1. Nature of Business, Liquidity, Basis of Presentation and LiquiditySummary of Significant Accounting Policies
3. Revenue Recognition
Prepaid expenses and other current assets consisted of the following (in thousands):
In accordance with the credit agreement, PPA V was issued a floating rate debt based on LIBOR plus a margin, paid quarterly. The applicable margins used for calculating interest expense are 2.25% for years 1-3 following the Term Conversion Date and 2.5% thereafter. For the Lenders’ commitments to the loan and the commitments to the LC loan,a letter of credit ("LC") facility, the PPA V also pays commitment fees at 0.50% per annum over the outstanding commitments, paid quarterly. The loan is secured by all the assets of the PPA V and requires quarterly principal payments which began in March 2017. In connection with the floating-rate credit agreement, in July 2015 the PPA V entered into pay-fixed, receive-float interest rate swap agreements to convert its floating-rate loan into a fixed-rate loan.
The changes in fair value of the derivative contracts designated as cash flow hedges and the amounts recognized in accumulated other comprehensive loss and in earnings forwere as follows (in thousands):
The following common stock equivalents (in thousands) were excluded from the computation of dilutedour net loss per share attributable to common stockholders, diluted, for the periods presented because including themas their inclusion would have been antidilutive:
accordance with its forecasts. The CompanyWe can generally give notice of order cancellation at least 90 days prior to the delivery date. However, the Company issueswe issue purchase orders to itsour component suppliers and third-party manufacturers that may not be cancelable.cancellable. As of June 30, 20182020 and December 31, 2017, the Company2019, we had no material open purchase orders with itsour component suppliers and third-party manufacturers that are not cancelable.cancellable.
The PPA Entities guarantee the performance of Energy Servers at certain levels of output and efficiency to its customers over the contractual term. The PPA Entities monitor the need for any accruals arising from such guarantees,guaranties, which are calculated as the difference between committed and actual power output or between natural gas consumption at warranted efficiency levels and actual consumption, multiplied by the contractual rates with the customer. Amounts payable under these guaranteesguaranties are accrued in periods when the guaranteesguaranties are not met and are recorded in cost of service revenue in the condensed consolidated statements of operations. The PPA Entities did not have any such payments duringWe paid $5.7 million and $3.5 million for the three and six months ended June 30, 20182020 and 2017the year ended December 31, 2019, respectively.
Litigation - In July 2018, the Company received a Statement of Claim from two former executives of Advanced Equities, Inc. seeking to compel arbitration and alleging a breach of a confidential agreement from June 2014. This Statement of Claim sought, among other things, to void the indemnification and confidentiality provisions under the confidential agreement and to recover attorneys’ fees and costs. The Statement of Claim was dismissed without prejudice on July 22, 2018.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws. All statements contained in this Quarterly Report on Form 10-Q other than statements of historical fact, including statements regarding our future operating results and financial position, our business strategy and plans, and our objectives for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “predict,” “project,” “potential,” ”seek,” “intend,” “could,” “would,” “should,” “expect,” “plan” and similar expressions are intended to identify forward-looking statements.
You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, operating results, and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors, including those discussed in the section titled “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time and it is not possible for us to predict all risks and uncertainties or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make in this Quarterly Report on Form 10-Q. We cannot assure you that the results, events, and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events, or circumstances could differ materially and adversely from those described or anticipated in the forward-looking statements.
Forward-looking statements in this Quarterly Report on Form 10-Q include, but are not limited to, our plans and expectations regarding future financial results, expected operating results, business strategies, the sufficiency of our cash and our liquidity, projected costs and cost reduction, development of new products and improvements to our existing products, the impact of recently adopted accounting pronouncements, our manufacturing capacity and manufacturing costs, the adequacy of our agreements with our suppliers, legislative actions and regulatory compliance, competitive positions, management's plans and objectives for future operations, our ability to obtain financing, our ability to comply with debt covenants or cure defaults, if any, our ability to repay our obligations as they come due, our ability to continue as a going concern, trends in average selling prices, the success of our PPA Entities, expected capital expenditures, warranty matters, outcomes of litigation, our exposure to foreign exchange, interest and credit risk, general business and economic conditions in our markets, industry trends, the impact of changes in government incentives, risks related to privacy and data security, the likelihood of any impairment of project assets, long-lived assets, and investments, trends in revenue, cost of revenue and gross profit (loss), trends in operating expenses, including research and development expense, sales and marketing expense, and general and administrative expense, and expectations regarding these expenses as a percentage of revenue, our limited operating history and our nascent industry, the significant losses we have incurred in the past, the significant upfront costs of our Energy Servers, the risk of manufacturing defects in our Energy Servers, the availability of rebates, tax credits and other tax benefits, and other financial incentives, the sufficiency of our existing cash and cash equivalent balances and cash flow from operations to meet our working capital and capital expenditure needs, and general market, political, economic and business conditions, including potential changes in tariffs.
The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements.
You should read the following discussion of our financial condition and results of operations in conjunction with the condensedconsolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q10-Q. Some of the information contained in this discussion and our prospectus for the sale of our Class A common stock effective July 24, 2018 filed with the Securities and Exchange Commission. Our actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under “Risk Factors” andanalysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties as described under the heading Special Note Regarding Forward-Looking Statements following the Table of Contents of this Quarterly Report on Form 10-Q. You should review the disclosure under Part II, Item 1A - Risk Factors in this Quarterly Report on Form 10-Q for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Overview
Restatement of Previously Issued Condensed Consolidated Financial Statements
We provide an advanced distributed electric power generation solution, basedhave restated our previously reported financial information as of and for the three and six months ended June 30, 2019 in this Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations, including but not limited to information within Results of Operations and Liquidity and Capital Resources sections.
See Note 2, Restatement of Previously Issued Condensed Consolidated Financial Statements, in Part I, Item 1, Financial Statements, for additional information related to the restatement, including descriptions of the misstatements and the impacts on our proprietary solid oxide fuel cell technology that provides our customers with a reliable, resilient, sustainable and more cost effective clean alternative to the electric grid. condensed consolidated financial statements.
Description of Bloom Energy
Our solution, the Bloom Energy Server, is an on-sitea stationary power generation platform built for the digital age and capable of delivering highly reliable, uninterrupted, 24x7 base loadconstant power that is fault tolerant, resilientalso clean and clean.sustainable. The Bloom Energy Server converts standard low-pressure natural gas, biogas or hydrogen into electricity through an electrochemical process without combustion, resulting in very high conversion efficiencies and lower harmful emissions than conventional fossil fuel generation. A typical configuration produces 250 kilowatts of power in a footprint roughly equivalent to that of half of a standard thirty-foot shipping container, or approximately 125 times more space-efficient than solar power generation. 250 kilowatts of power is roughly equivalent to the constant power requirement of a typical big box retail store. Any number of our Energy Server systems can be clustered together in various configurations to form solutions from hundreds of kilowatts to many tens of megawatts. We currently primarily target commercial and industrial customers.
We market and sell our Energy Servers primarily through our direct sales organization in the United States.States, and also have direct and indirect sales channels internationally. Recognizing that deploying our solutions requires a material financial commitment, fromwe have developed a number of financing options to support sales of our Energy Servers to customers we typically seek to engage customers that havewho lack the financial capability to either purchase our Energy Servers directly, who prefer to finance the acquisition using third party financing or arrange creditworthy counterpartieswho prefer to financing agreements. contract for our services on a pay-as-you-go model.
Our typical target commercial or industrial customer has historically been either an investment-grade entity or a customer with investment-grade attributes such as size, assets and revenue, liquidity, geographically diverse operations and general financial stability. We have recently expanded our product and financing options to the below-investment-grade customers and have also expanded internationally to target customers with deployments on a wholesale grid. Given that our customers are typically large institutions with multi-level decision making processes, we generally experience a lengthy sales process.
Our solution is capable
COVID-19 Pandemic
General
We have been and will continue monitoring and adjusting as appropriate our operations in response to the COVID-19 pandemic. As a technology company that supplies resilient, reliable and clean energy, we have been able to conduct the majority of addressing customer needs across a wide rangeoperations as an “essential business” in California and Delaware, where we manufacture and perform many of industry verticals. The industries we currently serve consist of banking and financial services, cloud services, technology and data centers, communications and media, consumer packaged goods and consumables, education, government, healthcare, hospitality, logistics, manufacturing, real estate, retail and utilities. Our Energy Servers are deployed at customer sites across 11 states in the United States,our R&D activities, as well as in India, Japanother states and South Korea. Our customer base includes 25 of the Fortune 100 companies. We believe thatcountries where we are currently capturing only a small percentage of our largest customers’ total energy spend, which gives us an opportunity for growth within those customers, particularly as the price of grid power increases in the areas where our existing customers have additional sites. Since the timing of revenue we recognize depends, in part, on the option chosen by the customer to finance the purchase of the Energy Server, customers that may have accounted for a significant amount of product revenue in one period may not necessarily account for similar amounts of product revenue in future periods.
To date, substantially all of our revenue has been derived from customers based in the United States. However, we are increasing our sales efforts outside of the United States, with initial customer installations in India, Japan and South Korea.
Although the size of each system deployment can vary substantially and usually exceeds 250 kilowatts, we measure and track our system deployments and customer acceptances in 100 kilowatt equivalents. As of June 30, 2018, we had installed 3,281 of such systems, which is equivalent to 328 total megawatts.
The purchase ofinstalling or maintaining our Energy Servers, notwithstanding government “shelter in place” orders. For the safety of our employees and relatedothers, many of our employees are still working from home unless they are directly supporting essential manufacturing production operations, installation costswork,
service and maintenance activities and R&D. We have historically qualifiedestablished protocols to minimize the risk of COVID-19 transmission within our facilities, including enhanced cleaning, and temperature screenings upon entry. In addition, all individuals entering Bloom facilities are required to wear face coverings and are directed not to enter if they have COVID-19-like symptoms. We follow all CDC guidelines when notified of possible exposures. For more information regarding the risks posed to our company by the COVID-19 pandemic, refer to Risk Factors – Risks Relating to Our Products and Manufacturing – Our business has been and will continue to be adversely affected by the COVID-19 pandemic.
Liquidity and Capital Resources
We have implemented measures to preserve cash and enhance liquidity, including suspending salary increases and bonuses, instituting a company-wide hiring freeze, eliminating business travel, reducing capital expenditures, and delaying or eliminating discretionary spending. We are also focused on managing our working capital needs, maintaining as much flexibility as possible around timing of taking and paying for inventory and manufacturing our product while managing potential changes or delays in installations.
In March 2020, we extended the terms of the 10% Convertible Notes and the 10% Constellation Note to December 2021. Since then, the 10% Constellation Note was converted into equity and the potential liabilities associated with the 10% Constellation Notes have been extinguished. This relieves some pressure on our liquidity position in the near term. While we will likely need to access the capital markets to raise sufficient capital to redeem the 10% Convertible Notes, we do not expect that it will be necessary to access capital markets for cash to operate our business for the Federal Investment Tax Credit (ITC). Through 2016,next 12 months, unless the impact of COVID-19 to our business and financial position is more extensive than expected. Capital markets have been volatile and there is no assurance that we would have access to capital markets at a reasonable cost, or at all, at times when capital is needed. In addition, our existing debt has restrictive covenants that limit our ability to raise new debt or to sell assets, which would limit our ability to access liquidity by those means without obtaining consent from existing noteholders. The redemption penalty on our 10% Convertible Notes starting in October 2020 could also adversely affect our financial position if we are unable to access capital markets to refinance them on reasonable terms. Refer to Note 7, Outstanding Loans and Security Agreements; Management’s Discussion and Analysis of Financial Condition and Results of Operations, Liquidity and Capital Resources; and Risk Factors – Risks Relating to Our Liquidity – Our substantial indebtedness, and restrictions imposed by the agreements governing our and our PPA Entities’ outstanding indebtedness, may limit our financial and operating activities and may adversely affect our ability to incur additional debt to fund future needs, and We may not be able to generate sufficient cash to meet our debt service obligations, for more information regarding the terms of and risks associated with our debt.
Operations and maintenance cash flows for certain PPAs, direct purchases and leases are pledged to the 10% Senior Secured Notes and 10.25% Senior Secured Notes. If there is delay in payment from customers, or if a customer does not renew a contract with us that we expect to be renewed, our ability to service existing debt would be adversely affected, which could trigger a default if non-payment extends beyond the grace period. Even if we are able to sustain debt service payments, if we do not meet certain minimum debt service coverage ratio levels specified in our debt agreements, excess cash after the debt has been serviced could not be released to support our operations and would negatively affect our liquidity position.
Sales
In some markets, we have experienced an increase in time to obtain new business as our customers and financing partners could take advantage of ITC. They could receive a tax credit of 30% or $3,000 per kilowatt of their equipment purchase price anddeal with the installation cost on their federal tax returns. This federal tax benefit expired at the end of 2016. Accordingly, in 2017, customers no longer received the ITC benefit on purchases of our Energy Servers. In order to offset the negative economic impact of that lost benefitthe COVID-19 pandemic. Decision makers in organizations such as education and entertainment have shifted their focus to the immediate needs of the pandemic, thus delaying their purchase decisions and capital outlays. While there may ultimately be a reduction in electricity needs due to decrease in economic activity, the current impact generally equates to a longer transaction cycle.
Our ability to continue to expand our business both domestically and internationally and develop customer relationships also has been negatively impacted by current travel restrictions. Our marketing efforts historically have often involved customer visits to our customers and financing partners, in 2017 we lowered our selling price to customers. Because many customers or financing partners would monetize the tax credit upfront, the actual impact to our selling price was generally greater than 30%. Subsequently, the ITC was reinstated by the U.S. Congress on February 9, 2018 and made retroactive to January 1, 2017. The resulting benefit of the ITC renewal was recognized on our financial statements in the three months ending March 31, 2018.
We manufacture our Energy Servers at our facilitiesmanufacturing centers in California and Delaware. Due toor Delaware, which we have suspended.
On the intensive manufacturing process necessary to build our systems,other hand, a significant portion of our manufacturing costscustomers are hospitals, healthcare companies, retailers and data centers. These industries are composed of essential businesses that still need the resiliency and reliability offered by our products. We have seen an increase in demand for our products in these sectors where the COVID-19 pandemic has highlighted the benefits of always-on, on-site power in times of disaster and uncertainty. In addition, the pandemic has had no significant effect on our business in the Republic of Korea.
We have also had some unique opportunities to deploy our systems on an emergency basis to support temporary hospitals. We believe deploying clean electrical power with no oxides of nitrogen (NOx) or sulfur (SOx) emissions, especially as atmospheric pollutants, is fixed. We obtain our materials and components throughimportant for facilities preparing to treat a variety of third parties. Components and materials, direct labor and overhead such as facility and equipment expenses comprise the substantial majority of the costs of our Energy Servers.respiratory disease like COVID-19. As we have commercialized and introduced successive generations of our Energy Servers, we have focused on reducing production costs. Our product costs per system manufactured have generally declined since delivering our first commercial product. These cost declines are thea result of continuous improvements and increased automation inthis opportunity to introduce our manufacturing processes as well asproducts to more healthcare providers, demand for our ability to reduce the costs of our materials and components, allowing us to gain greater economies of scale with our growth.products at some permanent hospitals has also increased.
Customer Financing
COVID-19 has not yet had any significant improvements in our efficiency and the quality of our products. Our success depends in partimpact on our ability to obtain financing for our customers’ use of our products, but we are finding it more difficult to find financiers who are able to monetize tax credit. A majority of the installations we have planned in the United States in 2020 have obtained financing. However, we have actively been working with new sources of capital that could finance projects for our 2021 installations. We believe the current environment may increase the time to solidify new relationships, and thus negatively impact the time required to achieve funding. In addition, our products’ useful lives, which would significantly reduceability to obtain financing for our cost of services to maintain the Energy Servers over time.partly depends on the creditworthiness of our customers. Some of our customers’ credit ratings have recently fallen, which may make it difficult for us to obtain financing for their use of an Energy Server. Our recent experience has been that financing parties have capital to deploy and are interested in financing our Energy Servers and, at present, cash flow and results of operations including revenue have not been impacted by our inability to obtain financing for customer installations.
Installations of Energy Servers The COVID-19 pandemic has caused delays that affected nearly all of our installations with varying degrees of severity. Since we do not recognize revenue on the sales of our products until installation and acceptance, installation delays have a negative impact on our results of operations including revenue. Since we generally earn cash as we progress through the installation process, delays to installation activity also adversely affects our cash flows.
While our installation activity has been deemed “essential business” and allowed to proceed in many jurisdictions, the essential business designations for our activities (and those of our suppliers and other third party organizations that are critical to our success) has been inconsistent from region to region and across the various third parties upon whom we are critically dependent to complete our installations. As an example, in New York City, one of our installations was deemed essential while the other was not deemed essential and the utilities on whom we rely for water, gas and electric inter-connections were also not uniformly affected. This resulted in all of the projects in New York City being adversely affected to some extent. As another example, while the State of Massachusetts designated construction as an essential business, some local authorities in Massachusetts did not apply the same designation, resulting in delays and additional compliance costs.
In addition, we have experienced delays and interruptions to our installations where customers have shut down or otherwise limited access to their facilities.
Some of our backlog can only be deployed when the customer brings on sufficient load for our systems. Facility closings and diminished economic activity delay that load coming online, leading customers to postpone the completion of installations.
