, incentive programs, and defined sustainability initiatives such as Renewable Portfolio Standards (“RPS”).

Various states and municipalities in the U.S. have adopted programs for which our products qualify, including programs supporting self-generation, clean air power generation, combined heat and power applications, carbon reduction, grid resiliency/Microgrids and utility ownership of fuel cell projects.

Many states in the U.S. have enacted legislation adopting Clean Energy Standards (“CES”) or RPS mechanisms. Under these standards, regulated utilities and other load serving entities are required to procure a specified percentage of their total electricity sales to end-user customers from eligible resources. CES and RPS legislation and implementing regulations vary significantly from state to state, particularly with respect to the percentage of renewable energy required to achieve the state’s mandate, the definition of eligible clean and renewable energy resources, and the extent to which renewable energy credits (certificates representing the generation of renewable energy) qualify for CES or RPS compliance. Fuel cells using Biogas qualify as renewable power generation technology in all of the CES and RPS states in the U.S., and some states specify that fuel cells operating on natural gas are also eligible for these initiatives in recognition of the high efficiency and low pollutants of fuel cells.  Other states are moving away from generation utilizing fossil fuels in favor of zero carbon resources.

In February 2018, the U.S. Congress reinstated the 30% Investment Tax Credit (“ITC”) for fuel cells and also extended and significantly expanded the existing Carbon Oxide Sequestration Credit. The ITC phased down to 26% in 2020 and was scheduled to phase down to 22% by 2022 and expire in 2023. The reinstatement of the ITC for fuel cells provided equal access to tax incentives for U.S. fuel cell manufacturers when compared with other clean energy solutions. The ITC phase down was extended by two years pursuant to the Consolidated Appropriations Act, 2021 passed by Congress in December 2020 and signed by the President on December 27, 2020, thus extending the 26% ITC until 2022 and the expiration to 2025.

Internationally, South Korea has an RPS to promote clean energy, reduce carbon emissions, and develop local manufacturing of clean energy generation products to accelerate economic growth. The RPS is designed to increase new and renewable power generation to 10% of total power generation by 2023 from 2% when the RPS began in 2012.  Twenty-two of the largest power generators are obligated to achieve the RPS requirements in their generation or purchase offsetting renewable energy certificates.  Financial penalties are levied by the government for non-compliance.  European governments are supportive of hydrogen-based generation and efficient CHP applications, and some European governments such as Germany, the UK and the Netherlands, provide incentives in the form of tax incentives, grants and waivers of regulatory fees for such installations.

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Government Regulation

Our Company and our products are subject to various federal, provincial, state and local laws and regulations relating to, among other things, land use, safe working conditions, handling and disposal of hazardous and potentially hazardous substances and emissions of pollutants into the atmosphere. Negligible emissions of SOx and NOx from our power plants are substantially lower than conventional combustion-based generating stations and are far below existing and proposed regulatory limits. The primary emissions from our power plants, assuming no cogeneration application, are humid flue gas that is discharged at temperatures of 700-800° F, water that is discharged at temperatures of 10-20° F above ambient air temperatures, and CO₂ in per kW hour amounts that are much less than conventional fossil fuel central generation power plants due to the high efficiency of fuel cells. The discharge of water from our power plants requires permits that depend on whether the water is to be discharged into a storm drain or into the local wastewater system.

We are also subject to federal, state, provincial and/or local regulation with respect to, among other things, siting. In addition, utility companies and several states in the U.S. have created and adopted, or are in the process of creating and adopting, interconnection regulations covering both technical and financial requirements for interconnection of fuel cell power plants to utility grids. Our power plants are designed to meet all applicable laws, regulations and industry standards for use in the international markets in which we operate.  Our SureSource solutions are CARB 2007 certified, and our SureSource 1500 and SureSource 3000, when operating on Biogas, are certified for the CARB 2013 Biogas standard.

Proprietary Rights and Licensed Technology

Our intellectual property consists of patents, trade secrets and institutional knowledge and know-how that we believe is a competitive advantage and represents a barrier to entry for potential competitors.  Our Company was founded in 1969 as an applied research company and began focusing on Carbonate Fuel Cells in the 1980s, with our first fully-commercialized SureSource power plant sold in 2003. Over this time, we have gained extensive experience in designing, manufacturing, operating and maintaining fuel cell power plants.  This experience cannot be easily or quickly replicated and, combined with our trade secrets, proprietary processes and patents, safeguards our intellectual property rights.

As of October 31, 2020, we (excluding our subsidiaries) had 102 U.S. patents and 186 patents in other jurisdictions covering our fuel cell technology (in certain cases covering the same technology in multiple jurisdictions), with patents directed to various aspects of our SureSource technology, SOFC technology, PEM fuel cell technology and applications thereof. As of October 31, 2020, we also had 55 patent applications pending in the U.S. and 107 patent applications pending in other jurisdictions. Our U.S. patents will expire between 2020 and 2039, and the current average remaining life of our U.S. patents is approximately 9.5 years.

As of October 31, 2020, our subsidiary, Versa Power Systems, Ltd. (“Versa”), had 32 U.S. patents and 93 international patents covering SOFC technology (in certain cases covering the same technology in multiple jurisdictions), with an average remaining U.S. patent life of approximately 4.7 years. As of October 31, 2020, Versa also had 3 pending U.S. patent applications and 14 patent applications pending in other jurisdictions. In addition, as of October 31, 2020, our subsidiary, FuelCell Energy Solutions, GmbH, had license rights to 2 U.S. patents and 7 patents outside the U.S. for Carbonate Fuel Cell technology licensed from Fraunhofer IKTS.

Five patents expired in 2019 and 6 patents expired in 2020 for FuelCell Energy and Versa, but none of these expirations, individually or in the aggregate, is expected to have any material impact on our current or anticipated operations.  As has historically been the case, we are continually innovating and have a significant number of invention disclosures that we are reviewing that may result in additional patent applications.

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Certain of our U.S. patents are the result of government-funded research and development programs, including our DOE programs. U.S. patents we own that resulted from government-funded research are subject to the government potentially exercising “march-in” rights. We believe that the likelihood of the U.S. government exercising these rights is remote and would only occur if we ceased our commercialization efforts and there was a compelling national need to use the patents.

Significant Customers and Information about Geographic Areas

We contract with a concentrated number of customers for the sale of our products and for research and development. For the years ended October 31, 2020, 2019 and 2018, our top customers, EMRE, UIL Holdings Corporation, Connecticut Light and Power, the DOE, Clearway Energy (formerly NRG Yield, Inc.), Pfizer, Inc., Dominion Bridgeport Fuel Cell, LLC, POSCO Energy, Hanyang Industrial Development Co., Ltd, and AEP Onsite Partners, LLC, accounted for an aggregate of 86%, 81% and 88%, respectively, of our total annual consolidated revenue. Revenue percentage by major customer for the last three fiscal years is as follows:

See Item 7 – “Management's Discussion and Analysis of Financial Condition and Results of Operations” and Item 8 – “Financial Statements and Supplementary Data” for further information regarding our revenue and revenue recognition policies.

We have marketing and manufacturing operations both within and outside the United States. We source raw materials and BOP components from a diverse global supply chain.  In 2020, the foreign country with the greatest concentration risk was South Korea, accounting for 3% of our consolidated net revenues.  The Company was entitled to receive royalties from POSCO Energy on the sale of power plants and module replacements related to service of fuel cell power plants in Asia, and the Company received approximately $0.4 million in such royalties during the fiscal year ended October 31, 2019 as part of a net settlement of an arbitration brought by POSCO Energy in 2018.  As part of our strategic plan, we are in the process of diversifying our sales mix from both a customer specific and geographic perspective. See Item 1A “Risk Factors” - “The pending legal proceedings with POSCO Energy could expose us to costs of such legal proceedings or an adverse judgment.”

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The international nature of our operations subjects us to a number of risks, including fluctuations in exchange rates, adverse changes in foreign laws or regulatory requirements and tariffs, taxes, and other trade restrictions. See Item 1A “Risk Factors” – “We are subject to risks inherent in international operations.” See also Note 17. “Segment Information,” to the consolidated financial statements in Part II, Item 8, “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K for information about our net sales by geographic region for the years ended October 31, 2020, 2019, and 2018. See also Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” for other information about our operations and activities in various geographic regions.

Sustainability

FuelCell Energy’s clean, efficient and reliable fuel cell power platforms assist our customers in achieving their environmental and sustainability goals. Our patented FuelCell Energy products offer a sustainable alternative to traditional internal combustion-based power generation. Traditional power plants create harmful emissions, such as NOx, SOx and Particulate Matter, that are a serious public health concern. Alternatively, the FuelCell Energy power platforms use a combustion-free power generation process that is virtually free of pollutants. Our platforms are highly efficient and environmentally friendly products that support the “Triple Bottom Line” concept of sustainability, consisting of environmental, social and economic considerations. As an enterprise, we are proud that, in October 2018, we were certified ISO 14001:2015 compliant, having demonstrated the establishment of and adherence to an environmental management system standard. We believe that FuelCell Energy is the only fuel cell manufacturer to have received this certification.

Product efficiency

The electrical efficiency of our Carbonate Fuel Cell solutions ranges from approximately 47% to 60% depending on the configuration.  When configured for CHP, our system efficiencies can potentially reach up to 90%, depending on the application. This compares favorably to the average efficiency of the U.S. electrical grid of about 40%.  Our solutions deliver this high electrical efficiency where the power is used, avoiding transmission.  Transmission line losses average about 5% for the U.S. grid, which represents inefficiency and is a hidden cost to ratepayers.