We use general contractors and sub-contractors, and need supplies of various types of ancillary equipment, for our installations. Some of our suppliers have had COVID-19 outbreaks among their workforces, which have caused installation delays. In addition, the availability and productivity of contractors, sub-contractors, and suppliers has generally been negatively impacted by social distancing requirements and other safety measures.
Nearly all of our installations completed in the quarter ended June 30, 2020 were impacted by COVID-19 to some extent and some installations were unable to achieve acceptance in light of the delays which impacted our cash flows and results of operation including revenue for the quarter ended June 30, 2020. As examples, our pre-contract installation planning activity was affected by access to potential customer sites, our permitting activity was affected in virtually all jurisdictions by delays in the permitting process as various cities and municipalities shut down or implemented limited services in response to COVID-19, and our utility related work was impacted as our gas and electric utility suppliers facing challenges brought on by COVID-19. We expect disruptions like those noted above to continue with the current COVID-19 restrictions.
Supply Chain
We have experienced COVID-19 related delays from certain vendors and suppliers, however, we have been able to find and qualify alternative suppliers and our production to date has not been impacted. At present, our supply chain has stabilized; however, if spikes in COVID-19 occur in regions in which our supply chain operates we could experience a delay in materials which could in turn impact production and installations and our cash flow and results of operations including revenue.
Manufacturing
As an essential business, we have continued to manufacture Energy Servers, but have adopted strict measures to keep our employees safe. These measures have decreased productivity to an extent, but our deployments, maintenance and installations have not yet been constrained by our current pace of manufacturing. As described above, we have established protocols to minimize the risk of COVID-19 transmission within our manufacturing facilities and follow all CDC guidelines when notified of possible exposures. We also are now instituting testing of anyone who comes into any of our facilities. Even with these
precautions, it is possible an asymptomatic individual could enter our facilities and transmit the virus to others. We have had a couple positive tests and in such cases, we have followed CDC Guidelines.To date, it has not impacted our production.
If we become aware of any cases of COVID-19 among any of our employees, we notify those with whom the person is known to have been in contact, send the exposed employees home for at least 14 days and require each employee to be tested negative before returning to work. Certain roles within our facilities involve greater mobility throughout our facilities and potential exposure to more employees. In the event one of such employees suffers from COVID-19, or if we otherwise believe that a significant number of employees have been exposed and sent home, particularly in our manufacturing facilities, our production could be significantly impacted. Furthermore, since our manufacturing process requires tasks performed at both our California facility and Delaware facility, significant exposure at either facility would have a substantial impact on our overall production, and could adversely affect our cash flow and results of operations including revenue.
Purchase and Lease Options
OurInitially, we only offered our Energy Servers on a direct purchase basis, in which the customer purchases the product directly from us. In order to expand our offerings to customers may choosewho lack the financial capability to purchase our Energy Servers outright directly (including customers who are unable to monetize the tax credits available to purchasers of our Energy Servers) and/or may choosewho prefer to lease them through one ofthe product or contract for our financing partners asservices on a pay-as-you-go model, we subsequently developed the traditional lease or a sale-leaseback sublease arrangement, the latter of which we refer to as managed services. Our customers may also purchase electricity through Bloom Electrons, our("Traditional Lease"), Managed Services, and power purchase financing program.agreement ("PPA") programs ("PPA Programs").
DependingOur capacity to offer our Energy Servers through any of these financed arrangements depends in large part on the financing arrangement, either our customers orability of the financing provider may utilizeparty or parties involved to monetize the related investment tax credits, accelerated tax depreciation and other government incentives. Interest rate fluctuations may also impact the attractiveness of any financing offerings for our customers, and currency exchange fluctuations may also impact the attractiveness of international offerings. The timingTraditional Lease, Managed Services and PPA Program options are limited by the creditworthiness of the product-related cash flowscustomer. Additionally, the Managed Services and Traditional Lease options, as with all leases, are also limited by the customer’s willingness to commit to making fixed payments regardless of the Company is generally consistent acrossperformance of the Energy Servers or our performance of our obligations under the customer agreement.
In each of our purchase options, we typically perform the functions of a project developer, including identifying end customers and financiers, leading the negotiations of the customer agreements and financing agreements, securing all necessary permitting and interconnections approvals, and overseeing the above financing options, whether directdesign and construction of the project up to and including commissioning the Energy Servers.
Under each purchase arrangements, leases or managed services.
Weoption, we provide warranties and performance guaranteesguaranties regarding theour Energy Servers’ efficiency and outputoutput. We refer to a “warranty” as a commitment where the failure of the Energy Servers to satisfy the stated performance level obligates us to repair or replace the Energy Servers as necessary to improve performance. If we fail to complete such repair or replacement, or if repair or replacement is impossible, we may be obligated to repurchase the Energy Servers from the customer or financier. We refer to a “guaranty” as a commitment where the failure of the Energy Servers to satisfy the stated performance level obligates us to make a payment to compensate the beneficiary of such guaranty for the resulting increased cost or diminution in benefits resulting from such failure. Our obligation to make payments under allthe guaranty is always contractually capped and represents a contingency linked to our services obligation with no economic incentive for us to default and force an exercise of our financing arrangements. the payment obligation.
Under direct purchase and traditional lease options,Traditional Lease, the warrantywarranties and guarantee isguaranties are typically included in the price of theour Energy Server for the first year. The warrantywarranties and guaranteeguaranties may be renewed annually at the customer’s option, as an operations and maintenance services agreement, at predetermined prices for a period of up to 2030 years. Historically, our customers and financiers have almost always exercised their option to renew the warranties and guaranties under these operations and maintenance services agreements.
Under the managed services program,Managed Services Program, the operationswarranties and maintenance performance guaranteesguaranties are included for the fixed period specified in the price of the Energy Server for a fixedcustomer agreement. This period ofis typically 10 years, which may be extended at the option of the parties for upadditional years.
Under the PPA Programs, we typically provide warranties and guaranties regarding our Energy Servers’ efficiency to an additional 10 years with all payments made annually.
Our capacity to offerthe customer (i.e., the end user of the electricity generated by our Energy Servers, through anywho is also responsible for the purchase of the financing arrangements above depends in large part on the ability of the parties involved in providing payment for the Energy Servers to monetize either the related investment tax credits, accelerated tax depreciation and other incentives, and/or the future power purchase obligations of the end customer. Interest rate fluctuations would also impact the attractiveness of any lease financing offeringsfuel required for our customers. Additionally,Energy Servers’ operations), and we provide warranties and guaranties regarding our Energy Servers’ output to the managed services option is limited by the creditworthiness of the customerfinancier(s) that purchases our Energy Servers. The warranties and as with all leases, the customer’s willingness to commit to making fixed payments regardless of the output of the system.
The portion of acceptancesguaranties are typically included in the three months ended June 30, 2018 attributable to each payment option was as follows: direct purchase 75%, traditional lease 25%, managed services 0%, and Bloom Electrons 0%. The portion of revenue in the three months ended June 30, 2018 attributable to each payment option was as follows: direct purchase 63%, traditional lease 19%, managed services 5%, and Bloom Electrons 13%. The portion of acceptances in the three months ended June 30, 2017 attributable to each payment option was as follows: direct purchase 65%, traditional lease 4%, managed services 31%, and Bloom Electrons 0%. The portion of revenue in the three months ended June 30, 2017 attributable to each payment option was as follows: direct purchase 61%, traditional lease 6%, managed services 8%, and Bloom Electrons 25%.
The portion of acceptances in the six months ended June 30, 2018 attributable to each payment option was as follows: direct purchase 87%, traditional lease 13%, managed services 0%, and Bloom Electrons 0%. The portion of revenue in the six months ended June 30, 2018 attributable to each payment option was as follows: direct purchase 72%, traditional lease 10%, managed services 5%, and Bloom Electrons 13%. The portion of acceptances in the six months ended June 30, 2017 attributable to each payment option was as follows: direct purchase 53%, traditional lease 10%, managed services 37%, and Bloom Electrons 0%. The portion of revenue in the six months ended June 30, 2017 attributable to each payment option was as follows: direct purchase 51%, traditional lease 13%, managed services 8%, and Bloom Electrons 28%.
The portion of acceptances in 2017 attributable to each payment option was as follows: direct purchase 72%, traditional lease 7%, managed services 21%, and Bloom Electrons 0%. The portion of revenue in 2017 attributable to each payment option was as follows: direct purchase 61%, traditional lease 7%, managed services 8%, and Bloom Electrons 24%. In 2017, we observed a shift in our customers’ purchase option preferences to our direct purchase options.
Purchase and Lease Programs
Initially, we only offered our Energy Servers on a purchase basis, in which the customer purchases the product directly from us. Included within our direct purchase option are sales we make to a third party who in turn, sells electricity through one of its own power purchase agreement programs of which we have no equity interest. The salesprice of our Energy ServersServer for the first year and may be renewed annually at the financier’s option, as an operations and maintenance services agreement, at predetermined prices for a period of up to 30 years. Historically, our financiers have almost always exercised their option to renew the third party entity have manywarranties and guaranties under these operations and maintenance services agreements. We
also provide a fixed schedule of prices for each year of the same termsterm of our agreements with our customers and conditions as a standard sale, as described above. We refernone of our customers have failed to these arrangements as Third-Party PPA Entities. renew our operations and maintenance agreements.
The substantial majority of salesbookings made as direct purchases in recent periods are pursuant to Third-Partythe PPA Entities finance arrangements. Payment forand the purchaseManaged Services Programs.
Each of our productfinancing structures is generally broken down into multiple installments, which may include payments upon signing of the purchase agreement, within 180 days prior to shipment, upon shipment of the Energy Server, and upon acceptance of the Energy Server. Acceptance typically occurs when the Energy Server is installed and running at full power as defineddescribed in each contract. A one-year service warranty is provided with the initial sale. After the expiration of the initial one-year warranty, customers have the option to enter into annual operations and maintenance services agreements with us at a price determined at the time of purchase of the Energy Server, which may be renewed each year for up to 20 years. Pursuant to the service warranty, we warrant minimum efficiency and output levels. In the event that the Energy Servers fail to satisfy these warranty levels, we may be obligated to repurchase the applicable Energy Servers if we are unable to repair or replace during the applicable cure period. Across all service agreements, including purchase and lease programs, as of June 30, 2018, we have incurred no repurchase obligations pursuant to such warranties. In addition, in some cases, we guarantee minimum output and efficiency levels greater than the warranty levels and pay certain capped performance guarantee amounts if those levels are not achieved. These performance guarantees arefurther detail below.
negotiated on a case-by-case basis, but we typically provide an Output Guaranty of 95% measured annually and an Efficiency Guaranty of 52% measured cumulatively from the date the applicable Energy Server(s) are commissioned. In each case, underperformance obligates us to make a payment to the owner of the Energy Server(s). The fleet of Energy Servers deployed pursuant to purchase agreements performed at an average output of approximately 86% for three and six months ended June 30, 2018, and a lifetime average efficiency of approximately 52% through June 30, 2018. As of June 30, 2018, our obligation to make payments for underperformance on the direct purchase projects was capped at an aggregate total of approximately $54.7 million (including payments both for low output and for low efficiency). As of June 30, 2018, our aggregate remaining potential liability under this cap was approximately $41.6 million.
Third-Party Power Purchase Agreement Programs (Third-Party PPAs)
In addition to our traditional lease, managed services, and Bloom Electrons programs, we also sell Energy Servers under power purchase agreements where the owner of the Energy Servers generating the electricity delivered to the end customer is a third party in which we have no equity interests. Under these Third-Party PPAs, we identify end customers, lead the negotiations with such end customers regarding the offtake agreements to purchase electricity, and then enter into an Energy Server sales and operations and maintenance agreement with the Third-Party PPA entity that will own the Energy Servers for the full term of the offtake agreement. In some cases, the applicable third-party owner assists with the identification of end customers, and the negotiation of the offtake agreements. The Third-Party PPA entity then enters into offtake agreements with the end customer, who purchases electricity from the Third-Party PPA Entity. Unlike our Bloom Electrons program, we have no equity ownership in the entity that owns the Energy Servers, and thus the third-party owner receives all cash flows generated under the offtake agreement(s), all investment tax credits, all accelerated tax depreciation benefits, and any other cash flows generated by the operation of the Energy Servers. In the fourth quarter of 2016, we secured a commitment from a major utility company to finance up to 50 MW of Energy Server deployments under a Third-Party PPA; this commitment was subsequently expanded to an aggregate total of approximately 100.4 MW, of which we have deployed 48.0 MW as of June 30, 2018. Additionally, we have established a second Third-Party PPA with another major utility company; while this second program does not include a firm commitment as to total financing capacity, it permits the inclusion of sub-investment grade end customers.
For example, we have been working with financing sources to arrange for additional third-party Power Purchase Agreement Program entities, one of which will need to be finalized in order for our customers to arrange financing so that we can complete our planned installations for 2018.
Obligations to Third-Party Owners of Energy Servers
In each Third-Party PPA, we and the applicable third-party owner enter into an operations and maintenance agreement (O&M Agreement) similar to the O&M Agreements entered into under the Bloom Electrons program, which O&M Agreement may be renewed on an annual basis at the option of the third-party owner until the end of the term of the third-party owner’s offtake agreement(s) to purchase electricity, with its end customers for such project. These offtake agreements have a fifteen-year term, but in some cases the offtake agreement and related O&M Agreement may extend for up to twenty years.
Our obligations under the O&M Agreement include (i) designing, manufacturing, and installing the Energy Servers, and selling such Energy Servers to the Third-Party PPA entity, (ii) obtaining all necessary permits and other governmental approvals necessary for the installation and operation of the Energy Servers, and maintaining such permits and approvals throughout the term of the O&M Agreement, (iii) operating and maintaining the Energy Servers in compliance with all applicable laws, permits and regulations, (iv) satisfying the efficiency and output warranties set forth in such O&M Agreement and the offtake agreement(s) (Performance Warranties), and (v) complying with any specific requirements contained in the offtake agreement(s) with individual end-customer(s). The O&M Agreement obligates us to repurchase the Energy Servers in the event the Energy Servers fail to comply with the Performance Warranties or we otherwise breach the terms of the applicable O&M Agreement and we fail to remedy such failure or breach after a cure period, or in the event that an offtake agreement terminates as a result of any failure by us to comply with the applicable O&M Agreement. In some Third-Party PPAs, our obligation to repurchase Energy Servers extends to the entire fleet of Energy Servers installed pursuant to the applicable O&M Agreement in the event such failure affects more than a specified number of Energy Servers.
In some cases, we have also agreed to pay liquidated damages to the third-party owner in the event of delays in the manufacture and installation of Energy Servers, either in the form of a cash payment or a reduction in the purchase price for the applicable Energy Server(s). Both the upfront purchase price for the Energy Servers and the ongoing fees for our operations and maintenance are paid on a fixed dollar-per-kilowatt ($/kilowatt) basis.
The O&M Agreement for each Third-Party PPA project generally provides for the following performance and indemnity obligations:
Efficiency Obligations. We warrant to the applicable third-party owner that each Energy Server and/or the portfolio of Energy Servers sold to such entity will operate at an average efficiency level specified in the O&M Agreement, calculated over a period specified in the O&M Agreement following the commercial operations date of such Energy Server. In some cases, we are obligated to repair and replace Energy Servers that are unable to satisfy the Efficiency Warranty, or if a repair or replacement is not feasible, to repurchase such Energy Servers at the original purchase price, subject to adjustment for depreciation (“Efficiency Warranty”). In other cases, we are obligated to make a payment to compensate for the increased costs of procuring natural gas for the applicable Energy Server(s) resulting from the underperformance as against the warranted level, which payments are capped at a level specified in the applicable O&M Agreement (“Efficiency Guaranty”).
Output Obligations. In addition, we warrant that the Energy Servers will generate a minimum amount of electricity during specified periods of time.
Under O&M Agreements, our output obligations include: (i) the generation of a minimum amount of electricity, the failure of which obligates us to repair or replace the Energy Servers that are unable to satisfy such warranty, or if such repair or replacement is not feasible, to repurchase such Energy Servers at the original purchase price, subject to adjustment for depreciation (“Output Warranty”), and (ii) the generation of a minimum amount of electricity on a cumulative basis beginning on the commercial operations date of such Energy Server, the failure of which obligates us to make a payment to the applicable third-party owner based on the volume of the shortfall below the warranted level, subject to a liability cap specified in the applicable O&M Agreement (“Output Guaranty”). Satisfaction of the Output Warranty is measured on either a cumulative basis or in each calendar month or calendar quarter, as specified in the applicable O&M Agreement. In some Third-Party PPAs, these generation obligations are aggregated across the entire fleet of Energy Servers deployed pursuant to such project; in others, each Energy Server must satisfy the minimum generation obligations measured individually.
Indemnification of Performance Warranty Expenses Under Offtake Agreements. In addition to the efficiency and output obligations, we also have agreed to indemnify certain Third-Party PPA entities for any expenses it incurs to any of the end-customers resulting from failures of the applicable Energy Servers to satisfy any of the efficiency, output or other performance warranties set forth in the applicable offtake agreement(s). In addition, in the event that an offtake agreement is terminated by a customer as to any Energy Servers as a result of our failure to perform any of our obligations under the O&M Agreement, we are obligated to repurchase such Energy Server from the applicable Third-Party PPA owner for a repurchase price equal to the original purchase price, subject to adjustment for depreciation.
Administration of Third-Party PPA Projects. Unlike the Bloom Electrons program, we perform no administrative services in the Third-Party PPA projects.
Obligations to End Customers. While the counterparty to the offtake agreements under the Third-Party PPA program is the third-party owner, under the O&M Agreements we are obligated to perform each of the obligations of such third-party owner set forth in each offtake agreement with the end customer. As such, our obligations to the end customers under the Third-Party PPAs are in all material respects the same as our obligations to the end customers under the Bloom Electrons program.
Our Third-Party PPA programs have O&M agreements that provide for Efficiency Guarantees and Output Guarantees, subject to performance guarantee caps. The performance guarantees for our existing Third-Party PPA agreements are capped at $56.9 million. As of June 30, 2018, we have paid $0.2 million in performance guarantee payments under these Third-Party PPA programs leaving potential obligations under the performance guarantees of $56.7 million. In addition, the O&M agreements with these Third-Party PPA agreements have minimum warranty guarantees for efficiency and output. As of June 30, 2018, no warranty claims have been made under the O&M agreements for these Third-Party PPA agreements.
Over time we have also developed various lease programs with our financing partners to provide alternative financing options. These programs take the form of either (1) a traditional lease agreed directly with the financing partner or (2) managed services.
Traditional Lease
Under the traditional leaseTraditional Lease arrangement, the customer enters into a lease directly with a financing partner,financier, which pays us for theour Energy Servers purchased pursuant to a sales agreement (a Bank(see the description of the Financing Agreement described below). We recognize product and installation revenue upon acceptance. After the standard one-year warranty period, our customers have almost always exercised the option to enter into operations and maintenance services agreements with us, under which we receive annual service payments from the customer. The price for the annual operations and maintenance services is set at the time we enter into the lease.Financing Agreement. The durationterm of our traditional leasesa lease in a Traditional Lease ranges from 6five to 15eight years.
Under a BankFinancing Agreement, we are generally paid the full price of theour Energy Servers as if sold as a purchase by the customer based on four milestones (on occasion negotiated with the customer, but in all cases equal to no less than 60% of the purchase price billed at the shipment milestone, described below).milestones. The four payment milestones are typically as follows:
(i) 15% upon execution of the bank’sfinancier's entry into the lease with a customer, (ii) 25% on the day that is 180 days prior to delivery of the Energy Servers, (iii) 40% upon shipment of the Energy Servers, and (iv) 20% upon acceptance of the Energy Servers. The bankfinancier receives title to the Energy Servers upon installation at the customer site and the customerfinancier has risk of loss while theour Energy Server is in operation on the customer’s site.
The BankFinancing Agreement provides for the installation of theour Energy Servers and includes a standard one-year warranty, to the financier, which includes the performance guaranteesguaranties described below, with the warranty offered on an annually renewing basis at the discretion of, and to, the customer. The customer must provide gasfuel for the Bloom Energy Servers to operate.
Warranty Commitments. WeOur direct lease deployments typically provide (i) an “Output Warranty” to operate at or above a specified baseloadfor warranties and guaranties of both the efficiency and output of theour Energy Servers, on a site,all of which are written in favor of the customer and (ii) an “Efficiency Warranty” to operate at or above a specified level of fuel efficiency. Both arecontained in the operations and maintenance services agreement. These warranties and guaranties may be measured on a monthly, annual, cumulative or other basis. Upon the applicable financing partner or its customer making a warranty claim for aAs of June 30, 2020, we had incurred no liabilities due to failure of any of our warranty commitments, we are then obligated to repair or replace theour Energy Server, or if a repair or replacement is not feasible, to pay the customer an amount approximately equal to the net book value of the Energy Server, after which the Bank Agreement would be terminated. As of June 30, 2018, we have incurred no obligations to make paymentsServers pursuant to these warranty commitments.
Performance Guarantees.warranties. Our performance guarantees are negotiated on a case-by-case basis for projects deployed through the traditional lease program, but we typically provide an Output Guaranty of 95% measured annually and an Efficiency Guaranty of 52% measured cumulatively from the date the applicable Energy Server(s) are commissioned. In each case, underperformance obligates us to make a payment to the applicable customer. As of June 30, 2018, the fleet of Energy Servers deployed pursuant to the traditional lease programs are performing at a lifetime average output of approximately 91% and a lifetime average efficiency of approximately 55%. As of June 30, 2018, our obligation to make payments for underperformance against the performance guaranteesguaranties for traditional leaseTraditional Lease projects was capped contractually under the sales agreements between us and each customer at an aggregate total of approximately $5.8$6.0 million (including payments both for low output and for low efficiency). As of June 30, 2018,, and our aggregate remaining potential liability under this cap was approximately $5.5$4.1 million.
Remarketing at Termination of Lease. At the end of any customer lease in
In the event the customer does not renew or purchase theour Energy Servers to the end of any customer lease, we may remarket any such Energy Servers to a third party, and anyparty. Any proceeds of such sale would be allocated between us and the applicable financing partner as agreed between them at the time of such sale.
Managed Services Financing
Under our managed services program,Managed Services Programs, we initially enter into a Managed Services Agreement with a customer, pursuant to which the customer is able to use the Energy Server for a certain term. Under the Managed Services Agreement, the customer makes a monthly payment for the use of the Energy Server. The customer payment typically has two components: (i) a fixed monthly capacity-based payment and (ii) a performance-based payment based on the output of electricity that month from the Energy Server. The fixed capacity-based payments made by the customer under the Managed Services Agreement are applied toward our obligation to pay down our liability under the master lease with the financier. The performance payment is transferred to us as compensation for operations and maintenance services and recorded as services revenue within the condensed consolidated statements of operations. In some cases, the customer’s monthly payment consists solely of the first component, a fixed monthly capacity-based payment.
Once a financier is identified and the Energy Server’s installation is complete, we sell the Energy Server contemplated by the Managed Services Agreement directly to a financier and the financier, as lessor, leases it back to us, as lessee, pursuant to a master lease in a sale-leaseback transaction. The proceeds from the sale are recorded as a financing partner, which holds titleobligation within the condensed consolidated balance sheets. Any ongoing operations and maintenance service payments are scheduled in the Managed Services Agreement in the form of the performance-based payment described above. The financier typically pays the financing proceeds for the Energy Server contemplated by the Managed Services Agreement on or shortly after acceptance.
The fixed capacity payments made by the customer under the Managed Services Agreement are recognized as electricity revenue when billed and applied toward our obligation to pay the financing obligation under the master lease. Our Managed Services financings have historically shifted customer credit risk to the Energy Server. Once a customer is identified,financier, as lessor, by providing in the master lease agreement that we enter into an additional operating lease withhave no liability for payment of rent except in certain enumerated circumstances, including in the financing partnerevent we are in breach of the Managed Services Agreement between us and a service agreement with the customer.
The duration of our managed services leases is currently 10 years. We begin to recognize revenue from the sale of the equipment to the financing partner once the Energy Server has been accepted by the customer. Under the master lease we then make operatingin a Managed Services financing is typically 10 years. The term of the master lease payments tois typically the financing partner. Undersame as the service agreement withterm of the related Managed Services Agreement, but in some cases the term of the master lease is shorter than that of the Managed Services Agreement.
Our Managed Services deployments typically provide only for warranties of both the efficiency and output of the Energy Server(s), all of which are written in favor of the customer there are two payment components:and contained in the operations and maintenance services agreement. These warranties may be measured on a monthly, equipment fee calculated based on the size of the installation, which covers the amount of our lease payment, and a service payment based on the monthly output of electric power produced by the Energy Server.
Our warranty commitments under the managed services option are substantially similar to those applicable to the traditional lease program described above. Our managed services deploymentsannual, cumulative or other basis. Managed Services projects typically do not typically
include any performance guaranteesguaranties above the warranty commitments, but in projects where the customer’s payment to uscustomer agreement includes a service payment for our operations and maintenance, that payment is typically proportionate to the output generated by the Energy Server(s) and our pricing assumes service revenues at the 95% output level. Therefore,This means that our service revenues aremay be lower than expected if output is less than 95% (andand higher if output exceeds 95%). As of June 30, 2018,2020, we had incurred no liabilities due to failure to repair or replace our Energy Servers pursuant to these warranties and the fleet of our Energy Servers deployed pursuant to the managed services program wereManaged Services Program was performing at a lifetime average output of approximately 94%87%.
Power Purchase Agreement Programs
In 2010,
*Under the Third Party PPA arrangements, there is no link with an investment company, as we began offeringdo not have an equity investment in these arrangements.
Under our PPA Programs, we sell our Energy Servers through Bloom Electrons, financing for our Power Purchase Agreement Programs. These programs are financed via special purpose investment entities (the Investment Companies),to an Operating Company, which typically are majority-owned by third-party investors and by us as a minority investor. The Investment Companies own and are parent tosells the operating entities (the Operating Companies). The Operating Companies, together with the Investment Companies, represent the PPA Entities. The investors contribute cash to the PPA Entity in exchange for equity interests, providing funding for the PPA Entities to purchase the Energy Servers from us. As we identify end customers, the PPA Entity enters into an agreement with the end customer pursuant to which the customer agrees to purchase the electric powerelectricity generated by the Energy Server atServers to the ultimate end customers pursuant to a specified rate per kilowatt hourPPA, energy services agreement, or similar contract. Because the end customer's payment is stated on a dollar-per-kilowatt-hour basis, we refer to these agreements as Power Purchase Agreements ("PPAs"). Currently, our offerings for a specified term,PPA Programs primarily include our Third-Party PPA Programs pursuant to which can range from 10 to 21 years. Eachwe recognize revenue on acceptance. Through 2017, as part of our PPA Entity currently serves between one and nine customers. As with our purchase and leasing arrangements,Programs, we had also offered the standard one-year warranty and
guarantees areBloom Electrons Program, which included an equity investment by us in the price of the product to the PPA Entity. The PPA Entity typically enters into an operationsOperating Company and maintenance services agreement with us following the first year of service to extend the warranty services and performance guarantees. This service agreement has a term coincident with the term of the applicable Power Purchase Agreement Project and paid for on an annual basis by the PPA Entity. The aggregate amount of extended warranty services paymentsin which we expect to receive over the remaining term of the Power Purchase Agreement Projects was $447.2 million as of June 30, 2018.
The mix of orders between our Bloom Electrons financing program and other purchase options is generally driven by customer preference. While we cannot predict with certainty in any given period how customers will choose to finance their purchase, we have observed that, more recently, customers tend to choose a financing option that more closely mirrors the customers’ monthly payment stream for electricity. Power purchase agreements (PPAs), including our Bloom Electrons financing program, provide for payment streams as monthly payments similar to those for grid electricity payments.
Product revenue associated with the sale of the Energy Servers under the PPAs that qualify as sales-type leases is recognized at the present value of the minimum lease payments, which approximate fair value, assuming all other conditions for revenue recognition noted above have also been met. Customer purchases financed by PPA Entities since 2014 have been accounted for as operating leases and the related revenue under those agreements have been recognized as electricity revenue as the electricity is produced and paid for by the customer. Under eachwas produced. For further discussion on our Bloom Electrons Programs, see Note 13, Power Purchase Agreement Programs, in Part I, Item 1, Financial Statements.
In our PPA arrangement, while the end customer pays the PPA Entity over the life of the contract for the electricity consumed, the timing of cash receipts to us is similar to that of an end-user directly purchasingProgram, we enter into an Energy Server from us.
Under our Power Purchase Agreement Program financing arrangements, wesales, operations and our Power Purchase Agreement Program equity investors (Equity Investors) contribute funds into a limited liability Investment Company, which is treated as a partnership for U.S. federal income tax purposes,maintenance agreement ("EPC and which ownsO&M Agreement") with the Operating Company that acquires Energy Servers. This Operating Company then contracts with us to operate and servicewill own the Energy Servers. The Operating Company sellsthen enters into the PPA with the end customer which purchases electricity producedgenerated by the Energy Servers. The Operating Company receives all cash flows generated under the PPA(s), in addition to all investment tax credits, all accelerated tax depreciation benefits, and any other cash flows generated by the operation of the Energy Servers not allocated to the end customer under the PPA.
The sales of our Energy Servers to the Operating Company in connection with the various PPA Programs have many of the same terms and conditions as a direct sale. Payment of the purchase price is generally broken down into multiple installments, which may include payments prior to shipment, upon shipment or delivery of the Energy Server, and upon acceptance of the Energy Server. Acceptance typically occurs when the Energy Server is installed and running at full power as
defined in the applicable EPC and O&M Agreement. A one-year service warranty is provided with the initial sale. After the expiration of the initial standard one-year warranty, the Operating Company has the option to extend our operations and maintenance services under the EPC and O&M Agreement on an annual basis at a price determined at the time of purchase of our Energy Server, which may be renewed annually for each Energy Server for up to 30 years. After the standard one-year warranty period, the Operating Company has almost always exercised the option to renew our operations and maintenance obligations under the EPC and O&M Agreement.
We typically provide output warranties and output guaranties to the Operating Company pursuant to the applicable EPC and O&M Agreement with the Operating Company. The end customer agreement between the Operating Company and the end customer also provides efficiency warranties and efficiency guaranties to the end user, and we provide a backstop of all of the Operating Company’s obligations under those agreements, including both the repair or replacement obligations pursuant to the warranties and any payment liabilities under the guaranties.
As of June 30, 2020, we had incurred no liabilities due to failure to repair or replace Energy Servers pursuant to these warranties. Our obligation to make payments for underperformance against the performance guaranties for PPA Program projects was capped at an aggregate total of approximately $106.5 million (including payments both for low output and for low efficiency) and our aggregate remaining potential liability under this cap was approximately $101.4 million.
Obligations to Operating Companies
In addition to our obligations to the end customers, under PPAs. Any debt incurredour PPA Programs involve many obligations to the Operating Company that purchases our Energy Servers. These obligations are set forth in the applicable EPC and O&M Agreement(s), and may include some or all of the following obligations:
•designing, manufacturing, and installing the Energy Servers, and selling such Energy Servers to the Operating Company,
•obtaining all necessary permits and other governmental approvals necessary for the installation and operation of the Bloom Energy Servers, and maintaining such permits and approvals throughout the term of the EPC and O&M Agreements,
•operating and maintaining the Bloom Energy Servers in compliance with all applicable laws, permits and regulations,
•satisfying the efficiency and output warranties set forth in such EPC and O&M Agreements and the PPAs ("performance warranties"), and
•complying with any specific requirements contained in the PPAs with individual end-customers.
The EPC and O&M Agreements obligate us to repurchase the Energy Servers in the event the Energy Servers fail to comply with the performance warranties and in the event we otherwise breach the terms of the applicable EPC and O&M Agreements and we fail to remedy such failure or breach after a cure period, or in the event that a PPA terminates as a result of any failure by us to comply with the applicable EPC and O&M Agreements. In some PPA Entities is non-recourseProgram projects, our obligation to us. Cash generated byrepurchase Energy Servers extends to the electricity sales, as well as from anyentire fleet of Energy Servers sold pursuant to the applicable government incentive programs, is usedEPC and O&M Agreements in the event such failure affects more than a specified number of Energy Servers.
In some PPA Programs, we have also agreed to pay operatingliquidated damages to the applicable Operating Company in the event of delays in the manufacture and installation of our Energy Servers, either in the form of a cash payment or a reduction in the purchase price for the applicable Energy Servers.
Both the upfront purchase price for our Energy Servers and the ongoing fees for our operations and maintenance are paid on a fixed dollar-per-kilowatt basis.
Indemnification of Performance Warranty Expenses Under PPAs - In addition to the performance warranties and guaranties in the EPC and O&M Agreements, we also have agreed to indemnify certain Operating Companies for any expenses they incur to any of the end customers resulting from failures of the applicable Energy Servers to satisfy any of the performance warranties and guaranties set forth in the applicable PPAs.
Administration of Operating Companies - In each of the Bloom Electrons programs, we perform certain administrative services on behalf of the applicable Operating Company, including invoicing the end customers for amounts owed under the PPAs, administering the cash receipts of the Operating Company (including the operations and maintenance services we provide) and to service the non-recourse debt,in accordance with the remaining cash flows distributedrequirements of the financing arrangements, interfacing with applicable regulatory agencies, and other similar obligations. We are compensated for these services on a fixed dollar-per-kilowatt basis.
The Operating Company in each of the Bloom Electrons Programs (other than PPA I) has incurred debt in order to finance the Equity Investors based onacquisition of Energy Servers. The lenders for these projects are a combination of banks and/or institutional investors. In each case, the cash distribution allocations agreed betweendebt is secured by all of the assets of the applicable Operating Company, such assets being primarily comprised of the Energy Servers and a collateral assignment of each of the contracts to which the Operating Company is a party, including the O&M Agreement entered into with us and the Equity Investors. Foroff take agreements entered into with the Operating Company’s customers, and is senior to all other debt obligations of the Operating Company. As further information see Note 12 - Power Purchase Agreement Programs to our consolidated financial statements includedcollateral, the lenders receive a security interest in 100% of the membership interest of the Operating Company. However, as is typical in structured finance transactions of this Quarterly Report on Form 10-Q. The Equity Investors receive substantiallynature, although the project debt is secured by all of the value attributableOperating Company’s assets, the lenders have no recourse to the long-term recurring customer lease payments, investment tax credits, accelerated tax depreciation and, in some cases, other incentives until the Equity Investors receive their contractual rate of return. In some cases, after the Equity Investors receive their contractual rate of return, we expectus or to receive substantially allany of the remaining value attributable to the long-term recurring customer payments and the other incentives. As of June 30, 2018, none of our customers under PPAs have defaulted on their payment obligations.