Product end-of-life management

Our commitment to sustainability is evident in the design, manufacturing, installation and servicing of our fuel cell power platforms, which are engineered for recycling and reuse. We start with a commitment to sustainability best practices as part of our corporate culture, then apply this core belief to the design, manufacture, installation and servicing of our fuel cell power platforms.  For example, when our plants reach the end of their useful lives, we have the capability to refurbish and re-use certain parts and also recycle most of what we cannot re-use.  This is a departure from other power generation methods that typically produce a significant amount of waste. The BOP has an operating life of 25-to-30 years, at which time metals such as steel and copper are reclaimed for scrap value. For context, by weight, approximately 93% of the entire power plant can be re-used or recycled at the end of its useful life.

Our manufacturing process has a very low carbon footprint, utilizing an assembly-oriented production strategy.  While we continue to enhance and adopt sustainable business practices, we recognize this is an ongoing effort with more to be accomplished, such as further reducing the direct and indirect aspects of our carbon footprint.

Materials sourcing

Assuring the absence of conflict minerals in our power plants is a continuing initiative.  Our fuel cells, including the fuel cell components and completed fuel cell module, do not utilize any 3TG minerals (i.e., tin, tungsten, tantalum and gold) that are classified as conflict minerals.  We do utilize componentry in the BOP such as computer circuit boards that utilize trace amounts of 3TG minerals. For perspective, total shipments in fiscal year 2019 weighed approximately 1.8 million pounds, of which 8.0 pounds, or 0.000450%, represented 3TG minerals, so the presence of these minerals is minimal.  Our conflict mineral disclosure filed with the Securities and Exchange Commission (“SEC”) on Form SD contains specific information on the actions we are taking to avoid the use of conflict minerals.

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Human Capital Resources

As of October 31, 2020, we had 316 full-time employees, of whom 121 were located at the Torrington, Connecticut manufacturing facility, 160 were located at the Danbury, Connecticut facility or other field offices within the U.S., and 35 were located abroad. We did not have any part-time employees. None of our U.S. employees are represented by a labor union or covered by a collective bargaining agreement.  We believe our relations with our employees are good.

Workforce Health and Safety

We take workplace safety very seriously and are proud of the fact that we have never had a workplace fatality at any of our facilities or power plant installations. Our robust safety program, bolstered over the past five years, ensures that we are constantly evaluating our safety protocols in an effort to keep our facilities safe for our workers.

We work to continually improve what we believe is a robust safety program.  This is demonstrated by an improving safety trend over each of the past 5 years. Our Experience Modification Rates (“EMR”) for the past 5 years are as follows:2015: 1.0, 2016: 0.81, 2017: 0.65, 2018: 0.62, 2019: 0.65, and 2020: 0.59. We have maintained an “A” rating since 2016 providing “Safety Tier 1” performance with ISNetworld, a database for online contractor safety management designed to streamline companies' and contractors' compliance pre-qualification processes.

During fiscal year 2020, the Company launched a proactive response to the escalating COVID-19 outbreak and temporarily suspended operations at its Torrington, Connecticut manufacturing facility in March 2020. The Company also commenced remote work protocol for those employees worldwide that were capable of working from home. The Company took these actions to secure the safety of the Company’s employees, our corporate community as a whole, and the communities in which our team members live, and to adhere to Center for Disease Control (CDC) recommendations of social distancing and limited public exposure in connection with the COVID-19 pandemic. All employees that were not able to work from home during the manufacturing facility shutdown due to their job function received full wages and benefits during such time. We did not implement any furlough, layoff or shared work program during such time. The Company resumed manufacturing in June 2020 and the Torrington, Connecticut manufacturing facility employees returned to work. The Company continues to encourage a remote work protocol for portions of the workforce due to the continuing pandemic. We continue to evaluate our ability to operate in light of recent resurgences of COVID-19 and the advisability of continuing operations based on federal, state and local guidance, evolving data concerning the pandemic and the best interests of our employees, customers and stockholders.

Compensation and Benefits

As part of our compensation philosophy, we believe that we must offer and maintain market competitive compensation and benefit programs for our employees in order to attract and retain superior talent. In addition to competitive base wages, additional programs include an annual Management Incentive Plan, Long-Term Equity Incentive Plans, a Company matched 401(k) Plan, healthcare and insurance benefits, health savings and flexible spending accounts, paid time off, family leave, and employee assistance programs.

Diversity and Inclusion

We are committed to our continued efforts to increase diversity and foster an inclusive work environment that supports the global workforce and the communities we serve. We recruit the best qualified employees regardless of gender, ethnicity or other protected traits and it is our policy to fully comply with all laws (domestic and foreign) applicable to discrimination in the workplace. Our diversity, equity and inclusion principles are also reflected in our employee training and policies. We continue to enhance our diversity, equity and inclusion policies which are guided by our executive leadership team.

Available Information

We file annual, quarterly and current reports, proxy statements and other information electronically with the SEC. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all

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amendments to those reports are made available free of charge through the Investor Relations section of the Company’s website (http://www.fuelcellenergy.com) as soon as practicable after such material is electronically filed with, or furnished to, the SEC. Material contained on our website is not incorporated by reference in this report. Our executive offices are located at 3 Great Pasture Road, Danbury, CT 06810. The SEC also maintains an Internet website that contains reports and other information regarding issuers that file electronically with the SEC located at http://www.sec.gov.

Information about our Executive Officers

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An investment in our common stock involves a high degree of risk. Prior to making a decision about investing in our securities, you should carefully consider the specific risk factors discussed below. The risks and uncertainties we have described are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our operations. If any such risks actually occur, our business, financial condition, or results of operations could be materially and adversely affected. In such cases, the trading price of our common stock could decline, and you may lose all or part of your investment.

Risks Related to Our Business, Industry and Supply Chain

Our business and operations may be adversely affected by the 2019 novel coronavirus (COVID-19) outbreak or other similar outbreaks.

Any outbreaks of contagious diseases, including the recent outbreak of the 2019 novel coronavirus (“COVID-19”) that was first detected in Wuhan, China in December 2019 and has since developed into a global pandemic, and other adverse public health developments in countries where we and our suppliers operate, could have a material and adverse effect on our business, financial condition and results of operations. These effects could include disruptions to or restrictions on our employees’ ability to travel, as well as temporary closures of our facilities or the facilities of our customers, suppliers, or other vendors in our supply chain. In addition, COVID-19 has resulted in a widespread health crisis that has adversely affected, and may continue to adversely affect, the economies and financial markets of many countries, resulting in an economic downturn that could affect demand for our products or our ability to obtain financing for our business or projects. COVID-19 may impact the health of our team members, directors or customers, reduce the availability of our workforce or those of companies with which we do business, or otherwise cause human impacts that may negatively impact our business. Any of these events, which may result in disruptions to our supply chain or customer demand, could materially and adversely affect our business and our financial results. The extent to which COVID-19 will impact our business and our financial results will depend on future developments, which are highly uncertain and cannot be predicted. Such developments may include the geographic spread of COVID-19, the severity of the disease, the duration of the outbreak, the actions that may be taken by various governmental authorities in response to the outbreak, such as quarantine or “shelter-in-place” orders and business closures imposed by various states within the United States, and the impact on the U.S. or global economy. For example, on March 18, 2020, in response to the escalating global COVID-19 outbreak, we temporarily

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suspended operations at our Torrington, Connecticut manufacturing facility, and also ordered those employees that could work from home to do so. While we resumed operations in the manufacturing facility on June 22, 2020, we continue to evaluate our ability to operate in light of recent resurgences of COVID-19 and the advisability of continuing operations, based on federal, state and local guidance, evolving data concerning the pandemic and the best interests of our employees, customers and stockholders. Accordingly, there can be no assurance that any of our facilities will remain open (in full or in part), that our employees that continue to work remotely will return to the office or that our other operations will continue at full or limited capacity. If we again have to shut down production either due to a worsening of the COVID-19 pandemic or due to an outbreak in one of our facilities, our project schedules and associated financing could be adversely affected. An extended period of remote working by our employees could strain our technology resources and introduce operational risks, including heightened cybersecurity risk. Further, we have experienced, and may continue to experience, increased costs and expenses, including as a result of (i) conducting daily “fitness-for-duty” assessments for employees, including symptom checks and providing personal protective equipment, (ii) the expansion of benefits to our employees, including the provision of additional time off for employees who have contracted COVID-19 or are required to be quarantined or who are unable to obtain childcare to return to work, (iii) implementing increased health and safety protocols at all of our facilities, including increased cleaning/ sanitization of workspaces, restricting visitor access, mandating social distancing guidelines and increasing the availability of sanitization products, and (iv) the increased cost of personal protective equipment. Although we believe the Company is currently considered an “essential” business in its operating markets, if any of the applicable exceptions or exemptions are curtailed or revoked in the future, or any of these exemptions or exceptions do not extend to any of our key suppliers, our business, operating results and financial condition could be adversely impacted. While we have attempted to continue business development activities during the pandemic, state and local shutdowns, shelter-in-place orders and travel restrictions have impeded our ability to meet with customers and solicit new business, and certain bids and solicitations in which we typically participate have been postponed. As a result, at this time, it is impossible to predict the overall impact of COVID-19 on our business, liquidity, capital resources, supply chain and financial results or its effect on clean energy demand, capital budgets of our customers, or demand for our products. Additionally, while we have continued to prioritize the health and safety of our team members and customers as we continue to operate during the pandemic, we face an increased risk of litigation related to our operating environments. Even after the COVID-19 pandemic has subsided, we may continue to experience adverse impacts to our business as a result of any economic recession that has occurred or may occur in the future because of the pandemic, or because the pandemic worsens again. Additional public health crises could also emerge in the future, including other pandemics or epidemics. Any such public health crisis could pose further risks to us and could also have a material adverse effect on our business, results of operations and financial position.