We currently operate five distinct PPA Entities. Three of these PPA Entities (PPA II, PPA IIIa and PPA IIIb) are flip structures and the remaining two (PPA IV and PPA V) are strategic long-term partnerships with the Equity Investor that do not flip during the term of the arrangements. Of the three PPA Entity flip structures, PPA II is based on the Equity Investor reaching an agreed upon internal rate of return (IRR) and PPA IIIa and PPA IIIb are based on the flip occurring at a fixed dateequity investors in the future.
Since we electedproject. The applicable debt agreements include provisions that implement a customary “payment waterfall” that dictates the priority in which the Operating Company will use its available funds to decommission PPA I and purchasedsatisfy its payment obligations to us, the Equity Investor’s interest for $25.0 million in convertible debt, we will receive 100% of any remaining cash flows from PPA I. Prior tolenders, the decommissioning, we received cash flows from PPA I totaling $393.6 million related to the purchase of Energy Servers, distributions of incentive receipts, annual maintenance payments and monthly administrative services payments. Since the decommissioning through June 30, 2018, we have received $13.2 million from PPA I related to customer electricity billings. With respect to PPA II, we estimate that the Equity Investor will need to receive additional cash distributions of approximately $96.2 million to reach its target IRR at which point we will receive substantially all of the remaining value attributable to the long-term customer paymentstax equity investors and other incentives. To achieve these cash distributions and the contractual internal rate of return to trigger the ownership flip, PPA II will need to generate additional aggregate revenue of approximately $383.8 million. Our PPA II contracts do not specify the date on which the flip is projected to occur; rather, the PPA II contracts set forth the conditions that will trigger the flip and define the parties’ respective rights and obligations before and after the occurrence of the flip. Based on the current contractual terms, we estimate that PPA II will flip on approximately June 30, 2028, assuming prior termination does not occur.third parties.
For PPA IIIa and PPA IIIb, the Equity Investors receive preferred distributions of 2% of their total cash investment through the flip date, a fixed date in the future, and are not dependent on additional earned amounts. In PPA IIIa and IIIb, the flip dates are January 1, 2020 and January 1, 2021, respectively, and the remaining preferred distributions to be paid through the flip dates are $1.5 million and $1.2 million, respectively. We will receive substantially all of the remaining income (loss), tax and tax allocations attributable to the long-term customer payments and other incentives after each flip date.
Even after the occurrence of the flip date for PPA II, PPA IIIa and PPA IIIb, we do not anticipate subsequent distributions to us from the PPA Entities to be material enough to support our ongoing cash needs, and therefore we will still need to generate significant cash from product sales.
The Energy Servers purchased by the PPA Entities are recorded as property, plant and equipment and included within our consolidated balance sheets. We then reduce these assets by the amounts received by the Equity Investors from U.S. Treasury grants and the associated incentive rebates. In turn, we recognize the incentive rebates and subsequent customer payments as electricity revenue over the customer lease term and amortize U.S. Treasury grants as a reduction to depreciation of the associated Energy Servers over the term of the PPA. Since our inception, government incentives have accounted for approximately 13% of the expected total cash flows for all PPA Entities. As of June 30, 2018, our PPA Entities had received a total of $282.9 million in government grants and rebates.
We have determined that we are the primary beneficiary in these investment entities.the PPA Entities, subject to reassessments performed as a result of upgrade transactions (see Note 13, Power Purchase Agreement Programs, in Part I, Item 1, Financial Statements.) Accordingly, we consolidate 100% of the assets, liabilities and operating results of these entities, including the Energy Servers and lease income, in our consolidated financial statements. We recognize the tax equity investors’ share of the net assets of the investment entities as noncontrolling interests in subsidiaries in our condensed consolidated balance sheet. We recognize the amounts that are contractually payable to these investors in each period as distributions to noncontrolling interests in our condensed consolidated statements of convertible redeemable preferred stocknoncontrolling interest, stockholders' deficit and equity.noncontrolling interest. Our condensed consolidated statements of cash flows reflect cash received from these investors as proceeds from investments by noncontrolling interests in subsidiaries. Our condensed consolidated statements of cash flows also reflect cash paid to these investors as distributions paid to noncontrolling interests in subsidiaries. We reflect any unpaid distributions to these investors as distributions payable to noncontrolling interests in subsidiaries on our condensed consolidated balance sheets.
All five However, the PPA Entities are separate and distinct legal entities, and Bloom Energy Corporation may not receive cash or other distributions from the PPA Entities except in certain limited circumstances and upon the satisfaction of certain conditions, such as compliance with applicable debt service coverage ratios and the achievement of a targeted internal rate of return to the tax equity investors, or otherwise.
For further information about our PPA Programs, see Note 13, Power Purchase Agreement Programs, in Part I, Item 1, Financial Statements.
Delivery and Installation
The timing of delivery and installations of our products have utilized their entire available financing capacitya significant impact on the timing of the recognition of product and completed their purchasesinstallation revenue. Many factors can cause a lag between the time that a customer signs a purchase order and our recognition of product revenue. These factors include the number of Energy Servers asinstalled per site, local permitting and utility requirements, environmental, health and safety requirements, weather, and customer facility construction schedules. Many of June 30, 2018.
Throughthese factors are unpredictable and their resolution is often outside of our or our customers’ control. Customers may also ask us to delay an installation for reasons unrelated to the foregoing, including delays in their obtaining financing. Further, due to unexpected delays, deployments may require unanticipated expenses to expedite delivery of materials or labor to ensure the installation meets the timing objectives. These unexpected delays and expenses can be exacerbated in periods in which we deliver and install a larger number of smaller projects. In addition, if even relatively short delays occur, there may be a significant shortfall between the revenue we expect to generate in a particular period and the revenue that we are able to recognize. For our installations, revenue and cost of revenue can fluctuate significantly on a periodic basis depending on the timing of acceptance and the type of financing used by the customer. As described in the Power Purchase Agreement Programs section above, we offered the Bloom Electrons purchase program through the end of 2016 and no longer offer this financing program,structure to potential customers.
International Channel Partners
Prior to 2018, we consummated a totalsmall number of approximately $1.1 billionsales outside the United States, including in financing has been funded through June 30,India and Japan.
India. In India, sales activities are currently conducted by Bloom Energy (India) Pvt. Ltd., our wholly-owned indirect subsidiary; however, we are currently evaluating the Indian market to determine whether the use of channel partners would be a beneficial go-to-market strategy to grow our India market sales.
Japan. In Japan, sales are conducted pursuant to a Japanese joint venture established between us and subsidiaries of SoftBank Corp, called Bloom Energy Japan Limited ("Bloom Energy Japan"). Under this arrangement, we sell Energy Servers to Bloom Energy Japan and we recognize revenue once the Energy Servers leave the port in the United States. Bloom Energy Japan enters into the contract with the end customer and performs all installation work as well as some of the operations and maintenance work.
The Republic of Korea. In 2018, including approximately $609.2 million in equity investments and an additional $448.7 million in non-recourse debt to support an aggregate deployment of approximately 106.8 megawattsBloom Energy Japan consummated a sale of Energy Servers as of June 30, 2018. Equity Investors in our PPA Entities include banks and other large companies such as Credit Suisse, Exelon Generation Company, Intel Corporation and U.S. Bancorp. In the future, in addition to or in lieu of arranging customer financing through PPA Entities, we may use debt, equity or other financing strategies to fund our operations.
We view our obligations under Bloom Electrons in four categories: first, our obligations to the relevant PPA Entity formed to own the Energy Servers and sell electricity generated by such Energy Servers to the end-customers; second, the Project Company’s obligations to the lenders of such Project Company, if any; third, our obligations to the Equity Investors in the applicable project; and fourth,Republic of Korea to Korea South-East Power Company. Following this sale, we entered into a Preferred Distributor Agreement with SK Engineering & Construction Co., Ltd. ("SK E&C") to enable us to sell directly into the end-customers. We discuss these obligations in further detail below.Republic of Korea.
Obligations to PPA Entities
In each Power Purchase Agreement Project, we and the applicable PPA Entity enter into two primary contracts:Under our agreement with SK E&C, SK E&C has a right of first a contract for the purchase, sale, installation, operation and maintenance of the Energy Servers to be employed in such PPA project (the O&M Agreement), and second, a contract whereby we are engaged to perform administrative functions for the PPA projectrefusal during the term of the PPA project (the Administrative Services Agreement, or ASA). The O&M Agreement and the ASA each have a term coincidentagreement, with the termcertain exceptions, to serve as distributor of the applicable PPA project. The aggregate amount of extended warranty services payments we expect to receive under the O&M Agreement over the remaining term of the PPA projects was $447.2 million as of June 30, 2018. The aggregate amount of ASA payments we expect to receive over the remaining term of the PPA projects was $34.0 million as of June 30, 2018.
Our obligations to the PPA Entities pursuant to the O&M Agreement include: (i) designing, manufacturing, and installing the Energy Servers for any fuel cell generation project in the Republic of Korea, and selling suchwe have the right of first refusal to serve as SK E&C’s supplier of generation equipment for any Bloom Energy Servers tofuel cell project in the PPA Entity, (ii) obtaining all necessary permitsRepublic of Korea. Under the terms of each purchase order, title, risk of loss and other governmental approvals necessary for the installation and operationacceptance of the Energy Servers and maintaining such permits and approvals throughoutpass from us to SK E&C upon delivery at the termnamed port of the O&M Agreement, (iii) operating and maintaining the Energy Servers in compliance with all applicable laws, permits and regulations, (iv) satisfying the efficiency and output obligations set forth in such O&M Agreement (Performance Warranties), and (v) complying with any specific requirements containedlading for shipment in the offtake agreements with individual end-customers. The O&M Agreement obligates us to repurchase the Energy Servers in the event the Energy Servers fail to comply with the Performance Warranties and we fail to remedy such failure after a cure period, or in the event that an offtake agreement terminates as a result of any failure by us to comply with the requirements contained therein. In some cases, we have also agreed to pay liquidated damages to the PPA Entity in the event of delays in the manufacture and installation of Energy Servers. Both the upfront purchase priceUnited States for the Energy Servers shipped in 2018 and thereafter upon delivery at the ongoing feesnamed port of unlading in the Republic of Korea, prior to unloading subject to final purchase order terms. The Preferred Distributor Agreement has an initial term expiring on December 31, 2021, and thereafter will automatically be renewed for three-year renewal terms unless either party terminates this agreement by prior written notice under certain circumstances.
Under the terms of the Preferred Distributor Agreement, we (or our subsidiary) contract directly with the customer to provide operations and maintenance are paid on a fixed dollar per kilowatt ($/kW) basis.
The O&M Agreementsservices for each PPA Entity generally provide for the following Performance Warranties and indemnity obligations:
Efficiency Warranty and Efficiency Guaranty. We warrant to the applicable PPA Entity that the Energy Servers sold to such entity will operate at an average efficiency level specified in the O&M Agreement, calculated either cumulatively from the commercial operations date of each Energy Server or during each calendar month. We are obligated to repair or replace Energy Servers that are unable to satisfy the Efficiency Warranty, or if a repair or replacement is not feasible, to repurchase such Energy Servers at a price specified in the applicable O&M Agreement. In the case of PPA II, if the aggregate average efficiency falls below the specified threshold, we are also obligated to make a payment to the PPA Entity equal to the increased expense resulting from such efficiency shortfall, subject to a cap on aggregate payments equivalent to the purchase price of all Energy Servers in the PPA II portfolio. During the period from September 2010 to June 30, 2018, no Energy Servers have been repurchased pursuant to any Efficiency Warranty and no payments have been made pursuant to the Efficiency Guarantees.
One-Month Output Warranty. In the case of PPA II, we also warrant that the PPA II portfolio of Energy Servers will generate a minimum amount of electricity in each calendar month, and we are obligated to repair or replace Energy Servers that fail to satisfy this warranty. If we determine that a repair or replacement is not feasible, we are obligated to repurchase such Energy Servers at the original purchase price. During the period from September 2010 to June 30, 2018, no Energy Servers have been repurchased and no payments have been made pursuant to a One-Month Output Warranty.
Quarterly Output Warranty. In the case of PPA IIIa, we also warrant that each of the applicable Energy Servers will generate a minimum amount of electricity in each calendar quarter, and we are obligated to repair or replace Energy Servers that fail to satisfy this warranty. If we determine that a repair or replacement is not feasible, we are obligated to repurchase such Energy Servers at the original purchase price, subject to adjustment for depreciation. In addition, we are obligated to make a payment to the PPA IIIa entity to make it whole for lost revenues resulting from the shortfall below the warranted level, subject to a cap on payments equal to ten percent (10%) of the purchase price of the Energy Servers in the PPA IIIa portfolio. If we fail to make any such warranty payments if and when due, then PPA IIIa may elect to require us to repurchase Energy Servers that fail such warranty at the original purchase price, subject to adjustment for depreciation. During the period from September 2010 to June 30, 2018, no Energy Servers have been repurchased pursuant to the Quarterly Output Warranty, and we have made payments in the aggregate amount of $0.2 million pursuant to the Quarterly Output Warranty.
Quarterly Output Guaranty. In the cases of PPA IIIb, PPA IV and PPA V, we also guarantee to the applicable PPA Entity that the applicable portfolio of Energy Servers will generate a minimum amount of electricity in each calendar quarter. In the event the applicable portfolio fails to satisfy this Output Guaranty, we are obligated to make a payment to the applicable PPA Entity to make it whole for lost revenues resulting from the shortfall below the guaranteed level, and such liability is uncapped. If we fail to make any such Output Guaranty payments if and when due, then the applicable PPA Entity may elect to require us to repurchase Energy Servers that fail such guaranty, at a price specified in the applicable
O&M Agreement and pursue other damages. During the period from September 2010 to June 30, 2018, no Energy Servers have been repurchased pursuant to a Quarterly Output Guaranty, and we have made no payments pursuant to any Quarterly Output Guaranty.
Annual Output Guaranty. We also guarantee to the applicable PPA Entity that the applicable portfolio of Energy Servers will generate a minimum amount of electricity in each calendar year. In the event that such portfolio fails to satisfy this Output Guaranty, we are obligated to make a payment to the applicable PPA Entity to make it whole for lost revenues resulting from the shortfall below the warranted level, subject to a liability cap equal to a portion of the purchase price of the applicable portfolio. During the period from September 2010 to June 30, 2018, we have made payments in the aggregate amount of $23.5 million pursuant to these Output Guarantees. These payments were primarily as a result of performance issues in our early generation systems deployed in our first three PPA Entities (PPA I, PPA II & PPA IIIa). Of the aggregate amount of $23.5 million paid, $0.9 million was paid in the six months ended June 30, 2018, $3.7 million was paid in 2017, $4.8 million was paid in 2016, and $14.1 million was paid prior to 2016.
Indemnification of Performance Warranty Expenses under Offtake Agreements. In the cases of PPA IIIa, PPA IIIb, PPA IV and PPA V, we also have agreed to indemnify the applicable PPA Entity for any expenses it incurs to any of its customers resulting from failures of the applicable portfolio of Energy Servers to satisfy any of the efficiency, output or other performance commitments in the applicable offtake agreements. In addition, in the event that an offtake agreement is terminated by a customer as to any Energy Servers as a result of a default by us under the O&M Agreement, we are obligated to repurchase such Energy Server from the applicable PPA Entity for a repurchase price specified in the applicable O&M Agreement. During the period from September 2010 to June 30, 2018, we have incurred no obligations for payments pursuant to these provisions under any of our Power Purchase Agreement Program arrangements.
Our obligations pursuant to the ASA include performing a variety of administrative and management services necessary to conduct the business of the Power Purchase Agreement Program project. These duties include: (i) invoicing and collecting amounts due from the end-customers, (ii) engaging, supervising and monitoring any third-party service providers required for the operation of the project, (iii) paying, on behalf of the PPA Entity and with the PPA Entity’s available funds, any amounts owed, including debt service payments on the debt incurred by the PPA Entity (Project Debt), if applicable, (iv) maintaining books and records and preparing financial statements, (v) representing the PPA Entity in any administrative or other public proceedings, (vi) preparing annual budgets and other reports and deliverables owed by the PPA Entity under the Project Debt agreements, if applicable, and (vii) generally performing all other administrative tasks required in relation to the project. We receive an annual administration fee for its services, calculated on a fixed dollar per kilowatt ($/kW) basis.
Obligations to Lenders
Each of the Power Purchase Agreement Program projects (other than the PPA I project) has incurred debt in order to finance the acquisition of Energy Servers. The lenders for these projects are a combination of banks and/or institutional investors.
In each case, the Project Debt incurred by the applicable PPA Entity is secured by all of the assets comprising the project (primarily comprised of the Energy Servers owned by the PPA Entity and a collateral assignment of each of the contracts to which it is a party, including the O&M Agreement entered into with us and the offtake agreements entered into with PPA Entity’s customers), and is senior to all other debt obligations of the PPA Entity. As further collateral, the lenders receive a security interest in 100% of the membership interest of the PPA Entity. However, as is typical in structured finance transactions of this nature, although the Project Debt is secured by all of the PPA Entity’s assets, the lenders have no recourse to us or to any of the other Equity Investors in the project.