Our PPP Loan may not be forgiven, may subject us to challenges regarding qualification for the PPP Loan, enforcement actions, fines and penalties, and has resulted in an informal SEC inquiry into our financial disclosures.

On April 20, 2020, we entered into a Paycheck Protection Program Promissory Note, dated April 16, 2020 (the “PPP Note”), evidencing a loan to the Company from Liberty Bank under the CARES Act. Pursuant to the PPP Note, we received total proceeds of approximately $6.5 million on April 24, 2020. In accordance with the requirements of the CARES Act, as amended by the Paycheck Protection Program Flexibility Act of 2020 (the “PPP Flexibility Act”), the PPP Loan may be fully forgiven if (i) proceeds are used to pay eligible payroll costs, rent, mortgage interest and utilities and (ii) full-time employee headcount and salaries are either maintained during the 24-week period following disbursement of the PPP Loan or restored by December 31, 2020. If not so maintained or restored, forgiveness of the PPP Loan will be reduced in accordance with regulations to be issued by the SBA. In order to obtain the consent of the Orion Agent and the lenders under the Orion Credit Agreement (each as defined below) to enter into the PPP Note, the Orion Agent and such lenders required us to apply for forgiveness within 30 days after the last day of the loan forgiveness period as designated under regulations in effect as of June 6, 2020. We used 100% of the proceeds of the PPP Loan to pay eligible payroll costs, and on October 29, 2020, we applied for forgiveness of the PPP Loan. While we believe we have met all of the requirements of the CARES Act, as amended by the PPP Flexibility Act, no assurance can be given that any portion of the PPP Loan will be forgiven. In addition, based on guidance from the United States Department of the Treasury, since the total PPP Loan proceeds exceeded $2.0 million, our forgiveness application will be subject to audit by the SBA, including with respect to our certification that the economic uncertainty at the time of our application made our request for a PPP Loan necessary to support our ongoing operations. Such certification does not contain any objective criteria and is subject to interpretation. If we are found to have been ineligible to receive the PPP Loan under the PPP Note, or in violation of any of the laws or regulations that may apply to us in connection with the PPP Note, including the False Claims Act, we may be subject to enforcement actions, fines and penalties, including significant civil, criminal and

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administrative penalties, and could be required to repay the PPP Note. In addition, our receipt of the PPP Loan and our submission of a forgiveness application may result in adverse publicity and damage to our reputation, governmental investigations, inquiries, reviews and audits, such as the SEC inquiry described below, which could consume significant financial and management resources. Any of these events could harm our business, results of operations and financial condition.

On or about May 11, 2020, the Division of Enforcement of the SEC sent the Company an inquiry requesting that we voluntarily provide information to the SEC pertaining to our application and resulting PPP Loan and how the need for the PPP Loan compares with our filings, disclosures and financial condition. While this request for information is voluntary and the Company was not obligated to respond, we are cooperating and have provided information to the SEC.

We have incurred losses and anticipate continued losses and negative cash flows.

We have transitioned from a research and development company to a commercial products manufacturer, services provider and developer. We have not been profitable since our year ended October 31, 1997. We expect to continue to incur net losses and generate negative cash flows until we can produce sufficient revenues and gross profit to cover our costs. We may never become profitable. Even if we do achieve profitability, we may be unable to sustain or increase our profitability in the future. For the reasons discussed in more detail below, there are uncertainties associated with our achieving and sustaining profitability. We have, from time to time, sought financing in the public markets in order to fund operations and will continue to do so. Our future ability to obtain such financing could be impaired by a variety of factors, including, but not limited to, the price of our common stock, our lack of available shares and general market conditions.

Our cost reduction strategy may not succeed or may be significantly delayed, which may result in our inability to deliver improved margins.

Our cost reduction strategy is based on the assumption that increases in production will result in economies of scale. In addition, our cost reduction strategy relies on advancements in our manufacturing process, global competitive sourcing, engineering design, reducing the cost of capital and technology improvements (including stack life and projected power output). Failure to achieve our cost reduction targets could have a material adverse effect on our results of operations and financial condition.

We have debt outstanding and may incur additional debt in the future, which may adversely affect our financial condition and future financial results.

As of October 31, 2020, our total consolidated debt outstanding (“indebtedness”) was $174.2 million ($165.1 million, net of finance costs and debt discounts), of which an aggregate of $80.0 million ($72.7 million, net of finance costs and debt discounts) was senior secured indebtedness under the Orion Credit Agreement with the Orion Agent (in each case as defined elsewhere herein) and certain of its affiliates, which was entered into in connection with our $200.0 million senior secured credit facility (which is referred to herein as the Orion Facility), and an aggregate of $94.2 million ($92.4 million, net of finance costs and debt discounts) was other secured indebtedness.

On December 7, 2020, the Company repaid all outstanding debt under the Orion Facility. Concurrently with the Orion Agent’s receipt of full payment pursuant to the Orion Payoff Letter (as defined elsewhere herein), the Orion Agent released all of the collateral from the liens granted under the security documents associated with the Orion Facility (which included the release of $11.2 million of restricted cash to the Company), and the Company and its subsidiaries were unconditionally released from their respective obligations under the Orion Credit Agreement (and related loan documents) and the Orion Facility without further action.

Our ability to make scheduled payments of principal and interest and other required repayments depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control. Our business may not generate cash flows from operations in the future sufficient to service our debt and make necessary capital expenditures. If we are unable to generate such cash flows, we may be required to adopt one or more alternatives, such as selling assets, restructuring operations, restructuring debt or obtaining additional equity capital on terms that may be onerous or dilutive.

We may incur additional indebtedness in the future in the ordinary course of business, which could include onerous restrictions on us. If new debt is added to current debt levels, the risks described above could intensify. Our debt

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agreements contain representations and warranties, affirmative and negative covenants, and events of default that entitle the lenders to cause our indebtedness under such debt agreements to become immediately due and payable.

Unanticipated increases or decreases in business growth may result in adverse financial consequences for us.

If our business grows more quickly than we anticipate, our existing and planned manufacturing facilities may become inadequate and we may need to seek out new or additional space, or retrofit or further equip our existing facilities, at considerable cost to us. If our business does not grow as quickly as we expect, our existing and planned manufacturing facilities would, in part, represent excess capacity for which we may not recover the cost. In that circumstance, our revenues may be inadequate to support our committed costs and our planned growth, and our gross margins and business strategy would be adversely affected.

If our goodwill and other intangible assets, long-lived assets, inventory or project assets become impaired, we may be required to record a significant charge to operations.

We have in the past recorded charges and may in the future be required to record a significant charge to operations in our financial statements should we determine that our goodwill, other indefinite-lived intangible assets (i.e., in process research and development (“IPR&D”)), other long-lived assets (i.e., property, plant and equipment and definite-lived intangible assets), inventory, or project assets are impaired. Such a charge might have a significant impact on our reported financial condition and results of operations.

As required by accounting rules, we review our goodwill for impairment at least annually as of July 31 or more frequently if facts and circumstances indicate that it is more likely than not that the fair value of a reporting unit that has goodwill is less than its carrying value. Factors that may be considered a change in circumstances indicating that the carrying value of our goodwill might not be recoverable include a significant decline in projections of future cash flows and lower future growth rates in our industry. We review IPR&D for impairment on an annual basis as of July 31 or more frequently if facts and circumstances indicate the fair value is less than the carrying value. If the technology has been determined to be abandoned or not recoverable, we would be required to record a charge reflecting impairment of the asset. We review inventory, long-lived assets and project assets for impairment whenever events or changes in circumstances indicate the carrying amount may not be recoverable. We consider a project commercially viable and recoverable if such project is anticipated to be sellable for a profit, or generates positive cash flows, in excess of the cost of the project once it is either fully developed or fully constructed. If any of our projects are not considered commercially viable or costs are not deemed to be recoverable, we would be required to record a charge reflecting the impairment of such project assets.

Our Advanced Technologies contracts are subject to the risk of termination by the contracting party and we may not realize the full amounts allocated under some contracts due to the lack of Congressional appropriations or early termination.

A portion of our revenues has been derived from long-term cooperative agreements and other contracts with the DOE and other U.S. government agencies. These agreements are important to the continued development of our technology and our products. We also contract with private sector companies under certain Advanced Technologies contracts to develop strategically important and complementary offerings.

Generally, our privately funded Advanced Technologies contracts, including our EMRE Joint Development Agreement, and our government research and development contracts are subject to the risk of termination at the convenience of the contracting party and may contain certain milestones and deliverables which we may not be able to meet if actual results differ materially from our original estimates. Furthermore, with respect to government-funded contracts, irrespective of the amounts allocated by the contracting agency, such contracts are subject to annual Congressional appropriations and the results of government or agency sponsored reviews and audits of our cost reduction projections and efforts. We can only receive funds under government-funded contracts ultimately made available to us annually by Congress as a result of the appropriations process. Accordingly, we cannot be sure whether we will receive the full amounts awarded under our privately funded, government research and development or other contracts. Termination of the contracts or failure to receive the full amounts under any of our Advanced Technologies contracts could materially and adversely affect our business prospects, results of operations and financial condition.

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Utility companies may resist the adoption of Distributed Generation and could impose customer fees or interconnection requirements on our customers that could make our products less desirable.