The applicable PPA Entity is obligated to make quarterly principal and interest payments according to an amortization schedule agreed between us, the Equity Investors and the lenders. The debt is either a “term loan”, where the final maturity date coincides with the expiration of the offtake agreements included in the project, or a “mini-perm loan,” where the final maturity date occurs at some point prior to such expiration; in the case of these “mini-perm loans”, we expect to be able to refinance these loans on or prior to their maturity date by procuring debt from other sources and using the proceeds of such new debt to repay the existing loans.
The Project Debt documentation also includes provisions that implement a customary “payment waterfall” that dictates the priority in which the PPA Entity will use its available funds to satisfy its payment obligations to us, the lenders, the Equity Investors and other third parties. These provisions generally provide that all revenues from the sale of electricity under the applicable offtake agreements and any other cash proceeds received by the PPA Entity are deposited into a “revenue account”, and those funds are then distributed in the following order: first, to pay for ongoing project expenses, including amounts due to us under the O&M Agreement and the ASA, taxes, insurance premiums, and any legal, accounting and other third party service provider costs; second, to pay any fees due to collateral agents and depositary agents, if any; third, to pay interest then due on the loans; fourth, to pay principal then due on the loans; fifth, to fund any reserve accounts to the extent not fully funded; and finally, any remaining cash (Distributable Cash) may be distributed to us and the Equity Investors in the project, subject to the satisfaction of any conditions to distributions agreed with the applicable lenders, such as a minimum debt service coverage ratios, absence of defaults, and similar requirements. Additional information regarding the Project Debt for each individual project is set forth in the Liquidity and Capital Resources section below. In addition, the “Distribution Conditions” are negotiated individually for each project, but in each case include (i) absence of defaults, and (ii) satisfaction of minimum debt service coverage ratios. In the event that there is Distributable Cash remaining after the payment of all higher-priority payment obligations but the applicable Distribution Conditions are not satisfied, the applicable funds are deposited into a “Distribution Suspense Account” and remain in such account until the Distribution Conditions are subsequently satisfied. In the event that any funds have been on deposit in the Distribution Suspense Account for four (4) consecutive calendar quarters, the applicable Project Company is obligated to use such “Trapped Cash” to prepay the Project Debt.
In connection with the PPA IIIb, PPA IV and PPA V projects, we procured a Fuel Cell Energy Production Insurance Policy on behalf of the applicable PPA Entity and the lenders (Production Insurance). The Production Insurance policies are intended to mitigate the risk of our failure or inability to operate and maintain the applicable portfolio of Energy Servers in accordance with the requirements of the O&M Agreement, and provides for debt service payment on the Project Debt in the event that the PPA Entity’s revenues are insufficient to make such payments due to a shortfall in the electricity generated by the Energy Servers. To date, no claimsWe have been made under anyestablished a subsidiary in the Republic of Korea, Bloom Energy Korea, LLC, to which we subcontract such operations and maintenance services. The terms of the Production Insurance policies.
Obligations to Investors
Each of our Power Purchase Agreement Projects has involved an investment by one or more Equity Investors, who contribute funds to the applicable PPA Entity in exchange for equity interests entitling such investors to distributions of the cash and any tax credits and other tax benefits generated by the project. In each of the projects, we (via a wholly-owned subsidiary) and one or more additional Equity Investors form a jointly-owned special purpose entity (each, a Holding Company), which entity in turn owns 100% of the membership interests of the applicable PPA Entity. Our obligations to the Equity Investors are set forth in the Holding Company limited liability company operating agreement (the Operating Agreement). We act as the managing member of each Holding Company, managing its day-to-day affairs subject to consent rights of the Equity Investors with respect to decisions agreed between us and the Equity Investors in the Operating Agreement.
As members of a Holding Company, we and the applicable Equity Investors are entitled to (i) allocations of items of income, loss, gain, deduction and credit (Tax Items) including, where applicable, the 30% investment tax credit under Section 48 of the Internal Revenue Code, and (ii) distributions of any cash held by such Holding Company in excess of amounts necessary for the ongoing operation of such Holding Company, including any Distributable Cash received from the applicable PPA Entity. The members’ respective allocations of Tax Items and cash distributions are negotiated on a project-by-project basis between us and the Equity Investors in each project. Distributions are made to Equity Investors (including us) on a quarterly basis in connection with PPA II, PPA IV and PPA V, and on a semi-annual basis in PPA IIIa and PPA IIIb.
In the event of a bankruptcy of a PPA Entity, the assets of such PPA Entity would be liquidated, likely at the direction of the bankruptcy trustee, if one was appointed, or according to the direction of the applicable lenders to such PPA Entity. In the event of a bankruptcy or liquidation, assets would first be liquidated to repay the applicable project’s debt. If any cash remained following the repayment of debt, such cash would be distributed among us and the Equity Investor(s) in the project in accordance with the applicable LLC agreement for the Investment Company. As a general matter, cash is first applied to the payment of owed but unpaid preferred distributions to the Equity Investor(s) other than us, if any, with any remaining assets split between us and such Equity Investor(s) in accordance with the sharing percentages of distributions as set forth in the applicable LLC agreement.
The Power Purchase Agreement Project agreements do not permit for voluntary early termination of the arrangements by us or the applicable Equity Investors. The Equity Investors in the projects may not withdraw from the applicable PPA Entity, except in connection with a permitted transfer or sale of such member’s assets in compliance with any restrictions on transfer set forth in the limited liability company agreement applicable to such project.
The following sets forth a project-by-project summary of obligations that are unique to individual projects:
PPA II. Diamond State Generation Partners, LLC (PPA Company II) is a wholly-owned subsidiary of Diamond State Generation Holdings, LLC (PPA II HoldCo), which is jointly-owned by us and an Equity Investor. As of June 30, 2018, we owned 100% of the Class A Membership Interests of PPA II HoldCo, and the Equity Investor owned 100% of the Class B Membership Interests of PPA II HoldCo. We (through our wholly-owned subsidiary Clean Technologies II, LLC), act as the managing member of PPA II HoldCo.
The economic benefits of the PPA II project are allocated between us and the Equity Investor as follows:
Other than Tax Items relating to the proceeds of any cash grant under Section 1603 of the American Recovery and Reinvestment Tax Act of 2009 (Cash Grant), Tax Items are allocated (i) 99% to the Equity Investor and 1% to us until the last date of the calendar month in which the Equity Investor has achieved an internal rate of return equal to the “Target IRR” specified in the PPA II HoldCo operating agreement (Flip Date), and (ii) following the Flip Date, 5% to the Equity Investor and 95% to us.
All Tax Items relating to the Cash Grant are allocated 99% to the Equity Investor and 1% to us.
All cash proceeds of the Cash Grant are distributed 99% to the Equity Investor and 1% to us.
All other cash available for distribution is distributed (i) 99% to the Equity Investor and 1% to us until the Flip Date, and (ii) following the Flip Date, 5% to the Equity Investor and 95% to us.
Pursuant to the PPA II HoldCo LLC agreement, we have the option, exercisable at our sole discretion, to purchase all of the Equity Investor’s membership interests in PPA II HoldCo on the eleventh anniversary of the date of the initial equity investment of the PPA II project by the Equity Investor, which will occur in June, 2023. If we were to exercise this purchase option, we would thereafter be entitled to all subsequent cash, income (loss), tax and tax allocations generated by the PPA II Project (net of payments to the PPA II lenders under the PPA II Credit Agreement) and the purchase price for the Equity Investor’s membership interests would be equal to the greater of (i) the fair market value of such equity interests at such time, or (ii) the amount that would cause the Equity Investor to realize an internal rate of return stated in the PPA II HoldCo LLC agreement. The cash consideration required to generate the required internal rate of return for the Equity Investor pursuant to this purchase option will vary based on the distributions generated by the PPA II Project thru June, 2023, and may range
between approximately $73.4 million and $137.4 million. We have agreed to indemnify the Equity Investor in PPA II HoldCo from any liability related to recapture of the Cash Grant, except to the extent such recapture results from (i) a breach of applicable representations and covenants of the Equity Investor, or (ii) a prohibited transfer of the Equity Investor’s membership interests in PPA II HoldCo.
The PPA II project includes an annual Output Guaranty of 95% and a cumulative Efficiency Guaranty of 50%. In each case, underperformance obligates us to make a payment to PPA Company II. As of June 30, 2018, the PPA II project is operating at an average output of approximately 86% for calendar year 2018, and a lifetime average efficiency of approximately 51%. Our obligation to make payments for underperformance of the PPA II project is capped at an aggregate total of approximately $13.9 million under the Output Guaranty and approximately $263.6 million under the Efficiency Guaranty. As of June 30, 2018, we have no remaining liability under the Output Guaranty, and our remaining potential liability under the Efficiency Guaranty cap is approximately $263.6 million.
Obligations Under the PPA II Tariff Agreement
PPA Company II is required to declare a “Forced Outage Event” if permitted under the PPA II tariff agreement in the event that (i) the Company has reached its cap on performance warranty payments under the O&M Agreement, such that PPA Company II is not eligible for further warranty payments under such O&M Agreement, (ii) the project’s lifetime efficiency falls below the level warranted in the O&M Agreement and the Company has not reimbursed PPA Company II for the resulting excess costs of procuring natural gas resulting from such shortfall, (iii) the Energy Servers have failed to generate electricity at an average above a minimum threshold specified in the PPA II Credit Agreement (i.e., 85% of the project’s nameplate capacity during any calendar month) or (iv) the Company has suffered a bankruptcy event or the Company ceases to carry on its business. As of June 30, 2018, no “Forced Outage Event” had been declared. The PPA II project’s average output for June 2018 equaled 86.0% of the project’s nameplate capacity.
In addition, in the event that PPA Company II claims that a “Forced Outage Event” has occurred under the PPA II tariff, PPA Company II is obligated to purchase and deliver replacement RECs in an amount equal to the number of megawatt hours for which it receives compensation under the ‘forced outage’ provisions of the tariff, but only if such replacement RECs are available in sufficient quantities and can be purchased for less than $45 per REC. A “Forced Outage Event” is defined under the PPA II tariff agreement as the inability of PPA II to obtain a replacement component part or a service necessary for the operation of the Energy Servers at their nameplate capacity. The PPA II tariff agreement provides for payments to PPA Company II in the event of a Forced Outage Event lasting in excess of 90 days. For the first 90 days following the occurrence of a Forced Outage Event, no payments are made under this provision of the tariff. Thereafter, PPA Company II is entitled to payments equal to 70% of the payments that would have been made under the tariff but for the occurrence of the Forced Outage Event-that is, the “Forced Outage Event” provision of the PPA II tariff agreement provides for payments to PPA Company II under the tariff equal to the amount that would be paid were PPA Company II’s Energy Servers operating at 70% of their nameplate capacity, irrespective of actual output. The PPA II tariff agreement also provides that the “Forced Outage Event” protections afforded thereunder shall automatically terminate in the event that we obtain an investment grade rating. In addition, in the event we obtain an investment grade rating, we are required to offer to repurchase the Notes from each individual noteholder unless we provide a guarantee of the debt obligations of the PPA Company II.
The Equity Investor in PPA II HoldCo has the option, exercisable on March 16, 2022, to sell 100% of its equity interests in the project to us for a sale price equal to the then-applicable fair market value of such equity interests. We guarantee the obligations of Clean Technologies II to make the payment of such purchase price in the event the Equity Investor exercises such option.
PPA IIIa. 2012 ESA Project Company, LLC (PPA Company IIIa) is a wholly-owned subsidiary of 2012 V PPA Holdco, LLC (PPA IIIa HoldCo), which is jointly-owned by us and an Equity Investor. As of June 30, 2018, we owned 100% of the Class B Membership Interests of PPA IIIa HoldCo, and the Equity Investor owned 100% of the Class A Membership Interests of PPA IIIa HoldCo. We (through our wholly-owned subsidiary Clean Technologies III, LLC), act as the managing member of PPA IIIa HoldCo.
The economic benefits of the PPA IIIa project are allocated between us and the Equity Investor as follows:
Tax Items (including the ITC) are allocated (i) 99% to the Equity Investor and 1% to us.
Cash available for distribution is distributed (i) until January 1, 2020, first, to the Equity Investor, a payment equal to 2% of the investor’s investment on an annual basis, and next, all remaining amounts are distributed to us; and (ii) from and after January 1, 2020, first, to the Equity Investor, a payment equal to 2% of the Equity Investor’s investment on an annual basis, and next, all remaining amounts are distributed 95.05% to us and 4.95% to the Equity Investor.
Pursuant to the PPA IIIa HoldCo LLC agreement, we have the option, exercisable at our sole discretion, to purchase all of the Equity Investor’s membership interests in PPA IIIa HoldCo, exercisable within six months following either January 1, 2020 or January 1, 2025. If we were to exercise this purchase option, we would thereafter be entitled to all subsequent cash, income (loss), tax and tax allocations generated by the PPA IIIa Project (net of payments to the PPA IIIa lenders under the PPA IIIa Credit Agreement) and the purchase price for the Equity Investor’s membership interests would be equal to the greater of (i) the fair market value of such equity interests at such time, or (ii) the sum of (x) any unpaid amounts owed to the Equity Investor pursuant to its entitlement to cash distributions equal to 2% of its investment (as described above), plus (y) approximately $2.1 million. The PPA IIIa project includes (i) an Output Guaranty of 95% measured annually, (ii) an Output Warranty of 80% measured quarterly, (iii) an Efficiency Warranty of 45% measured monthly, and (iv) an indemnity of any payments made by PPA Company IIIa regarding failure of the Energy Servers to perform in accordance with the applicable offtake agreements, which generally provide for an Efficiency Guaranty of 52% measured cumulatively over the life of the project. In the case of underperformance with respect to the Output Warranty and/or the Output Guaranty, we are obligated to make a payment to PPA Company IIIa; additionally, in the case of underperformance against the Output Warranty, we are obligated to repair or replace the applicable Energy Servers. In the case of underperformance with respect to the Efficiency Warranty, we are obligated to repair or replace the applicable Energy Servers, and we are obligated to reimburse PPA Company IIIa for any payments owed to the applicable customer(s). As of June 30, 2018, the PPA IIIa project is operating at an average output of approximately 85% for calendar year 2018, an average output of approximately 85% for the three months ended June 30, 2018 and a lifetime average efficiency of approximately 52%. Our obligation to make payments for underperformance of the PPA IIIa project is capped at an aggregate total of approximately $5.0 million under the annual Output Guaranty, approximately $10.0 million under the quarterly Output Warranty, and approximately $675,000 under the Efficiency Guarantees in the applicable offtake agreements. As of June 30, 2018, our aggregate remaining potential liability under these caps is approximately $2.4 million under the annual Output Guaranty, approximately $9.8 million under the quarterly Output Warranty, and approximately $675,000 under the Efficiency Guarantees.
We have agreed to indemnify the Equity Investor in PPA IIIa HoldCo from any liability related to recapture of the ITC except to the extent such recapture results from (i) a transfer of the Equity Investor’s membership interest in the project, (ii) a change in the federal income tax classification of the Equity Investor or its owners, (iii) a change in federal income tax law or (iv) adverse findings regarding the tax classification of the project.
The Equity Investor has the option, exercisable for a six month period commencing January 1, 2021, to withdraw from PPA IIIa HoldCo by notice to us. Notwithstanding the allocations of cash available for distribution set forth above, in the event that the Equity Investor exercises this withdrawal option, such investor shall receive 99% of the cash available for distribution until it has received the fair market value of its Class A Membership Interests in PPA IIIa HoldCo at such time, but in any event no more than approximately $2.0 million.
PPA IIIb. 2013B ESA Project Company, LLC (PPA Company IIIb) is a wholly-owned subsidiary of 2013B ESA Holdco, LLC (PPA IIIb HoldCo), which is jointly-owned by us and an Equity Investor. As of June 30, 2018, we owned 100% of the Class B Membership Interests of PPA IIIb HoldCo, and the Equity Investor owned 100% of the Class A Membership Interests of PPA IIIb HoldCo. We (through our wholly-owned subsidiary Clean Technologies 2013B, LLC), act as the managing member of PPA IIIb HoldCo.
The economic benefits of the PPA IIIb project are allocated between us and the Equity Investor as follows:
Tax Items (including the ITC) are allocated 99% to the Equity Investor and 1% to us.
Cash available for distribution is distributed (i) until January 1, 2021, first, to the Equity Investor, a payment equal to 2% of the investor’s investment on an annual basis, and next, all remaining amounts are distributed to us; and (ii) from and after January 1, 2021, first, to the Equity Investor, a payment equal to 2% of the Equity Investor’s investment on an annual basis, and next, all remaining amounts are distributed 95.05% to us and 4.95% to the Equity Investor.