Investor-owned utilities may resist adoption of Distributed Generation fuel cell plants as such plants are disruptive to the utility business model that primarily utilizes large central generation power plants and associated transmission and distribution. On-site Distributed Generation that is on the customer-side of the electric meter competes with the utility. Distributed Generation on the utility-side of the meter generally has power output that is significantly less than central generation power plants and may be perceived by the utility as too small to materially impact its business, limiting its interest. Additionally, perceived technology risk may limit utility interest in stationary fuel cell power plants.

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 increase the cost to our customers of using our SureSource products and could make our products less desirable, thereby harming our business prospects, results of operations and financial condition.

We depend on third party suppliers for the development and supply of key raw materials and components for our products.

We use various raw materials and components to construct a fuel cell module, including nickel and stainless steel that are critical to our manufacturing process. We also rely on third-party suppliers for the BOP components in our products. Suppliers must undergo a qualification process, which takes four to twelve months. We continually evaluate new suppliers, and we are currently qualifying several new suppliers. There are a limited number of suppliers for some of the key components of our products. We do not know whether we will be able to maintain long-term supply relationships with our critical suppliers, or secure new long-term supply relationships on terms that will allow us to achieve our objectives, if at all. A supplier’s failure to develop and supply components in a timely manner or to supply components that meet our quality, quantity or cost requirements or our technical specifications, or our inability to obtain alternative sources of these components on a timely basis or on terms acceptable to us, could each harm our ability to manufacture our SureSource products. In addition, to the extent the processes that our suppliers use to manufacture components are proprietary, we may be unable to obtain comparable components from alternative suppliers, all of which could harm our business prospects, results of operations and financial condition.

Risks Related to Sales of our Products

We derive significant revenue from contracts awarded through competitive bidding processes involving substantial costs and risks. Our contracted projects may not convert to revenue, and our project awards and sales pipeline may not convert to contracts, which may have a material adverse effect on our revenue and cash flows.

We expect a significant portion of the business that we will seek in the foreseeable future will be awarded through competitive bidding against other fuel cell technologies and other forms of power generation. The competitive bidding process involves substantial costs and a number of risks, including the significant cost and managerial time to prepare bids and proposals for contracts that may not be awarded to us and our failure to accurately estimate the resources and costs that will be required to fulfill any contract we win. In addition, following a contract award, we may encounter significant expense, delay or contract modifications or award revocation as a result of our competitors protesting or challenging contracts awarded to us in competitive bidding. Our failure to compete effectively in this procurement environment could adversely affect our revenue and/or profitability.

Some of the project awards we receive and orders we accept from customers require certain conditions or contingencies (such as permitting, interconnection, financing or regulatory approval) to be satisfied, some of which are outside of our control. Certain awards are cancelable or revocable at any time prior to contract execution. The time periods from receipt of an award to execution of a contract, or receipt of a contract to installation may vary widely and are determined by a number of factors, including the terms of the award, governmental policies or regulations that go into effect after the award, the terms of the customer contract and the customer’s site requirements. These same or similar conditions and contingencies may be required by financiers in order to draw on financing to complete a project. If these conditions or contingencies are not satisfied, or changes in laws affecting project awards occur, or awards are revoked or cancelled, project awards may not convert to contracts, and installations may be delayed or canceled. This could have an adverse impact on our revenue and cash flow and our ability to complete construction of a project.

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We have signed product sales contracts, EPCs, PPAs and long-term service agreements with customers subject to contractual, technology, operating and commodity risks as well as market conditions that may affect our operating results.

We apply the transfer of control over time revenue recognition method under Accounting Standards Codification Topic 606: Revenue from Contracts with Customers to certain service contracts which are subject to estimates. On a quarterly basis, we perform a review process to help ensure that total estimated contract costs include estimates of costs to complete that are based on the most recent available information. The amount of costs incurred on a cumulative to date basis as a function of estimated costs at completion is applied to contract consideration to determine the cumulative revenue that should be recognized to date.

In certain instances, we have executed PPAs with the utility, end-user of the power or site host of the fuel cell power plant. We may then sell the PPA and power plant to a project investor or retain the project and collect revenue from the sale of power over the term of the PPA, recognizing electricity revenue as power is generated and sold. Our growing portfolio of project assets used to generate and sell power under PPAs and utility tariff programs exposes us to operational risks and uncertainties, including, among other things, lost revenues  due to prolonged outages, replacement equipment costs, risks associated with facility start-up operations, failures in the availability or acquisition of fuel, the impact of severe adverse weather conditions, natural disasters, terrorist attacks, cybersecurity attacks, risks of property damage or injury from energized equipment, availability of adequate water resources and ability to intake and discharge water, use of new or unproven technology, fuel commodity price risk and fluctuating market prices, and lack of alternative available fuel sources.

We have contracted under long-term service agreements with certain customers to provide service on our products over terms up to 20 years. Under the provisions of these contracts, we provide services to maintain, monitor, and repair customer power plants to meet minimum operating levels. Pricing for service contracts is based upon estimates of future costs including future module replacements. While we have conducted tests to determine the overall life of our products, we have not run certain of our products over their projected useful life or in all potential conditions prior to large scale commercialization. As a result, we cannot be sure that these products will last to their expected useful life or perform as anticipated in all conditions, which could result in warranty claims, performance penalties, maintenance and module replacement costs in excess of our estimates, losses on service contracts and/or a negative perception of our products.

Our ability to proceed with projects under development and complete construction of projects on schedule and within budget may be adversely affected by escalating costs for materials, tariffs, labor and regulatory compliance, inability to obtain necessary permits, interconnections or other approvals on acceptable terms or on schedule and by other factors. If any development project or construction is not completed, is delayed or is subject to cost overruns, we could become obligated to make delay or termination payments or become obligated for other damages under contracts, experience diminished returns or write off all or a portion of our capitalized costs in the project. Each of these events could have an adverse effect on our business, financial condition, results of operations and prospects.

We extend product warranties for our products, which products are complex and could contain defects and may not operate at expected performance levels, which could impact sales and market adoption of our products, affect our operating results or result in claims against us.

We develop complex and evolving products and we continue to advance the capabilities of our fuel cell stacks and are now producing stacks in the United States with a net rated power output of 350 kilowatts and an expected seven-year life. We provide for a warranty of our products for a specific period of time against manufacturing or performance defects. We accrue for warranty costs based on historical warranty claim experience; however, actual future warranty expenses may be greater than we have assumed in our estimates. We are still gaining field operating experience with respect to our products, and despite experience gained from our growing installed base and testing performed by us, our customers and our suppliers, issues may be found in existing or new products. This could result in a delay in recognition or loss of revenues, loss of market share or failure to achieve broad market acceptance. The occurrence of defects could also cause us to incur significant warranty, support and repair costs in excess of our estimates, could divert the attention of our engineering personnel from our product development efforts, and could harm our relationships with our customers. Although we seek to limit our liability, a product liability claim brought against us, even if unsuccessful, would likely be time consuming, could be costly to defend, and may hurt our reputation in the marketplace. Our customers could also seek and obtain damages from us for their losses.

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We currently face and will continue to face significant competition, including from products using other energy sources that may be lower priced or have preferred environmental characteristics.

We compete on the basis of our products’ reliability, efficiency, environmental considerations and cost. Technological advances in alternative energy products, improvements in the electric grid or other sources of power generation that use lower priced fuel or no fuel, or other fuel cell technologies may negatively affect the development or sale of some or all of our products or make our products less economically attractive, non- competitive or obsolete prior to or after commercialization. Significant decreases in the price of alternative technologies or grid delivered electricity, or significant increases in the price of our fuels could have a material adverse effect on our business because other generation sources could be more economically attractive to consumers than our products. Additionally, in certain markets, consumers and regulators have expressed a preference for zero-carbon generating resources over fueled resources, which could adversely affect sales of our products in such markets.

Other companies, some of which have substantially greater resources than ours, are currently engaged in the development of products and technologies that are similar to, or may be competitive with, our products and technologies. Several companies in the U.S. are engaged in fuel cell development, although we are the only domestic company engaged in manufacturing and deployment of stationary Carbonate Fuel Cells. Other emerging fuel cell technologies (and the companies developing them) include small or portable PEM fuel cells (Ballard Power Systems, Plug Power, and increasing activity by numerous automotive companies including Toyota, Hyundai, Honda and GM), stationary phosphoric acid fuel cells (Doosan), stationary Solid Oxide Fuel Cells (Bloom Energy and Doosan), and small residential Solid Oxide Fuel Cells (Ceres Power Holdings and Ceramic Fuel Cells Ltd.). Each of these competitors has the potential to capture market share in our target markets. There are also other potential fuel cell competitors internationally that could capture market share.

Other than fuel cell developers, we must also compete with companies that manufacture combustion-based distributed power equipment, including various engines and turbines, and have well-established manufacturing, distribution, operating and cost features. Electrical efficiency of these products can be competitive with our SureSource power plants in certain applications. Significant competition may also come from gas turbine companies and large scale solar and wind technologies.

Our plans are dependent on market acceptance of our products.

Our plans are dependent upon market acceptance of, as well as enhancements to, our products. Fuel cell systems represent an emerging market, and we cannot be sure that potential customers will accept fuel cells as a replacement for traditional power sources or non-fuel based power sources, hydrogen generation sources or storage. As is typical in a rapidly evolving industry, demand and market acceptance for recently introduced products and services are subject to a high level of uncertainty and risk. Since the Distributed Generation, hydrogen and storage markets are still evolving, it is difficult to predict with certainty the size of these markets and their growth rates. The development of a market for our products may be affected by many factors that are out of our control, including:

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If a sufficient market fails to develop or develops more slowly than we anticipate, we may be unable to recover the losses we will have incurred in the development of our products, and we may never achieve profitability.

Our products use inherently dangerous, flammable fuels, operate at high temperatures and use corrosive carbonate material, each of which could subject our business to product liability claims.

Our business exposes us to potential product liability claims that are inherent in products that use hydrogen. Our products utilize fuels such as natural gas and convert these fuels internally to hydrogen that is used by our products to generate electricity. Although our platforms do not combust fuels for the generation of electricity, the fuels we use are combustible and may be toxic. In addition, our SureSource products operate at high temperatures and use corrosive carbonate material, which could expose us to potential liability claims. Although we have incorporated a robust design and redundant safety features in our power plants, have established comprehensive safety, maintenance, and training programs, follow third-party certification protocols, codes and standards, and do not store natural gas or hydrogen at our power plants, we cannot guarantee that there will not be accidents. Any accidents involving our products or other hydrogen-using products could materially impede widespread market acceptance and demand for our products. In addition, we might be held responsible for damages beyond the scope of our insurance coverage. We also cannot predict whether we will be able to maintain adequate insurance coverage on acceptable terms.

Risks Related to Privacy, Data Protection and Cybersecurity

We are increasingly dependent on information technology, and disruptions, failures or security breaches of our information technology infrastructure could have a material adverse effect on our operations and the operations of our power plant platforms. In addition, increased information technology security threats and more sophisticated computer crime pose a risk to our systems, networks, products and services.

We rely on information technology networks and systems, including the Internet, to process, transmit and store electronic and financial information and to manage a variety of business processes and activities, including communication with power plants owned by us or our customers and production, manufacturing, financial, logistics, sales, marketing and administrative functions. Additionally, we collect and store data that is sensitive to us and to third parties. Operating these information technology networks and systems and processing and maintaining this data, in a secure manner, are critical to our business operations and strategy. We depend on our information technology infrastructure to communicate internally and externally with employees, customers, suppliers and others. We also use information technology networks and systems to comply with regulatory, legal and tax requirements and to operate our fuel cell power plants. These information technology systems, many of which are managed by third parties or used in connection with shared service centers, may be susceptible to damage, disruptions or shutdowns due to failures during the process of upgrading or replacing software, databases or components thereof, power outages, hardware failures, computer viruses, attacks by computer hackers or other cybersecurity risks, telecommunication failures, user errors, natural disasters, terrorist attacks or other catastrophic events. If any of our significant information technology systems suffer severe damage, disruption or shutdown, and our disaster recovery and business continuity plans do not effectively resolve the issues in a timely manner, our product sales, financial condition and results of operations may be materially and adversely affected, and we could experience delays in reporting our financial results, or our fuel cell power plant operations may be disrupted, exposing us to performance penalties under our contracts with customers.

In addition, information technology security threats — from user error to cybersecurity attacks designed to gain unauthorized access to our systems, networks and data — are increasing in frequency and sophistication. Cybersecurity attacks may range from random attempts to coordinated and targeted attacks, including sophisticated computer crime and advanced persistent threats. These threats pose a risk to the security of our systems and networks and the confidentiality, availability and integrity of our data.

Cybersecurity attacks could also include attacks targeting customer data or the security, integrity and/or reliability of the hardware and software installed in our products. We have experienced, and may continue  to experience in the future, cybersecurity attacks that have resulted in unauthorized parties gaining access to our information technology systems and networks and, in one instance, gaining control of the information technology system at one of our power plants. However, to date, no cybersecurity attack has resulted in any material loss of data, interrupted our day-

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to-day operations or had a material impact on our financial condition, results of operations or liquidity. While we actively manage information technology security risks within our control, there can be no assurance that such actions will be sufficient to mitigate all potential risks to our systems, networks and data. In addition to the direct potential financial risk as we continue to build, own and operate generation assets, other potential consequences of a material cybersecurity attack include reputational damage, litigation with third parties, disruption to systems, unauthorized release of confidential or otherwise protected information, corruption of data, diminution in the value of our investment in research, development and engineering, and increased cybersecurity protection and remediation costs, which in turn could adversely affect our competitiveness, results of operations and financial condition. The amount of insurance coverage we maintain may be inadequate to cover claims or liabilities relating to a cybersecurity attack.

Additionally, the legal and regulatory environment surrounding information security and privacy in the U.S. and international jurisdictions is constantly evolving. Violation or non-compliance with any of these laws or regulations, contractual requirements relating to data security and privacy, or our own privacy and security policies, either intentionally or unintentionally, or through the acts of intermediaries could have a material adverse effect on our brand, reputation, business, financial condition and results of operations, as well as subject us to significant fines, litigation losses, third-party damages and other liabilities.

Tax, Accounting, Compliance and Regulatory Risks

We are required to maintain effective internal control over financial reporting. Our management previously identified a material weakness in our internal control over financial reporting that has been remediated. If other control deficiencies are identified in the future, we may not be able to report our financial results accurately, prevent fraud or file our periodic reports in a timely manner, which may adversely affect investor confidence in our Company and, as a result, the value of our common stock.

We are required, pursuant to Section 404 of the Sarbanes-Oxley Act (“Section 404”), to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting. Complying with Section 404 requires a rigorous compliance program as well as adequate time and resources. We may not be able to complete our internal control evaluation, testing and any required remediation in a timely fashion. Additionally, if we identify one or more material weaknesses in our internal control over financial reporting, we will not be able to assert that our internal controls are effective. A material weakness is a deficiency, or 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 initially disclosed in our Form 10-Q for the quarter ended April 30, 2019 that we did not have resources to sufficiently address asset impairments on a timely basis or the accounting considerations and disclosures related to our amended credit facilities. As a result, we concluded that there was a material weakness in internal control over financial reporting, as we did not maintain effective controls over the accounting for and disclosures in the consolidated financial statements related to asset impairments and credit facilities. As disclosed in our Annual Report on Form 10-K for the fiscal year ended October 31, 2019, this control deficiency was not remediated as of October 31, 2019 and we further identified that we did not have resources to sufficiently address certain other non-routine transactions and disclosures. This material weakness resulted in material misstatements that were corrected in the 2019 consolidated financial statements prior to issuance. This material weakness was remediated as of October 31, 2020.

We cannot be certain that other material weaknesses and control deficiencies will not occur in the future. If other material weaknesses are identified in the future, or if we are not able to comply with the requirements of Section 404 in a timely manner, our reported financial results could be materially misstated and we could be subject to investigations or sanctions by regulatory authorities, which would require additional financial and management resources, and the value of our common stock could decline.

To the extent we identify future weaknesses or deficiencies, there could be material misstatements in our consolidated financial statements and we could fail to meet our financial reporting obligations. As a result, our ability to obtain additional financing on favorable terms or at all could be materially and adversely affected which, in turn, could materially and adversely affect our business, our financial condition and the value of our common stock. If we are unable to assert that our internal control over financial reporting is effective in the future, investor

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confidence in the accuracy and completeness of our financial reports could be further eroded, which would have a material adverse effect on the price of our common stock.

Our results of operations could vary as a result of changes to our accounting policies or the methods, estimates and judgments we use in applying our accounting policies.

The methods, estimates and judgments we use in applying our accounting policies have a significant impact on our results of operations. Such methods, estimates and judgments are, by their nature, subject to substantial risks, uncertainties and assumptions, and factors may arise over time that could lead us to reevaluate our methods, estimates and judgments.

In future periods, management will continue to reevaluate its estimates for contract margins, service agreements, loss accruals, warranty, performance guarantees, liquidated damages and inventory valuation allowances. Changes in those estimates and judgments could significantly affect our results of operations and financial condition. We will also adopt changes required by the Financial Accounting Standards Board and the SEC.

We may be affected by environmental and other governmental regulation.

We are subject to various federal, state and local laws and regulations relating to, among other things, land use, safe working conditions, handling and disposal of hazardous and potentially hazardous substances and emissions of carbon dioxide and pollutants into the atmosphere. Our business exposes us to the risk of harmful substances escaping into the environment, resulting in personal injury or loss of life, damage to or destruction of property, and natural resource damage. Depending on the nature of the claim, our current insurance policies may not adequately reimburse us for costs incurred in settling environmental damage claims, and in some instances, we may not be reimbursed at all. In addition, it is possible that industry-specific laws and regulations will be adopted covering matters such as transmission scheduling, distribution, emissions, and the characteristics and quality of our products, including installation and servicing. These regulations could limit the growth in the use of Carbonate Fuel Cell products, decrease the acceptance of fuel cells as a commercial product and increase our costs and, therefore, the price of our products. We believe that our businesses are operating in compliance in all material respects with applicable environmental laws; however, these laws and regulations have changed frequently in the past and it is reasonable to expect additional and more stringent changes in the future. Accordingly, compliance with existing or future laws and regulations could have a material adverse effect on our business prospects, results of operations and financial condition. If we fail to comply with applicable environmental laws and regulations, governmental authorities may seek to impose fines and penalties on us or to revoke or deny the issuance or renewal of operating permits and private parties may seek damages from us. Under those circumstances, we might be required to curtail or cease operations, conduct site remediation or other corrective action, or pay substantial damage claims.

Given that some of our product configurations run on fossil fuels, 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 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 products at particular sites. Additionally, our customers and potential customers’ energy procurement policies may prohibit or limit their willingness to procure our products. 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 products, or by our customers’ and potential customers’ energy procurement policies.

In addition, certain of our products benefit from federal, state and local governmental incentives, mandates or other programs promoting clean energy generation. Any changes to or termination of these programs could reduce demand for our products, impair sales financing, and adversely impact our business results.

A negative government audit could result in an adverse adjustment of our revenue and costs and could result in civil and criminal penalties.