Pursuant to the PPA IIIb HoldCo LLC agreement, we have the option, exercisable at our sole discretion, to purchase all of the Equity Investor’s membership interests in PPA IIIb HoldCo, exercisable within six months following either January 1, 2021 or January 1, 2026. If we were to exercise this purchase option, we would thereafter be entitled to all subsequent cash, income (loss), tax and tax allocations generated by the PPA IIIb Project (net of payments to the PPA IIIb lenders under the PPA IIIb Credit Agreement) and the purchase price for the Equity Investor’s membership interests would be equal to the greater of (i) the fair market value of such equity interests at such time, or (ii) the sum of (x) any unpaid amounts owed to the Equity Investor pursuant to its entitlement to cash distributions equal to 2% of its investment (as described above), plus (y) approximately $0.7 million. The PPA IIIb project includes (i) an Output Guaranty of 95% measured annually, (ii) an Output Guaranty of 80% measured quarterly, (iii) an Efficiency Warranty of 45% measured monthly, and (iv) an indemnity of any payments made by PPA Company IIIb regarding failure of the Energy Servers to perform in accordance with the applicable
offtake agreements, which generally provide for an Efficiency Guaranty of 52% measured cumulatively over the life of the project. In the case of underperformance with respect to either Output Guaranty, we are obligated to make a payment to PPA Company IIIb. In the case of underperformance with respect to the Efficiency Warranty, we are obligated to repair or replace the applicable Energy Servers, and we are obligated to reimburse PPA Company IIIb for any payments owed to the applicable customer(s). As of June 30, 2018, the PPA IIIb project is operating at an average output of approximately 89% for the period ending June 30, 2018, an average output of approximately 88% for the three months ended June 30, 2018, and a lifetime average efficiency of approximately 53%. Our obligation to make payments for underperformance of the PPA IIIb project is capped at an aggregate total of approximately $2.7 million under the annual Output Guaranty, is uncapped under the quarterly Output Guaranty, and is capped at an aggregate total of approximately $1.0 million under the Efficiency Guarantees in the applicable offtake agreements. As of June 30, 2018, our aggregate remaining potential liability under these caps is approximately $2.6 million under the annual Output Guaranty and is approximately $1.0 million under the Efficiency Guarantees.
We have agreed to indemnify the Equity Investor in PPA IIIa HoldCo from any liability related to recapture of the ITC except to the extent such recapture results from (i) a transfer of the Equity Investor’s membership interest in the project, (ii) a change in the federal income tax classification of the Equity Investor or its owners, (iii) a change in federal income tax law or (iv) adverse findings regarding the tax classification of the project.
The Equity Investor has the option, exercisable for a 6-month period commencing January 1, 2022, to withdraw from PPA IIIa HoldCo by notice to us. Notwithstanding the allocations of cash available for distribution set forth above, in the event that the Equity Investor exercises this withdrawal option, the Equity Investor shall receive 99% of the cash available for distribution until it has received the fair market value of its Class A Membership Interests in PPA IIIa HoldCo at such time, but in any event no more than approximately $1.2 million.
PPA IV. 2014 ESA Project Company, LLC (PPA Company IV) is a wholly-owned subsidiary of 2014 ESA Holdco, LLC (PPA IV HoldCo), which is jointly-owned by us and an Equity Investor. As of June 30, 2018, we owned 100% of the Class B Membership Interests of PPA IV HoldCo, and the Equity Investor owned 100% of the Class A Membership Interests of PPA IV HoldCo. We (through our wholly-owned subsidiary Clean Technologies 2014, LLC), act as the managing member of PPA IV HoldCo.
The economic benefits of the PPA IV project are allocated between us and the Equity Investor as follows:
•Tax Items (including the ITC) are allocated 90% to the Equity Investor and 10% to us.
•Cash available for distribution is distributed 90% to the Equity Investor and 10% to us.
The PPA IV project includes (i) an Output Guaranty of 95% measured annually, (ii) an Output Guaranty of 80% measured quarterly, (iii) an Efficiency Warranty of 45% measured monthly, and (iv) an indemnity of any payments made by PPA Company IV regarding failure of the Energy Servers to perform in accordance with the applicable offtake agreements, which generally provide for an Efficiency Guaranty of 52% measured cumulatively over the life of the project. In the case of underperformance with respect to either Output Guaranty, we are obligated to make a payment to PPA Company IV. In the case of underperformance with respect to the Efficiency Warranty, we are obligated to repair or replace the applicable Energy Servers, and we are obligated to reimburse PPA Company IV for any payments owed to the applicable customer(s). The offtake agreements generally provide for an Efficiency Guaranty of 52% measured cumulatively over the life of the project. As of June 30, 2018, the PPA IV project is operating at an average output of approximately 90% for calendar year 2018, and a lifetime average efficiency of approximately 55%. Our obligation to make payments for underperformance of the PPA IV project is capped at an aggregate total of approximately $7.2 million under the annual Output Guaranty, is uncapped under the quarterly Output Guaranty, and is capped at approximately $3.6 million under the Efficiency Guarantees in the applicable offtake agreements. As of June 30, 2018, our aggregate remaining potential liability under these caps is approximately $6.7 million under the annual Output Guaranty, and approximately $3.6 million under the Efficiency Guarantees.
We have agreed to indemnify the Equity Investor in PPA IV HoldCo from any liability related to recapture of the ITC that results from a breach of our representations, warranties and covenants to the Equity Investor set forth in the transaction documents associated with the PPA IV project.
PPA V. 2015 ESA Project Company, LLC (PPA Company V) is a wholly-owned subsidiary of 2015 ESA HoldCo, LLC (PPA V HoldCo). PPA V HoldCo is jointly-owned by us and 2015 ESA Investco, LLC (PPA V InvestCo), which is itself a jointly-owned subsidiary of two Equity Investors. As of June 30, 2018, we owned 100% of the Class B Membership Interests of PPA V HoldCo, and PPA V InvestCo owned 100% of the Class A Membership Interests of PPA V HoldCo. We (through our wholly-owned subsidiary Clean Technologies 2015, LLC), act as the managing member of PPA V HoldCo.
The economic benefits of the PPA V project are allocated between us and PPA V InvestCo as follows:
•Tax Items (including the ITC) are allocated 90% to PPA V InvestCo and 10% to us.
•Cash available for distribution is distributed 90% to PPA V InvestCo and 10% to us.
The PPA V project includes (i) an Output Guaranty of 95% measured annually, (ii) an Output Guaranty of 80% measured quarterly, (iii) an Efficiency Warranty of 45% measured monthly, and (iv) an indemnity of any payments made by PPA Company V regarding failure of the Energy Servers to perform in accordance with the applicable offtake agreements, which generally provide for an Efficiency Guaranty of 52% measured cumulatively over the life of the project. In the case of underperformance with respect to either Output Guaranty, we are obligated to make a payment to PPA Company V. In the case of underperformance with respect to the Efficiency Warranty, we are obligated to repair or replace the applicable Energy Servers, and we are obligated to reimburse PPA Company V for any payments owed to the applicable customer(s). The offtake agreements generally provide for an Efficiency Guaranty of 52% measured cumulatively over the life of the project. As of June 30, 2018, the PPA V project is operating at an average output of approximately 92% for calendar year 2018, and a lifetime average efficiency of approximately 57%. Our obligation to make payments for underperformance of the PPA V project is capped at an aggregate total of approximately $13.9 million under the annual Output Guaranty, is uncapped under the quarterly Output Guaranty, and is capped at approximately $6.8 million under the Efficiency Guarantees in the applicable offtake agreements. As of June 30, 2018, our aggregate remaining potential liability under these caps is approximately $13.9 million under the annual Output Guaranty, and approximately $6.8 million under the Efficiency Guarantees.
We have agreed to indemnify the Equity Investor in PPA V HoldCo from any liability related to recapture of the ITC that results from a breach of our representations, warranties and covenants to the Equity Investor set forth in the transaction documents associated with the PPA V project.
We have also agreed to make certain payments to our Equity Investors in the event that the average time period between receipt of the deposit payment for an Energy Server and the date on which such Energy Server achieves commercial operations exceeds specified periods. During 2017, we issued a payment of $3.2 million for delay penalties to our Equity Investors that was recorded within general and administrative expenses in the consolidated statements of operations when the delay period occurred. We do not expect any delay penalties as of June 30, 2018. In addition, we have agreed to make certain partner related developer fee payments required to be made by us to the Equity Investor upon acceptance of Energy Servers sold through PPA Company V. The final payment for developer fee liabilities was made in 2017, and there are no liabilities recorded as of June 30, 2018.
Obligations to End-Customers
Our obligations to the end-customers in the Bloom Electrons projects are set forth in the offtake agreement between the PPA Entity and the end-customer. The offtake agreements share the following provisions:
Term; Early Termination: The offtake agreements provide for an initial term of 15 years, except that (i) the offtake agreements included in PPA I provide for an initial term of 10 years, and (ii) the offtake agreement for PPA II has a term of 21 years. The offtake agreements may be renewed by the mutual agreement of the end-customer and the applicable PPA Entity for additional periods at the expiration of the initial term. In the event that the end customer desires to terminate the offtake agreement before the end of the contract term, or in the event that the offtake agreement is terminated by the applicable PPA Entity due to customer default as defined in the offtake agreement, the end customer is required to pay a “termination value” payment as liquidated damages. This termination value payment is calculated to be sufficient to allow the PPA Entity to repay any debt associated with the affected Energy Servers, make distributions to the Equity Investor(s) in the project equal to their expected return on investment, pay for the removal of the Energy Servers from the project site, and cover any lost tax benefits incurred as a result of the termination (if any). In some cases, we may agree to reimburse the end-user for some or all of the termination value payments paid if we are able to successfully resell or redeploy the applicable Energy Servers following termination of the offtake agreement.
Energy Server Installation and Operation: The applicable PPA Entity is responsible for the installation, operation and maintenance of the Energy Servers. In performing such services, the PPA Entity is required to comply with all applicable laws and regulations, with the requirements of any permits obtained for the Energy Servers, with any requirements of the interconnection agreement entered into with the local electric utility regarding such Energy Servers, and with any requirements agreed with the applicable end-customer in the offtake agreement (such as site access procedures, black-out periods regarding routine maintenance, etc.).
Take-Or-Pay Purchase Obligation: The end-customer is required to purchase all of the electricity generated by the Energy Servers for the duration of the offtake agreement. We perform an initial credit evaluation of our customer’s ability to pay under the PPA arrangements. Subsequently, on an at least annual basis, we re-evaluate and confirm the credit worthiness of our customers. Under our existing Power Purchase Agreement Programs, there are four customers that represent more than 10% of the total assets of our PPA Entities. The four customers include Delmarva, Home Depot, AT&T and Walmart. In the event that an end-customer is unwilling or unable to accept delivery of such electricity or fails to supply the necessary fuel to the
Energy Servers (if applicable), the end-customer is required to make a payment to the PPA Entity for the amount of electricity that would have been delivered had the Energy Servers continued to operate.
Fuel Supply Obligation: In PPA I, fuel supply obligations are either the obligation of the PPA Entity or the end-customer, on a case-by-case basis. In PPA II, the PPA entity is responsible for providing all required fuel to the Energy Servers and is reimbursed pursuant to the Delmarva Tariff so long as the Energy Servers maintain a specified operational efficiency. In the PPA IIIa, PPA IIIb, PPA IV and PPA V projects, the end-customers are required to provide all necessary fuel for the operation of the Energy Servers.
Ownership of Energy Servers: The applicable PPA Entity retains title to the Energy Servers at all times unless the end-customer elects to purchase the Energy Server(s).
Financial Incentives and Environmental Attributes: As the owner of the Energy Servers, the PPA Entity retains ownership of any tax benefits associated with the installation and operation of the Energy Servers. Additional financial incentives available in connection with the offtake agreements (such as payments under state incentive programs or renewable portfolio standard programs) and any environmental benefits associated with the Energy Servers (such as carbon emissions reductions credits) are allocated to either the PPA Entity or the end-customer on a case-by-case basis. In some circumstances, the PPA Entity has also agreed to purchase and deliver to the end-customer renewable energy credits in connection with the offtake agreement.
Efficiency Commitments: Where the end-customer is responsible for delivering fuel to the Energy Servers, the offtake agreement includes Energy Server efficiency commitments. Generally, these consist of (i) an “Efficiency Warranty”, where the PPA Entity is obligated to repair or replace Energy Servers that fail to operate at or above a specified level of efficiency during any calendar month, and/or (ii) an “Efficiency Guaranty”, where the PPA Entity is obligated to make payments to the end-customer to cover the cost of procuring excess fuel if the Energy Servers fail to operate at or above a specified level of efficiency on a cumulative basis during the term of the offtake agreement. Where an Efficiency Guaranty is provided, the PPA Entity’s aggregate liability for payments is capped. In certain circumstances, we may negotiate modifications to the efficiency commitments with the end-customer, including different efficiency thresholds or providing for monetary payments under the Efficiency Warranty in lieu of or in addition to our obligation to repair or replace underperforming Energy Servers.
Output Commitments: Although our standard Bloom Electrons offering does not include a minimum output commitment to the end-user, exceptions may be negotiated on a case-by-case basis if we believe the opportunity justifies such exception. These output commitments are at an output level lesser than or equal to the level warranted by us to the PPA Entity under the O&M Agreement, and provide either for a payment to the end-customer for the shortfall in electricity produced or for an end-customer termination right. In addition, where the end-user (as opposed to the PPA Entity) is entitled to the benefits of an incentive program that requires a minimum output level, the PPA Entity may agree to reimburse the end-customer for any decrease in incentive payments resulting from the Energy Servers’ failure to operate at such minimum output level.
Defaults; Remedies: Defaults under the offtake agreements are typically limited to (i) bankruptcy events, (ii) unexcused failure to perform material obligations, and (iii) breaches of representations and warranties. Additional defaults may be negotiated on a case-by-case basis with end-customers. The partieseach customer, but are generally afforded cure periods ofexpected to provide the customer with the option to receive services for at least 30 days10 years, and for up to cure any such defaults.the life of the Energy Servers.
SK E&C Joint Venture Agreement. In September 2019, we entered into a joint venture agreement with SK E&C to establish a light-assembly facility in the eventRepublic of an uncured defaultKorea for sales of certain portions of our Energy Server for the stationary utility and commercial and industrial market in the Republic of Korea. The joint venture is majority controlled and managed by us. We expect the facility to be operational by mid-2020 subject to the completion of certain conditions precedent to the establishment of the joint venture company. Other than a nominal initial capital contribution by Bloom, the joint venture will be funded by SK E&C. SK E&C, who currently acts as a distributor for our Energy Servers for the stationary utility and commercial and industrial market in the Republic of Korea, will be the primary customer for the products assembled by the PPA Entity,joint venture.
Community Distributed Generation Programs
In July 2015, the end-customer may terminatestate of New York introduced its Community Distributed Generation program, which extends New York’s net metering program in order to allow utility customers to receive net metering credits for electricity generated by distributed generation assets located on the offtake agreement either in whole or in part asutility’s grid but not physically connected to the customer’s facility. This program allows for the use of multiple generation technologies, including fuel cells.
In December 2019, we entered into fuel cell sales, installation, operations and maintenance agreements with two developers for the deployment of fuel cells pursuant to this Community Distributed Generation program. These agreements have many of the same terms and conditions as a direct sale. Payment of the purchase price is generally broken down into multiple installments, which may include payments prior to shipment, upon shipment or delivery of the Energy Server(s) affected by such default,Server, and may seek other remedies affordedupon acceptance of the Energy Server. Acceptance typically occurs when the Energy Server is installed and running at lawfull power as defined in each contract. A one-year service warranty is provided with the initial sale. After the expiration of the initial standard one-year warranty, the owner has the option to renew our operations and maintenance services for subsequent quarterly or in equity. In the event of an uncured default by the end-customer, the PPA Entity may terminate the offtake agreement either in whole or in part asannual periods for up to 30 years. We provide warranties and guaranties regarding both efficiency and output to the owners of the Energy Server(s) affected by such default, and may seek other remedies afforded at law or in equity; in addition, in the event an offtake agreement is terminated due to an end-customer default, the end-customer is obligated to make a termination value paymentServers pursuant to the PPA Entity.operations and maintenance services agreement with the Operating Company.
For further information about our PPA entities, see Note 12 - Power Purchase Agreement Programs, to our consolidated financial statements includedAs of June 30, 2020, we had not yet completed the sale of any Energy Servers in this Quarterly Report on Form 10-Q.connection with the New York Community Distributed Generation program.
Key Operating Metrics
In addition to the measures presented in the condensed consolidated financial statements, we use the following key operating metrics to evaluate business activity, to measure performance, to develop financial forecasts and to make strategic decisions:
•Product accepted - the number of customer acceptances of our Energy Servers in any period. We recognize revenue when an acceptance is achieved. We use this metric to measure the volume of deployment activity. We measure each Energy Server manufactured, shipped and accepted in terms of 100 kilowatt equivalents.
Megawatts deployed - the aggregate megawatt capacity of operating Energy Servers in the field that have achieved acceptance. We use this metric to measure the total electricity-generating capacity of deployed Energy Servers, measured in megawatts.
•Billings for product accepted in the period - the total contracted dollar amount of the product component of all Energy Servers that are accepted in a period. We use this metric to gauge the dollar value of the product acceptances and to evaluate the change in dollar amount of acceptances between periods.
•Billings for installation on product accepted in the period - the total contracted dollar amount billable with respect to the installation component of all Energy Servers that are accepted. We use this metric to gauge the dollar value of the installations of our product acceptances and to evaluate the change in dollar value associated with the installation of our product acceptances between periods.
•Billings for annual maintenance service agreements - the dollar amount billable for one-year service contracts that have been initiated or renewed.
We use this metric to measure the cumulative billings for all service contracts in any given period. As our installation base grows, we expect our billings for annual maintenance service agreements to grow, as well.•Product costs of product accepted in the period (per kilowatt) - the average unit product cost for the Energy Servers that are accepted in a period. We use this metric to provide insight into the trajectory of product costs and, in particular, the effectiveness of cost reduction activities.
•Period costs of manufacturing expenses not included in product costs - the manufacturing and related operating costs that are incurred to procure parts and manufacture Energy Servers that are not included as part of product costs.
We use this metric to measure any costs incurred to run our manufacturing operations that are not capitalized (i.e., absorbed, such as stock-based compensation) into inventory and therefore, expensed to our condensed consolidated statement of operations in the period that they are incurred.•Installation costs on product accepted (per kilowatt) - the average unit installation cost for Energy Servers that are accepted in a given period. This metric is used to provide insight into the trajectory of install costs and, in particular, to evaluate whether our installation costs are in line with our installation billings.
Key Operating Metrics -Comparison of the Three and Six Months Ended June 30, 2020 and 2019
|
| | | | | | | | | | | | |
| | | Three Months Ended
June 30, | | Change |
| | | 2018 | | 2017 | | Amount | | % |
| | | | | | | |
Product accepted during the period (in 100 kilowatt systems) | | 181 |
| | 162 |
| | 19 |
| | 11.7 | % |
| Megawatts deployed as of period end | | 328 | MW | | 263 | MW | | 65 | MW | | 24.7 | % |
The product acceptances in the periods were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended
June 30, | | | | Change | | | | Six Months Ended
June 30, | | | | Change | | |
| | | 2020 | | 2019 | | Amount | | % | | 2020 | | 2019 | | Amount | | % |
| | | | | | | | | | | | | | | | | |
Product accepted during the period
(in 100 kilowatt systems) | | 306 | | | 271 | | | 35 | | | 12.9 | % | | 562 | | | 506 | | | 56 | | | 11.1 | % |
Product accepted increased by approximately 1935 systems and 56 systems, or 11.7%12.9% and 11.1%, for the three and six months ended June 30, 2020 compared to the three and six months ended June 30, 2019, respectively. Acceptance volume increased as demand increased for our Energy Servers.
As discussed in the Purchase and Lease Options section above, our customers have several purchase options for our Energy Servers. The portion of acceptances attributable to each purchase option in the three and six months ended June 30, 2020 and 2019 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended
June 30, | | | | Six Months Ended
June 30, | | | | |
| | | 2020 | | 2019 | | 2020 | | 2019 | | |
| | | | | | | | | | | |
| Direct Purchase (including Third Party PPAs and International Channels) | | 100 | % | | 93 | % | | 99 | % | | 94 | % | | |
| Traditional Lease | | — | % | | 1 | % | | — | % | | — | % | | |
| Managed Services | | — | % | | 6 | % | | 1 | % | | 6 | % | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | 100 | % | | 100 | % | | 100 | % | | 100 | % | | |
As discussed in the Purchase and Lease Options section above, our customers have several purchase options for our Energy Servers. The portion of total revenue attributable to each purchase option in the period was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended
June 30, | | | | Six Months Ended
June 30, | | |
| | | 2020 | | 2019 | | 2020 | | 2019 |
| | | | | | | | | |
| Direct Purchase (including Third Party PPAs and International Channels) | | 88 | % | | 84 | % | | 87 | % | | 83 | % |
| Traditional Lease | | 1 | % | | 1 | % | | 1 | % | | 1 | % |
| Managed Services | | 5 | % | | 5 | % | | 6 | % | | 5 | % |
| | | | | | | | |
| Bloom Electrons | | 6 | % | | 10 | % | | 6 | % | | 11 | % |
| | 100 | % | | 100 | % | | 100 | % | | 100 | % |
Billings Related to Our Products
Total billings attributable to each revenue classification for the three and six months ended June 30, 2020 and 2019 was as follows (in thousands, except percentages):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended
June 30, | | | | Change | | | | Six Months Ended
June 30, | | | | Change | | |
| | | 2020 | | 2019 | | Amount | | % | | 2020 | | 2019 | | Amount | | % |
| | | | | | | | | | | | | | | | |
| Billings for product accepted in the period | | $ | 117,483 | | | $ | 165,081 | | | $ | (47,598) | | | (28.8) | % | | $ | 229,254 | | | $ | 271,810 | | | $ | (42,556) | | | (15.7) | % |
| Billings for installation on product accepted in the period | | 27,841 | | | 13,169 | | | 14,672 | | | 111.4 | % | | 42,452 | | | 27,632 | | | 14,820 | | | 53.6 | % |
| Billings for annual maintenance services agreements | | 18,915 | | | 15,158 | | | 3,757 | | | 24.8 | % | | 39,134 | | | 32,778 | | | 6,356 | | | 19.4 | % |
Billings for product accepted decreased by approximately $47.6 million, or 28.8%, for the three months ended June 30, 2018,2020, as compared to the three months ended June 30, 2017. Acceptance volume2019. The decrease is primarily due to a higher average selling price mix in the three months ended June 30, 2019, driven mainly by the PPA II upgrade that occurred in the three months ended June 30, 2019. Billings for installation on product accepted increased as we installed more systems from backlog.
Megawatts deployed increased approximately 65 megawatts, or 24.7%,$14.7 million for the three months ended June 30, 2018,2020, as compared to the three months ended June 30, 2017. Acceptances achieved from June 30, 2017 to June 30, 2018 were added to our installed base and therefore increased our megawatts deployed from 263 megawatts to 328 megawatts, respectively.
|
| | | | | | | | | | | |
| | | Three Months Ended
June 30, | | Change |
| | | 2018 | | 2017 | | Amount | | % |
| | | (dollars in thousands) |
| | | |
| Billings for product accepted in the period | | $107,554 | | $64,475 | | $43,079 | | 66.8 | % |
| Billings for installation on product accepted in the period | | $25,802 | | $25,803 | |
| ($1 | ) | | — | % |
| Billings for annual maintenance service agreements | | $19,160 | | $18,181 | | $979 | | 5.4 | % |
Billings for2019. Although product accepted increased approximately $43.1 million, or 66.8%, for the three months ended June 30, 2018, compared to the three months ended June 30, 2017. The increase was primarily due to three factors.
First, product accepted increased approximately 19 systems, or 11.7%, for the three months ended June 30, 2018, compared to the three months ended June 30, 2017.
Second, ITC was reinstated on February 9, 2018. ITC was not available to the fuel cell industry in 2017, so our billings for product accepted in 2017 did not include the benefit of ITC. Due to the reinstatement of ITC in 2018, billings for product accepted now includes the benefit of ITC. For the three months ended June 30, 2018, billings for product accepted included $26.4 million of benefit from ITC.
Third, the adoption of customer personalized applications such as batteries and grid-independent solutions increasedacceptances in the three months ended June 30, 2018 compared to the three months ended June 30, 2017. Products that incorporate these personalized applications have, on average, a higher billings rate than our standard platform products that do not incorporate these personalized applications.
Billings for installation on product accepted remains relatively unchanged for the three months ended June 30, 2018period increased 12.9%, compared to the three months ended June 30, 2017. Despite an 11.7% increase in product acceptances, billings for installation on product accepted remains unchangedincreased 111.4% due to the mix in installation billings driven by site complexity, site size, personalized applications, and customer purchase option.
When we analyze changes betweenoption to complete the three months ended June 30, 2018 and 2017, we take into account the impactinstallation of the ITC that was available in 2018 as a result of the reinstatement of the ITC. The effect of the reinstatement of ITC was higher billings in the periods eligibleour Energy Servers themselves. Billings for ITC. ITC was extended through December 2021. For the three months ended June 30, 2018, the combined total billings for product and installation accepted was $133.3annual maintenance service agreements increased $3.8 million, an increase of 47.7% from the billings for product and installation accepted combined of $90.3 millionor 24.8%, for the three months ended June 30, 2017. The increase was significantly greater than the 11.7% increase in associated acceptances during the same periods due to the reinstatement of the ITC in 2018.
Billings for annual maintenance service agreements increased approximately $1.0 million, or 5.4%, for the three months ended June 30, 2018, compared to the three months ended June 30, 2017. This increase was driven by the billing for new maintenance contract renewals for a greater number of megawatts deployed.
|
| | | | | | | | | | | |
| | | Three Months Ended
June 30, | | Change |
| | | 2018 | | 2017 | | Amount | | % |
| | | | | | | |
| Product costs of product accepted in the period | | $3,485/kW | | $3,121/kW | | $364/kW | | 11.7 | % |
| Period costs of manufacturing related expenses not included in product costs (in thousands) | | $3,018 | | $8,713 | |
| ($5,695 | ) | | (65.4 | )% |
| Installation costs on product accepted in the period | | $1,967/kW | | $1,306/kW | | $661/kW | | 50.6 | % |
Product costs of product accepted increased approximately $364 per kilowatt, or 11.7%, for the three months ended June 30, 2018, compared to the three months ended June 30, 2017. This increase in cost is primarily due to the increased adoption of customer personalized applications for the three months ended June 30, 2018. These customer personalized applications have a higher product cost on a per unit basis.
Period costs of manufacturing related expenses decreased approximately $5.7 million, or 65.4%, for the three months ended June 30, 2018, compared to the three months ended June 30, 2017. Our period costs of manufacturing related expenses decreased primarily due to higher absorption of fixed manufacturing costs due to higher factory utilization.
Installation costs on product accepted increased approximately $661 per kilowatt, or 50.6%, for the three months ended June 30, 2018,2020, as compared to the three months ended June 30, 2017.2019. This increase was driven primarily by the increase in cost is primarily due to the increased adoption of customer personalized applications for the three months ended June 30, 2018 as mentioned above. These customer personalized applications also have a higher install cost on a per unit basis.
Key Operating Metrics - Six Months Ended June 30our installed base.
|
| | | | | | | | | | | | |
| | | Six Months Ended
June 30, | | Change |
| | | 2018 | | 2017 | | Amount | | % |
| | | | | | | |
Product accepted during the period (in 100 kilowatt systems) | | 347 |
| | 281 |
| | 66 |
| | 23.5 | % |
| Megawatts deployed as of period end | | 328 | MW | | 263 | MW | | 65 | MW | | 24.7 | % |
ProductBillings for product accepted increaseddecreased by approximately 66 systems,$42.6 million, or 23.5%15.7%, for the six months ended June 30, 2018, compared to the six months ended June 30, 2017. Acceptance volume increased as we installed more systems from backlog.
Megawatts deployed increased approximately 65 megawatts, or 24.7%, for the six months ended June 30, 2018, compared to the six months ended June 30, 2017. Acceptances achieved from June 30, 2017 to June 30, 2018 were added to our installed base and therefore increased our megawatts deployed from 263 megawatts to 328 megawatts, respectively.
|
| | | | | | | | | | | |
| | | Six Months Ended
June 30, | | Change |
| | | 2018 | | 2017 | | Amount | | % |
| | | (dollars in thousands) |
| | | |
| Billings for product accepted in the period | | $228,697 | | $112,579 | |
| $116,118 |
| | 103.1 | % |
| Billings for installation on product accepted in the period | | $37,698 | | $48,830 | |
| ($11,132 | ) | | (22.8 | )% |
| Billings for annual maintenance services agreements | | $33,282 | | $33,063 | |
| $219 |
| | 0.7 | % |
Billings for product accepted increased approximately $116 million, or 103.1%, for the six months ended June 30, 2018, compared to the six months ended June 30, 2017. The increase was primarily due to three factors.
First, product accepted increased approximately 66 systems, or 23.5%, for the six months ended June 30, 2018, compared to the six months ended June 30, 2017.
Second, ITC was reinstated on February 9, 2018. ITC was not available to the fuel cell industry in 2017, so our billings for product accepted in 2017 did not include the benefit of ITC. Due to the reinstatement of ITC in 2018, billings for product accepted now includes the benefit of ITC. For the six months ended June 30, 2018, billings for product accepted includes $86.0 million in benefits from ITC, of which $45.1 million was retroactive ITC for 2017 acceptances.
Third, the adoption of customer personalized applications such as batteries and grid-independent solutions increased in the six months ended June 30, 2018 compared to the six months ended June 30, 2017. Products that incorporate these personalized applications have, on average, a higher billings rate than our standard platform products that do not incorporate these personalized applications.
Billings for installation on product accepted decreased by $11.1 million for the six months ended June 30, 2018,2020, as compared to the six months ended June 30, 2017. Despite2019. The decrease is primarily due to a 23.5% increasehigher average selling price mix in the six months ended June 30, 2019, driven mainly by the PPA II upgrade that occurred in the six months ended June 30, 2019. Billings for installation on product accepted increased $14.8 million for the six months ended June 30, 2020, as compared to the six months ended June 30, 2019. Although product acceptances in the period increased 11.1%, billings for installation on product accepted decreasedincreased 53.6% due to the mix in installation billings driven by site complexity, site size, personalized applications, and customer purchase option and one large customer in particular in the six months ended June 30, 2018 whereto complete the installation was performed by the customer, therefore, we did not have any installation billingof our Energy Servers themselves. Billings for that customer.
When we analyze changes between the six months ended June 30, 2018 and 2017, we take into account the impact of ITC that was available in 2018 as a result of the reinstatement of the ITC. The effect of the reinstatement of ITC was higher billings in the periods eligible for ITC. ITC was extended through December 2021. For the six months ended June 30, 2018, the combined total for billings for product and installation accepted was $266.4annual maintenance service agreements increased $6.4 million, an increase of 65.0% from the billings for product and installation accepted combined of $161.4 millionor 19.4%, for the six months ended June 30, 2017. The increase was significantly greater than the 23.5% increase in associated acceptances during the same periods due to the reinstatement of the ITC in 2018.
Billings for annual maintenance service agreements remained substantially the same for the six months ended June 30, 2018,2020, as compared to the six months ended June 30, 2017.2019. This increase was driven primarily by the increase in our installed base.
Costs Related to Our Products
Total product related costs for the three and six months ended June 30, 2020 and 2019 was as follows: | | | | | Six Months Ended
June 30, | | Change | | | Three Months Ended
June 30, | | | Change | | | Six Months Ended
June 30, | | | Change | |
| | | 2018 | | 2017 | | Amount | | % | | 2020 | | 2019 | | Amount | | % | | 2020 | | 2019 | | Amount | | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Product costs of product accepted in the period | | $3,662/kW | | $3,493/kW | | $169/kW | | 4.8 | % | Product costs of product accepted in the period | | $2,409 /kW | | $3,045 /kW | | $(636) /kW | | (20.9) | % | | $2,456 /kW | | $3,120 /kW | | $(664) /kW | | (21.3) | % |
| Period costs of manufacturing related expenses not included in product costs (in thousands) | | $13,803 | | $16,110 | | ($2,307) | | (14.3)% |
| Period costs of manufacturing related expenses not included in product costs (in thousands) | | $ | 4,913 | | | $ | 3,321 | | | $ | 1,592 | | | 47.9 | % | | $ | 11,267 | | | $ | 10,258 | | | $ | 1,009 | | | 9.8 | % |
| Installation costs on product accepted in the period | | $1,276/kW | | $1,589/kW | | $(313)/kW | | (19.7)% |
| Installation costs on product accepted in the period | | $1,200 /kW | | $627 /kW | | $573 /kW | | 91.4 | % | | $1,011/kW | | $650/kW | | $361/kW | | 55.5 | % |
Product costs of product accepted increaseddecreased by approximately $169$636 per kilowatt, or 4.8%20.9%, for the three months ended June 30, 2020, as compared to the three months ended June 30, 2019. The product cost reduction was driven generally by our ongoing cost reduction efforts to reduce material costs in conjunction with our suppliers and our reduction in labor and overhead costs through improved processes and automation at our manufacturing facilities.
Product costs of product accepted decreased by approximately $664 per kilowatt, or 21.3%, for the six months ended June 30, 2018,2020, as compared to the six months ended June 30, 2017. This increase in cost is primarily due to the increased adoption of customer personalized applications for the six months ended June 30, 2018. These customer personalized applications have a higher2019. The product cost on a per unit basis. A one-time impact of $271 per kilowattreduction was also includeddriven generally by our ongoing cost reduction efforts to reduce material costs in the product cost of product accepted for the six months ended June 30, 2018 which was associatedconjunction with supplier agreements that required us to forego previously negotiated discounts if ITC was renewed.our suppliers and our reduction in labor and overhead costs through improved processes and automation at our manufacturing facilities.
Period costs of manufacturing related expenses decreasedincreased by approximately $2,307,$1.6 million, or 14.3%47.9%, for the three months ended June 30, 2020, as compared to the three months ended June 30, 2019. This increase was driven primarily by additional one-time expenses incurred due to COVID-19.
Period costs of manufacturing related expenses increased by approximately $1.0 million, or 9.8%, for the six months ended June 30, 2018,2020, as compared to the six months ended June 30, 2017. Our period costs of manufacturing related2019. This increase was driven primarily by additional one-time expenses decreased primarilyincurred due to higher absorption of fixed manufacturing costs due to higher factory utilization.COVID-19.
Installation costs on product accepted decreasedincreased by approximately $313$573 per kilowatt, or 19.7%91.4%, for the three months ended June 30, 2020, as compared to the three months ended June 30, 2019. Each customer site is different and installation costs can vary due to a number of factors, including site complexity, size, location of gas, personalized applications, and customer option to complete the installation of our Energy Servers themselves. As such, installation on a per kilowatt basis can vary significantly from period-to-period.
Installation costs on product accepted increased by approximately $361 per kilowatt, or 55.5%, for the six months ended June 30, 2018,2020, as compared to the six months ended June 30, 2017. This decrease in cost2019. Each customer site is primarilydifferent and installation costs can vary due to the change in mixa number of factors, including site complexity, size, location of gas, personalized applications, and customer purchase option and one large customer in particular in the six months ended June 30, 2018 whereto complete the installation was performed by the customer, therefore, we did not have anyof our Energy Servers themselves. As such, installation cost for that customer. This decrease in cost was partially offset by higher installation cost driven by increased adoption of customer personalized applications for the six months ended June 30, 2018 as mentioned above. These customer personalized applications also have a higher install cost on a per unit basis.kilowatt basis can vary significantly from period-to-period.
Liquidity and Capital Resources
We have implemented measures to preserve cash and enhance liquidity, including suspending salary increases and bonuses, instituting a company-wide hiring freeze, eliminating business travel, reducing capital expenditures, and delaying or eliminating discretionary spending. We are also focused on managing our working capital needs, maintaining as much flexibility as possible around timing of taking and paying for inventory and manufacturing our product while managing potential changes or delays in installations.
In March 2020, we extended the terms of the 10% Convertible Notes and the 10% Constellation Note to December 2021. Since then, the 10% Constellation Note was converted into equity and the potential liabilities associated with the 10% Constellation Notes have been extinguished. This relieves some pressure on our liquidity position in the near term. While we will likely need to access the capital markets to raise sufficient capital to redeem the 10% Convertible Notes, we do not expect that it will be necessary to access capital markets for cash to operate our business for the next 12 months, unless the impact of COVID-19 to our business and financial position is more extensive than expected. Capital markets have been volatile and there is no assurance that we would have access to capital markets at a reasonable cost, or at all, at times when capital is needed. In addition, our existing debt has restrictive covenants that limit our ability to raise new debt or to sell assets, which would limit our ability to access liquidity by those means without obtaining consent from existing noteholders. The redemption penalty on our 10% Convertible Notes starting in October 2020 could also adversely affect our financial position if we are unable to access capital markets to refinance them on reasonable terms. Refer to Note 7, Outstanding Loans and Security Agreements; Management’s Discussion and Analysis of Financial Condition and Results of Operations, Liquidity and Capital Resources; and Risk Factors – Risks Relating to Our Liquidity – Our substantial indebtedness, and restrictions imposed by the agreements governing our and our PPA Entities’ outstanding indebtedness, may limit our financial and operating activities and may adversely affect our ability to incur additional debt to fund future needs, and We may not be able to generate sufficient cash to meet our debt service obligations, for more information regarding the terms of and risks associated with our debt.
RevenueOperations and maintenance cash flows for certain PPAs, direct purchases and leases are pledged to the 10% Senior Secured Notes and 10.25% Senior Secured Notes. If there is delay in payment from customers, or if a customer does not renew a contract with us that we expect to be renewed, our ability to service existing debt would be adversely affected, which could trigger a default if non-payment extends beyond the grace period. Even if we are able to sustain debt service payments, if we do not meet certain minimum debt service coverage ratio levels specified in our debt agreements, excess cash after the debt has been serviced could not be released to support our operations and would negatively affect our liquidity position.
Sales
In some markets, we have experienced an increase in time to obtain new business as our customers deal with the impact of the COVID-19 pandemic. Decision makers in organizations such as education and entertainment have shifted their focus to the immediate needs of the pandemic, thus delaying their purchase decisions and capital outlays. While there may ultimately be a reduction in electricity needs due to decrease in economic activity, the current impact generally equates to a longer transaction cycle.
Our ability to continue to expand our business both domestically and internationally and develop customer relationships also has been negatively impacted by current travel restrictions. Our marketing efforts historically have often involved customer visits to our manufacturing centers in California or Delaware, which we have suspended.
On the other hand, a significant portion of our customers are hospitals, healthcare companies, retailers and data centers. These industries are composed of essential businesses that still need the resiliency and reliability offered by our products. We have seen an increase in demand for our products in these sectors where the COVID-19 pandemic has highlighted the benefits of always-on, on-site power in times of disaster and uncertainty. In addition, the pandemic has had no significant effect on our business in the Republic of Korea.
We primarilyhave also had some unique opportunities to deploy our systems on an emergency basis to support temporary hospitals. We believe deploying clean electrical power with no oxides of nitrogen (NOx) or sulfur (SOx) emissions, especially as atmospheric pollutants, is important for facilities preparing to treat a respiratory disease like COVID-19. As a result of this opportunity to introduce our products to more healthcare providers, demand for our products at some permanent hospitals has also increased.
Customer Financing
COVID-19 has not yet had any significant impact on our ability to obtain financing for our customers’ use of our products, but we are finding it more difficult to find financiers who are able to monetize tax credit. A majority of the installations we have planned in the United States in 2020 have obtained financing. However, we have actively been working with new sources of capital that could finance projects for our 2021 installations. We believe the current environment may increase the time to solidify new relationships, and thus negatively impact the time required to achieve funding. In addition, our ability to obtain financing for our Energy Servers partly depends on the creditworthiness of our customers. Some of our customers’ credit ratings have recently fallen, which may make it difficult for us to obtain financing for their use of an Energy Server. Our recent experience has been that financing parties have capital to deploy and are interested in financing our Energy Servers and, at present, cash flow and results of operations including revenue have not been impacted by our inability to obtain financing for customer installations.
Installations of Energy Servers
The COVID-19 pandemic has caused delays that affected nearly all of our installations with varying degrees of severity. Since we do not recognize revenue on the sales of our products until installation and acceptance, installation delays have a negative impact on our results of operations including revenue. Since we generally earn cash as we progress through the installation process, delays to installation activity also adversely affects our cash flows.
While our installation activity has been deemed “essential business” and allowed to proceed in many jurisdictions, the essential business designations for our activities (and those of our suppliers and other third party organizations that are critical to our success) has been inconsistent from region to region and across the various third parties upon whom we are critically dependent to complete our installations. As an example, in New York City, one of our installations was deemed essential while the other was not deemed essential and the utilities on whom we rely for water, gas and electric inter-connections were also not uniformly affected. This resulted in all of the projects in New York City being adversely affected to some extent. As another example, while the State of Massachusetts designated construction as an essential business, some local authorities in Massachusetts did not apply the same designation, resulting in delays and additional compliance costs.
In addition, we have experienced delays and interruptions to our installations where customers have shut down or otherwise limited access to their facilities.
Some of our backlog can only be deployed when the customer brings on sufficient load for our systems. Facility closings and diminished economic activity delay that load coming online, leading customers to postpone the completion of installations.
We use general contractors and sub-contractors, and need supplies of various types of ancillary equipment, for our installations. Some of our suppliers have had COVID-19 outbreaks among their workforces, which have caused installation delays. In addition, the availability and productivity of contractors, sub-contractors, and suppliers has generally been negatively impacted by social distancing requirements and other safety measures.
Nearly all of our installations completed in the quarter ended June 30, 2020 were impacted by COVID-19 to some extent and some installations were unable to achieve acceptance in light of the delays which impacted our cash flows and results of operation including revenue for the quarter ended June 30, 2020. As examples, our pre-contract installation planning activity was affected by access to potential customer sites, our permitting activity was affected in virtually all jurisdictions by delays in the permitting process as various cities and municipalities shut down or implemented limited services in response to COVID-19, and our utility related work was impacted as our gas and electric utility suppliers facing challenges brought on by COVID-19. We expect disruptions like those noted above to continue with the current COVID-19 restrictions.
Supply Chain
We have experienced COVID-19 related delays from certain vendors and suppliers, however, we have been able to find and qualify alternative suppliers and our production to date has not been impacted. At present, our supply chain has stabilized; however, if spikes in COVID-19 occur in regions in which our supply chain operates we could experience a delay in materials which could in turn impact production and installations and our cash flow and results of operations including revenue.
Manufacturing
As an essential business, we have continued to manufacture Energy Servers, but have adopted strict measures to keep our employees safe. These measures have decreased productivity to an extent, but our deployments, maintenance and installations have not yet been constrained by our current pace of manufacturing. As described above, we have established protocols to minimize the risk of COVID-19 transmission within our manufacturing facilities and follow all CDC guidelines when notified of possible exposures. We also are now instituting testing of anyone who comes into any of our facilities. Even with these
precautions, it is possible an asymptomatic individual could enter our facilities and transmit the virus to others. We have had a couple positive tests and in such cases, we have followed CDC Guidelines.To date, it has not impacted our production.
If we become aware of any cases of COVID-19 among any of our employees, we notify those with whom the person is known to have been in contact, send the exposed employees home for at least 14 days and require each employee to be tested negative before returning to work. Certain roles within our facilities involve greater mobility throughout our facilities and potential exposure to more employees. In the event one of such employees suffers from COVID-19, or if we otherwise believe that a significant number of employees have been exposed and sent home, particularly in our manufacturing facilities, our production could be significantly impacted. Furthermore, since our manufacturing process requires tasks performed at both our California facility and Delaware facility, significant exposure at either facility would have a substantial impact on our overall production, and could adversely affect our cash flow and results of operations including revenue.
Purchase and Lease Options
Initially, we only offered our Energy Servers on a direct purchase basis, in which the customer purchases the product directly from us. In order to expand our offerings to customers who lack the financial capability to purchase our Energy Servers directly (including customers who are unable to monetize the tax credits available to purchasers of our Energy Servers) and/or who prefer to lease the product or contract for our services on a pay-as-you-go model, we subsequently developed the traditional lease ("Traditional Lease"), Managed Services, and power purchase agreement ("PPA") programs ("PPA Programs").
Our capacity to offer our Energy Servers through any of these financed arrangements depends in large part on the ability of the financing party or parties involved to monetize the related investment tax credits, accelerated tax depreciation and other incentives. Interest rate fluctuations may also impact the attractiveness of any financing offerings for our customers, and currency exchange fluctuations may also impact the attractiveness of international offerings. The Traditional Lease, Managed Services and PPA Program options are limited by the creditworthiness of the customer. Additionally, the Managed Services and Traditional Lease options, as with all leases, are also limited by the customer’s willingness to commit to making fixed payments regardless of the performance of the Energy Servers or our performance of our obligations under the customer agreement.
In each of our purchase options, we typically perform the functions of a project developer, including identifying end customers and financiers, leading the negotiations of the customer agreements and financing agreements, securing all necessary permitting and interconnections approvals, and overseeing the design and construction of the project up to and including commissioning the Energy Servers.
Under each purchase option, we provide warranties and performance guaranties regarding our Energy Servers’ efficiency and output. We refer to a “warranty” as a commitment where the failure of the Energy Servers to satisfy the stated performance level obligates us to repair or replace the Energy Servers as necessary to improve performance. If we fail to complete such repair or replacement, or if repair or replacement is impossible, we may be obligated to repurchase the Energy Servers from the customer or financier. We refer to a “guaranty” as a commitment where the failure of the Energy Servers to satisfy the stated performance level obligates us to make a payment to compensate the beneficiary of such guaranty for the resulting increased cost or diminution in benefits resulting from such failure. Our obligation to make payments under the guaranty is always contractually capped and represents a contingency linked to our services obligation with no economic incentive for us to default and force an exercise of the payment obligation.
Under direct purchase and Traditional Lease, the warranties and guaranties are typically included in the price of our Energy Server for the first year. The warranties and guaranties may be renewed annually at the customer’s option, as an operations and maintenance services agreement, at predetermined prices for a period of up to 30 years. Historically, our customers and financiers have almost always exercised their option to renew the warranties and guaranties under these operations and maintenance services agreements.
Under the Managed Services Program, the warranties and guaranties are included for the fixed period specified in the customer agreement. This period is typically 10 years, which may be extended at the option of the parties for additional years.
Under the PPA Programs, we typically provide warranties and guaranties regarding our Energy Servers’ efficiency to the customer (i.e., the end user of the electricity generated by our Energy Servers, who is also responsible for the purchase of the fuel required for our Energy Servers’ operations), and we provide warranties and guaranties regarding our Energy Servers’ output to the financier(s) that purchases our Energy Servers. The warranties and guaranties are typically included in the price of our Energy Server for the first year and may be renewed annually at the financier’s option, as an operations and maintenance services agreement, at predetermined prices for a period of up to 30 years. Historically, our financiers have almost always exercised their option to renew the warranties and guaranties under these operations and maintenance services agreements. We
also provide a fixed schedule of prices for each year of the term of our agreements with our customers and none of our customers have failed to renew our operations and maintenance agreements.
The substantial majority of bookings made in recent periods are pursuant to the PPA and the Managed Services Programs.
Each of our financing structures is described in further detail below.
Traditional Lease
Under the Traditional Lease arrangement, the customer enters into a lease directly with a financier, which pays us for our Energy Servers purchased pursuant to a sales agreement (see the description of the Financing Agreement below). We recognize product and installation revenue upon acceptance. After the standard one-year warranty period, our customers have almost always exercised the option to enter into operations and maintenance services agreements with us, under which we receive annual service payments from the customer. The price for the annual operations and maintenance services is set at the time we enter into the Financing Agreement. The term of a lease in a Traditional Lease ranges from five to eight years.
Under a Financing Agreement, we are generally paid the full price of our Energy Servers as if sold as a purchase by the customer based on four milestones. The four payment milestones are typically as follows: (i) 15% upon execution of the financier's entry into the lease with a customer, (ii) 25% on the day that is 180 days prior to delivery of the Energy Servers, (iii) 40% upon shipment of the Energy Servers, and (iv) 20% upon acceptance of the Energy Servers. The financier receives title to the Energy Servers upon installation at the customer site and the financier has risk of loss while our Energy Server is in operation on the customer’s site.
The Financing Agreement provides for the installation of our Energy Servers and includes a standard one-year warranty, to the financier, which includes the performance guaranties described below, with the warranty offered on an annually renewing basis at the discretion of, and to, the customer. The customer must provide fuel for the Bloom Energy Servers to operate.
Our direct lease deployments typically provide for warranties and guaranties of both the efficiency and output of our Energy Servers, all of which are written in favor of the customer and contained in the operations and maintenance services agreement. These warranties and guaranties may be measured on a monthly, annual, cumulative or other basis. As of June 30, 2020, we had incurred no liabilities due to failure to repair or replace our Energy Servers pursuant to these warranties. Our obligation to make payments for underperformance against the performance guaranties for Traditional Lease projects was capped contractually under the sales agreements between us and each customer at an aggregate total of approximately $6.0 million (including payments both for low output and for low efficiency), and our aggregate remaining potential liability under this cap was approximately $4.1 million.
Remarketing at Termination of Lease
In the event the customer does not renew or purchase our Energy Servers to the end of any customer lease, we may remarket any such Energy Servers to a third party. Any proceeds of such sale would be allocated between us and the applicable financing partner as agreed between them at the time of such sale.
Managed Services Financing
Under our Managed Services Programs, we enter into a Managed Services Agreement with a customer, pursuant to which the customer is able to use the Energy Server for a certain term. Under the Managed Services Agreement, the customer makes a monthly payment for the use of the Energy Server. The customer payment typically has two components: (i) a fixed monthly capacity-based payment and (ii) a performance-based payment based on the output of electricity that month from the Energy Server. The fixed capacity-based payments made by the customer under the Managed Services Agreement are applied toward our obligation to pay down our liability under the master lease with the financier. The performance payment is transferred to us as compensation for operations and maintenance services and recorded as services revenue within the condensed consolidated statements of operations. In some cases, the customer’s monthly payment consists solely of the first component, a fixed monthly capacity-based payment.
Once a financier is identified and the Energy Server’s installation is complete, we sell the Energy Server contemplated by the Managed Services Agreement directly to a financier and the financier, as lessor, leases it back to us, as lessee, pursuant to a master lease in a sale-leaseback transaction. The proceeds from the sale are recorded as a financing obligation within the condensed consolidated balance sheets. Any ongoing operations and installationmaintenance service payments are scheduled in the Managed Services Agreement in the form of the performance-based payment described above. The financier typically pays the financing proceeds for the Energy Server contemplated by the Managed Services Agreement on or shortly after acceptance.
The fixed capacity payments made by the customer under the Managed Services Agreement are recognized as electricity revenue when billed and applied toward our obligation to pay the financing obligation under the master lease. Our Managed Services financings have historically shifted customer credit risk to the financier, as lessor, by providing in the master lease agreement that we have no liability for payment of rent except in certain enumerated circumstances, including in the event we are in breach of the Managed Services Agreement between us and the customer.
The duration of the master lease in a Managed Services financing is typically 10 years. The term of the master lease is typically the same as the term of the related Managed Services Agreement, but in some cases the term of the master lease is shorter than that of the Managed Services Agreement.
Our Managed Services deployments typically provide only for warranties of both the efficiency and output of the Energy Server(s), all of which are written in favor of the customer and contained in the operations and maintenance services agreement. These warranties may be measured on a monthly, annual, cumulative or other basis. Managed Services projects typically do not
include guaranties above the warranty commitments, but in projects where the customer agreement includes a service payment for our operations and maintenance, that payment is typically proportionate to the output generated by the Energy Server(s) and our pricing assumes service revenues at the 95% output level. This means that our service revenues may be lower than expected if output is less than 95% and higher if output exceeds 95%. As of June 30, 2020, we had incurred no liabilities due to failure to repair