Government agencies, such as the Defense Contract Audit Agency, routinely audit and investigate government contractors. These agencies review a contractor’s performance under its contracts, cost structure, and compliance

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with applicable laws, regulations, and standards. If the agencies determine through these audits or reviews that we improperly allocated costs to specific contracts, they will not reimburse us for these costs. Therefore, an audit could result in adjustments to our revenue and costs.

Further, although we have internal controls in place to oversee our government contracts, no assurance can be given that these controls are sufficient to prevent isolated violations of applicable laws, regulations and standards. If the agencies determine that we or one of our subcontractors engaged in improper conduct, we may be subject to civil or criminal penalties and administrative sanctions, payments, fines, and suspension or prohibition from doing business with the government, any of which could materially affect our results of operations and financial condition.

Exports of certain of our products are subject to various export control regulations and may require a license or permission from the U.S. Department of State, the U.S. Department of Energy or other agencies.

As an exporter, we must comply with various laws and regulations relating to the export of products, services and technology from the U.S. and other countries having jurisdiction over our operations. We are subject to export control laws and regulations, including the International Traffic in Arms Regulation, the Export Administration Regulation, and the Specially Designated Nationals and Blocked Persons List, which generally prohibit U.S. companies and their intermediaries from exporting certain products, importing materials or supplies, or otherwise doing business with restricted countries, businesses or individuals, and require companies to maintain certain policies and procedures to ensure compliance. We are also subject to the Foreign Corrupt Practices Act, which prohibits improper payments to foreign governments and their officials by U.S. and other business entities. Under these laws and regulations, U.S. companies may be held liable for their actions and actions taken by their strategic or local partners or representatives. If we, or our intermediaries, fail to comply with the requirements of these laws and regulations, or similar laws of other countries, governmental authorities in the United States or elsewhere, as applicable, could seek to impose civil and/or criminal penalties, which could damage our reputation and have a material adverse effect on our business, financial condition and results of operations.

Risks Related to Our Need for Additional Capital

We will need to raise additional capital, and such capital may not be available on acceptable terms, if at all. If we do raise additional capital utilizing equity, existing stockholders will suffer dilution. If we do not raise additional capital, our business could fail or be materially and adversely affected.

The implementation of our business plan and strategy requires additional capital to fund operations as well as investment by us in project assets. If we are unable to raise additional capital in the amounts required, on terms acceptable to us, or at all, we will not be able to successfully implement our business plan and strategy. Our capital-intensive business model increases the risks of our being able to successfully implement our plans, if we do not raise additional capital in the amounts required.

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In addition, if we raise additional funds through further issuances of our common stock, or securities convertible into or exchangeable for shares of our common stock, into the public market, including shares of our common stock issued upon exercise of options or warrants, holders of our common stock could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of our then-existing capital stock. Any debt financing secured by us in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities. If we cannot raise additional funds when we need them, our business and prospects could fail or be materially and adversely affected. In addition, if additional funds are not secured in the future, we will have to modify, reduce, defer or eliminate parts of our present and anticipated future projects, or sell some or all of our assets.

Risks Related to our Intellectual Property and Technology Licenses

We depend on our intellectual property, and our failure to protect that intellectual property could adversely affect our future growth and success.

Failure to protect our existing intellectual property rights may result in the loss of our exclusivity or the right to use our technologies. If we do not adequately ensure our freedom to use certain technology, we may have to pay others for rights to use their intellectual property, pay damages for infringement, misappropriation, or other violation, or be enjoined from using such intellectual property. We rely on patent, trade secret, trademark and copyright law to protect our intellectual property.

We previously licensed certain of our Carbonate Fuel Cell manufacturing intellectual property to POSCO Energy on an exclusive basis in the South Korean and broader Asian markets, but we terminated our license agreements with POSCO Energy on June 28, 2020, which termination POSCO Energy is disputing. In addition, effective as of June 11, 2019, we entered into the EMRE License Agreement, pursuant to which we agreed, subject to the terms of the EMRE License Agreement, to grant EMRE and its affiliates a non-exclusive, worldwide, fully paid, perpetual, irrevocable, non-transferrable license and right to use our patents, data, know-how, improvements, equipment designs, methods, processes and the like to the extent it is useful to research, develop, and commercially exploit Carbonate Fuel Cells in applications in which the fuel cells concentrate carbon dioxide from industrial and power sources and for any other purpose attendant thereto or associated therewith. Such right and license is sublicensable to third parties performing work for or with EMRE or its affiliates, but shall not otherwise be sublicensable. Furthermore, on November 5, 2019, we entered into the EMRE Joint Development Agreement, pursuant to which we agreed to grant EMRE and its affiliates a worldwide, non-exclusive, royalty- free, irrevocable, perpetual, sub-licensable, non-transferable (subject to certain exceptions) right and license to practice certain Company background intellectual property (to the extent not already licensed pursuant to  the EMRE License Agreement) for new Carbonate Fuel Cell technology in Carbon Capture applications and hydrogen applications. We depend on POSCO Energy and EMRE to also protect our intellectual property rights, but we cannot assure you that POSCO Energy or EMRE will do so. For example, we have filed a demand for arbitration against POSCO Energy in the International Court of Arbitration of the International Chamber of Commerce based, in part, on POSCO Energy’s disclosure of our proprietary information to third parties.

As of October 31, 2020, we (excluding our subsidiaries) had 102 U.S. patents and 186 patents in other jurisdictions covering our fuel cell technology (in certain cases covering the same technology in multiple jurisdictions), with patents directed to various aspects of our SureSource technology, SOFC technology, PEM fuel cell technology and applications thereof. As of October 31, 2020, we also had 55 patent applications pending in the U.S. and 107 patent applications pending in other jurisdictions. Our U.S. patents will expire between 2021 and 2039, and the current average remaining life of our U.S. patents is approximately 9.5 years. As of October 31, 2020, our subsidiary, Versa Power Systems, Ltd., had 32 U.S. patents and 93 international patents covering SOFC technology (in certain cases covering the same technology in multiple jurisdictions), with an average remaining U.S. patent life of approximately 4.7 years. As of October 31, 2020, Versa Power Systems, Ltd. also had 3 pending U.S. patent applications and 14 patent applications pending in other jurisdictions. In addition, as of October 31, 2020, our subsidiary, FuelCell Energy Solutions, GmbH, had license rights to 2 U.S. patents and 7 patents outside the U.S. for Carbonate Fuel Cell technology licensed from Fraunhofer IKTS.

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Some of our intellectual property is not covered by any patent or patent application and includes trade secrets and other know-how that is not able to be patented, particularly as it relates to our manufacturing processes and engineering design. In addition, some of our intellectual property includes technologies and processes that may be similar to the patented technologies and processes of third parties. If we are found to be infringing, misappropriating or otherwise violating third-party intellectual property, we do not know whether we will be able to obtain licenses to use such intellectual property on acceptable terms, if at all. Our patent position is subject to complex factual and legal issues that may give rise to uncertainty as to the validity, scope, and enforceability of a particular patent.

We cannot assure you that any of the U.S. or international patents owned by us (including our subsidiaries) or other patents that third parties license to us will not be invalidated, circumvented, challenged, rendered unenforceable or licensed to others, or that any of our owned or licensed pending or future patent applications will be issued with the breadth of claim coverage sought by us or our licensors, if issued at all. In addition, effective patent, trademark, copyright and trade secret protection may be unavailable, limited or not applied for in certain foreign countries.

We also seek to protect our proprietary intellectual property, including intellectual property that may not be patented or able to be patented, in part by confidentiality agreements and, if applicable, inventors’ rights agreements with our subcontractors, vendors, suppliers, consultants, strategic business associates and employees. We cannot assure you that these agreements will not be breached, that we will have adequate remedies for any breach or that such persons or institutions will not assert rights to intellectual property arising out of these relationships. Certain of our intellectual property has been licensed to us on a non-exclusive basis from third parties that may also license such intellectual property to others, including our competitors. If our licensors are found to be infringing, misappropriating or otherwise violating third-party intellectual property, we do not know whether we will be able to obtain licenses to use the intellectual property licensed to us on acceptable terms, if at all.

If necessary or desirable, we may seek extensions of existing licenses or further licenses under the patents or other intellectual property rights of others. However, we can give no assurances that we will obtain such extensions or further licenses or that the terms of any offered licenses will be acceptable to us. The failure to obtain a license from a third party for intellectual property that we use at present could cause us to incur substantial liabilities, and to suspend the manufacture or shipment of products or our use of processes requiring the use of that intellectual property.

While, other than with respect to claims we have made against POSCO Energy in the arbitration for disclosure of our proprietary information to third parties, we are not currently engaged in any intellectual property litigation, we could become subject to lawsuits in which it is alleged that we have infringed, misappropriated or otherwise violated the intellectual property rights of others or commence lawsuits against others who we believe are infringing, misappropriating or otherwise violating our rights or violating their agreements to protect our intellectual property. Our involvement in intellectual property litigation could result in significant expense to us, adversely affecting the development of sales of the challenged product or intellectual property and diverting the efforts of our technical and management personnel, whether or not that litigation is resolved in our favor.

The U.S. government has certain rights relating to our intellectual property, including the right to restrict or take title to certain patents.

Multiple U.S. patents that we own have resulted from government-funded research and are subject to the risk of exercise of “march-in” rights by the government. March-in rights refer to the right of the U.S. government or a government agency to exercise its non-exclusive, royalty-free, irrevocable worldwide license to any technology developed under contracts funded by the government if the contractor fails to continue to develop the technology. These “march-in” rights permit the U.S. government to take title to these patents and license the patented technology to third parties if the contractor fails to utilize the patents.

The pending legal proceedings with POSCO Energy could expose us to costs of such legal proceedings or an adverse judgment.

From approximately 2007 through 2015, we relied on POSCO Energy to develop and grow the South Korean and Asian markets for our products and services. We entered into the License Agreements with POSCO Energy between February 2007 and October 2012. The License Agreements provided POSCO Energy with the exclusive technology

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rights to manufacture, sell, distribute and service our SureSource 300, SureSource 1500 and SureSource 3000 fuel cell technology in the South Korean and broader Asian markets. Due to certain actions and inactions of POSCO Energy, we have not realized any new material revenues, royalties or new projects developed by POSCO Energy since late 2015.

In November 2019, POSCO Energy spun-off its fuel cell business into a new entity, KFC, without our consent. As part of the spin-off, POSCO Energy transferred manufacturing and service rights under the License Agreements to KFC, but retained distribution rights and severed its own liability under the License Agreements. We formally objected to POSCO Energy’s spin-off, and POSCO Energy posted a bond to secure any liabilities to the Company arising out of the spin-off. In September 2020, the Korean Electricity Regulatory Committee found that POSCO Energy’s spin-off of the fuel cell business to KFC may have been done in violation of South Korean law.

On February 19, 2020, we notified POSCO Energy in writing that it was in material breach of the License Agreements by (i) its actions in connection with the spin-off of the fuel cell business to KFC, (ii) its suspension of performance through its cessation of all sales activities since late 2015 and its abandonment of its fuel cell business in Asia, and (iii) its disclosure of material nonpublic information to third parties and its public pronouncements about the fuel cell business on television and in print media that have caused reputational damage to the fuel cell business, the Company and its products. We also notified POSCO Energy that, under the terms of the License Agreements, it had 60 days to fully cure its breaches to our satisfaction and that failure to so cure would lead to termination of the License Agreements. Further, on March 27, 2020, we notified POSCO Energy of additional instances of its material breach of the License Agreements based on POSCO Energy’s failure to pay royalties required to be paid in connection with certain module replacements.

On April 27, 2020, POSCO Energy initiated a series of three arbitration demands against us at the International Court of Arbitration of the International Chamber of Commerce seated in Singapore alleging certain warranty defects in a sub-megawatt conditioning facility at its facility in Pohang, South Korea and seeking combined damages of approximately $3.3 million. Prior to filing the arbitrations, POSCO Energy obtained provisional attachments from the Seoul Central District Court attaching certain revenues owed to us by KOSPO as part of such warranty claims, which has delayed receipt of certain payments owed to us. POSCO Energy subsequently sought additional provisional attachments on KOSPO revenues from the Seoul Central District Court based on unspecified warranty claims not yet filed in an additional amount of approximately $7 million, and additional provisional attachments on KOSPO revenues from the Seoul Central District Court based on its alleged counterclaims in the license termination arbitration described below in an additional amount of approximately $110 million. As of October 31, 2020, outstanding accounts receivable due from KOSPO were $4.8 million.

On June 28, 2020, we terminated the License Agreements with POSCO Energy and filed a demand for arbitration against POSCO Energy and KFC in the International Court of Arbitration of the International Chamber of Commerce based on POSCO Energy’s (i) failure to exercise commercially reasonable efforts to sell our technology in the South Korean and Asian markets, (ii) disclosure of our proprietary information to third parties, (iii) attack on our stock price and (iv) spin-off of POSCO Energy’s fuel cell business into KFC without our consent. We have requested that the arbitral tribunal (a) confirm through declaration that POSCO Energy’s exclusive license to market our technology and products in South Korea and Asia is null and void as a result of the breaches of the License Agreements and that we have the right to pursue direct sales in these markets, (b) order POSCO Energy and KFC to compensate us for losses and damages suffered in the amount of more than $200 million, and (c) order POSCO Energy and KFC to pay our arbitration costs, including counsel fees and expenses. We have retained outside counsel on a contingency basis to pursue our claims, and outside counsel has entered into an agreement with a litigation finance provider to fund the legal fees and expenses of the arbitration. In October 2020, POSCO Energy filed a counterclaim in the arbitration (x) seeking approximately $880 million in damages based on allegations that we misrepresented the capabilities of our fuel cell technology to induce POSCO Energy to enter into the License Agreements and failed to  turn over know-how sufficient for POSCO Energy to successfully operate its business; (y) seeking a declaration that the License Agreements remain in full force and effect and requesting the arbitral tribunal enjoin us from interfering in POSCO Energy’s exclusive rights under the License Agreements and (z) seeking an order that we pay POSCO Energy’s arbitration costs, including counsel fees and expenses.

On August 28, 2020, POSCO Energy filed a complaint in the Court of Chancery of the State of Delaware (the “Court”) purportedly seeking to enforce its rights as a stockholder of the Company to inspect and make copies and extracts of certain books and records of the Company and/or the Company’s subsidiaries pursuant to Section 220 of

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the Delaware General Corporation Law and/or Delaware common law. POSCO Energy alleges that it is seeking to inspect these documents for a proper purpose reasonably related to its interests as a stockholder of the Company, including investigating whether the Company’s Board of Directors and its management breached their fiduciary duties of loyalty, due care, and good faith. POSCO Energy seeks an order of the Court permitting POSCO Energy to inspect and copy the demanded books and records, awarding POSCO Energy reasonable costs and expenses, including reasonable attorney’s fees incurred in connection with the matter, and granting such other and further relief as the Court deems just and proper.

On September 14, 2020, POSCO Energy filed a complaint in the United States District Court for the Southern District of New York alleging that the Company delayed the removal of restrictive legends on certain share certificates held by POSCO Energy in 2018, thus precluding POSCO Energy from selling the shares and resulting in claimed losses in excess of $1,000,000.

We cannot predict the outcome of the arbitration proceedings against POSCO Energy and KFC, the litigation and arbitration proceedings filed by POSCO Energy against us, or any future discussions with, or other actions or legal proceedings against or involving, POSCO Energy or KFC, if they occur, the future status or scope of our relationship with POSCO Energy or KFC, whether our relationship with POSCO Energy or KFC will continue in the future, whether we will become involved in additional mediations, arbitrations, litigation or other proceedings with POSCO Energy or KFC, what the costs of any such current or future proceedings will be or the effect of such current or future proceedings on the market. We also cannot predict collection timing of any receipts which are currently being delayed as a result of these proceedings. Any such current or future proceedings could result in significant expense to us, distract management’s attention from the operation of our business and adversely affect our business and financial condition and reputation in the market, whether or not such proceedings are resolved in our favor.

Additionally, although we believe that termination of the License Agreements affords us with the ability to market our products and services in South Korea and the broader Asian market, POSCO Energy is disputing the termination of the License Agreements, and we cannot predict whether our efforts to access the South Korean and Asian markets, which are complex markets, will be successful or will be limited, hindered or delayed.

Risks Related to Our Common and Preferred Stock

Our stock price has been and could remain volatile.

The market price for our common stock has been and may continue to be volatile and subject to extreme price and volume fluctuations in response to market and other factors, including the following, some of which are beyond our control:

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Our stock price has increased during the past thirteen months from an intra-day low price of $0.48 on December 10, 2019 to an intra-day high price of $20.94 on January 13, 2021. The closing price of our common stock on January 15, 2021 was $15.84. There can be no assurance that the current stock price will be maintained, and it is possible that our stock price could drop significantly. In the past, following periods of volatility in the market price of their stock, companies have been the subject of securities class action litigation. If we become involved in securities class action litigation in the future, it could result in substantial costs and diversion of management’s attention and resources and could harm our stock price, business prospects, results of operations and financial condition.

Future sales of substantial amounts of our common stock could affect the market price of our common stock.

Future sales of substantial amounts of our common stock, or securities convertible into or exchangeable for shares of our common stock, into the public market, including shares of our common stock issued upon exercise of options or warrants, or perceptions that those sales could occur, could adversely affect the prevailing market price of our common stock and our ability to raise capital in the future.

We have a limited number of shares of common stock available for issuance, which will limit our ability to raise equity capital in the future.

We have historically relied on the equity markets to raise capital to fund our business and operations. As of December 31, 2020, excluding 56,411 treasury shares which may be issued, we had 15,093,242 shares of common stock available for issuance, of which 5,185,674 shares were reserved for issuance under various warrants and equity awards, upon conversion of preferred stock, and under our employee stock purchase and equity incentive plans. As of December 31, 2020, we had 322,406,758 shares of common stock outstanding. Though we may in the future seek stockholder approval to increase the number of shares of common stock we are authorized to issue under our Certificate of Incorporation, as amended, there can be no assurance we will be successful in obtaining such approval. The limited number of shares of our common stock available for issuance will limit our ability to raise capital in the equity markets and satisfy obligations with shares instead of cash, which could adversely affect our business and operations.

Provisions of Delaware and Connecticut law and of our certificate of incorporation and by-laws may make a takeover more difficult.

Provisions in our Certificate of Incorporation, as amended (“Certificate of Incorporation”), and Amended and Restated By-Laws (“By-laws”) and in Delaware and Connecticut corporate law may make it difficult and expensive for a third-party to pursue a tender offer, change in control or takeover attempt that is opposed by our management and board of directors. These anti-takeover provisions could substantially impede the ability of public stockholders to benefit from a change in control or change in our management and board of directors.

Our By-laws provide that the Court of Chancery of the State of Delaware is the exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a judicial forum deemed favorable by the stockholder for disputes with us or our directors, officers or employees.

Our By-laws provide that the Court of Chancery of the State of Delaware is 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 Certificate of Incorporation or our By-laws, any action to interpret, apply, enforce, or determine the validity of our Certificate of Incorporation or By-laws, or any action asserting a claim against us that is governed by the internal affairs doctrine. The choice of forum

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provision may limit a stockholder’s ability to bring a claim in a judicial forum that the stockholder finds favorable for disputes against us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and other employees. Alternatively, if a court were to find the choice of forum provision contained in our By-laws to be inapplicable or unenforceable in such an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could adversely affect our business and financial condition.

The rights of our Series B Preferred Stock could negatively impact our cash flows and dilute the ownership interest of our stockholders.

The terms of our Series B Preferred Stock also provide rights to their holders that could negatively impact us. Holders of the Series B Preferred Stock are entitled to receive cumulative dividends at the rate of $50 per share per year, payable either in cash or in shares of our common stock. To the extent the dividend is paid in shares of our common stock, additional issuances could be dilutive to our existing stockholders and the sale of those shares could have a negative impact on the price of our common stock. A share of our Series B Preferred Stock may be converted at any time, at the option of the holder, into 0.5910 shares of our common stock (which is equivalent to an initial conversion price of $1,692 per share), plus cash in lieu of fractional shares. Furthermore, the conversion rate applicable to the Series B Preferred Stock is subject to additional adjustment upon the occurrence of certain events.

The Series B Preferred Stock ranks senior to our common stock with respect to payments upon liquidation, dividends, and distributions.

The rights of the holders of our Series B Preferred Stock rank senior to our obligations to our common stockholders. Upon our liquidation, the holders of Series B Preferred Stock are entitled to receive $1,000.00 per share plus all accumulated and unpaid dividends (the “Liquidation Preference”). Until the holders of Series B Preferred Stock receive the Liquidation Preference with respect to their shares of Series B Preferred Stock in full, no payment will be made on any junior shares, including shares of our common stock. The existence of senior securities such as the Series B Preferred Stock could have an adverse effect on the value of our common stock.

General Risk Factors

Litigation could expose us to significant costs and adversely affect our business, financial condition, and results of operations.

We are, or may become, party to various lawsuits, arbitrations, mediations, regulatory proceedings and claims, which may include lawsuits, arbitrations, mediations, regulatory proceedings or claims relating to commercial liability, product recalls, product liability, product claims, employment matters, environmental matters, breach of contract, intellectual property, indemnification, stockholder suits, derivative actions or other aspects of our business. Litigation (including the other types of proceedings identified above) is inherently unpredictable, and although we may believe we have meaningful defenses in these matters, we may incur judgments or enter into settlements of claims that could have a material adverse effect on our business, financial condition, and results of operations. The costs of responding to or defending litigation may be significant and may divert the attention of management away from our strategic objectives. There may also be adverse publicity associated with litigation that may decrease customer confidence in our business or our management, regardless of whether the allegations are valid or whether we are ultimately found liable.

Financial markets worldwide have experienced heightened volatility and instability which may have a material adverse impact on our Company, our customers and our suppliers.

Financial market volatility can affect the debt, equity and project finance markets. This may impact the amount of financing available to all companies, including companies with substantially greater resources, better credit ratings and more successful operating histories than ours. It is impossible to predict future financial market volatility and instability and the impact on our Company, and it may have a materially adverse effect on us for a number of reasons, such as:

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Our future success will depend on our ability to attract and retain qualified management, technical, and other personnel.

Our future success is substantially dependent on the services and performance of our executive officers and other key management, engineering, scientific, manufacturing and operating personnel. The loss of the services of any such personnel could materially adversely affect our business. Our ability to achieve our commercialization plans and to increase production at our manufacturing facility in the future will also depend on our ability to attract and retain additional qualified personnel, and we cannot assure you that we will be able to do so. Recruiting personnel for the fuel cell industry is competitive. Our inability to attract and retain additional qualified personnel, or the departure of key employees, could materially and adversely affect our development, commercialization and manufacturing plans and, therefore, our business prospects, results of operations and financial condition. In addition, our inability to attract and retain sufficient personnel to quickly increase production at our manufacturing facility when and if needed to meet increased demand may adversely impact our ability to respond rapidly to any new product, growth or revenue opportunities. Our inability to attract and retain sufficient qualified personnel to staff our government or third party funded research contracts may result in our inability to complete such contracts or terminations of such contracts, which may adversely impact financial conditions and results of operations.

We are subject to risks inherent in international operations.

Since we market our products both inside and outside the U.S., our success depends in part on our ability to secure international customers and our ability to manufacture products that meet foreign regulatory and commercial requirements in target markets. We have limited experience developing and manufacturing our products to comply with the commercial and legal requirements of international markets. In addition, we are subject to tariff regulations and requirements for export licenses, particularly with respect to the export of some of our technologies. We face numerous challenges in our international expansion, including unexpected changes in regulatory requirements and other geopolitical risks, fluctuations in currency exchange rates, longer accounts receivable requirements and collections, greater bonding and security requirements, difficulties in managing international operations, potentially adverse tax consequences, restrictions on repatriation of earnings and the burdens of complying with a wide variety of international laws. Any of these factors could adversely affect our results of operations and financial condition.

We source raw materials and parts for our products on a global basis, which subjects us to a number of potential risks, including the impact of export duties and quotas, trade protection measures imposed by the U.S. and other countries including tariffs, potential for labor unrest, changing global and regional economic conditions and current and changing regulatory environments. Changes to these factors may have an adverse effect on our ability to source raw materials and parts in line with our current cost structure.

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Although our reporting currency is the U.S. dollar, we conduct our business and incur costs in the local currency of most countries in which we operate. As a result, we are subject to currency translation and transaction risk. Changes in exchange rates between foreign currencies and the U.S. dollar could affect our net sales and cost of sales and could result in exchange gains or losses. We cannot accurately predict the impact of future exchange rate fluctuations on our results of operations.

We could also expand our business into new and emerging markets, many of which have an uncertain regulatory environment relating to currency policy. Conducting business in such markets could cause our exposure to changes in exchange rates to increase, due to the relatively high volatility associated with emerging market currencies and potentially longer payment terms for our proceeds. Our ability to hedge foreign currency exposure is dependent on our credit profile with financial institutions that are willing and able to do business with us. Deterioration in our credit position or a significant tightening of the credit market conditions could limit our ability to hedge our foreign currency exposure and, therefore, result in exchange gains or losses.

None.

The following is a summary of our offices and locations:

SEC Proceedings

The discussion under the heading “SEC Proceedings” in Note 22. “Commitments and Contingencies” to the consolidated financial statements is incorporated herein by reference.

POSCO Energy Matters

The discussion in Part I, Item 1. “Business–License Agreements and Royalty Income; Relationship with POSCO Energy—License Agreements with POSCO Energy” regarding the pending legal proceedings with POSCO Energy is incorporated herein by reference.

Other Legal Proceedings

From time to time, the Company is involved in other legal proceedings, including, but not limited to, regulatory proceedings, claims, mediations, arbitrations and litigation, arising out of the ordinary course of its business (“Other Legal Proceedings”). Although the Company cannot assure the outcome of such Other Legal Proceedings, management presently believes that the result of such Other Legal Proceedings, either individually, or in the aggregate, will not have a material adverse effect on the Company’s consolidated financial statements, and no

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material amounts have been accrued in the Company’s consolidated financial statements with respect to these matters.

Not applicable.

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PART II

FuelCell Common Stock

Our common stock has been publicly traded since June 25, 1992. Our common stock trades under the symbol “FCEL” on the Nasdaq Global Market.

On January 15, 2021, the closing price of our common stock on the Nasdaq Global Market was $15.84 per share. As of January 15, 2021, there were 109 holders of record of our common stock. This does not include the number of persons whose stock is in nominee or “street” name accounts through brokers.

We have never paid a cash dividend on our common stock and do not anticipate paying any cash dividends on our common stock in the foreseeable future. In addition, the terms of our Series B Preferred Stock prohibit the payment of dividends on our common stock unless all dividends on the Series B Preferred Stock have been paid in full.

On May 8, 2020, the Company obtained stockholder approval at the reconvened 2020 Annual Meeting of Stockholders to increase the number of shares of common stock we are authorized to issue under our Certificate of Incorporation, as amended. Our stockholders approved a 112.5 million increase in the number of authorized shares of common stock. Accordingly, on May 11, 2020, the Company filed a Certificate of Amendment of the Certificate of Incorporation of the Company with the Delaware Secretary of State increasing the total number of authorized shares of common stock from 225.0 million shares to 337.5 million shares.

FuelCell Preferred Stock

Information concerning the Company’s Series B Preferred Stock and the Class A Preferred Shares issued by FCE FuelCell Energy Ltd. (also referred to herein as the Series 1 Preferred Shares) is incorporated herein by reference to Note 16. “Redeemable Preferred Stock” of the Notes to the Consolidated Financial Statements. All obligations under the Series 1 Preferred Shares were paid off and satisfied subsequent to October 31, 2020, as disclosed in Note 25. “Subsequent Events” of the Notes to the Consolidated Financial Statements.

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Performance Graph

The following graph compares the annual change in the Company's cumulative total stockholder return on its common stock for the five fiscal years ended October 31, 2020 with the cumulative stockholder total return on the Russell 2000 Index, a peer group consisting of Standard Industry Classification Group Code 3690 companies listed on the Nasdaq Global Market and New York Stock Exchange and a customized 19 company peer group which includes FuelCell Energy, Inc. It assumes $100.00 invested on October 31, 2015 with dividends reinvested.

Equity Compensation Plan Information

See Part III, Item 12 for information regarding securities authorized for issuance under our equity compensation plans.

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Stock Repurchases

The following table sets forth information with respect to purchases made by us or on our behalf of our common stock during the periods indicated: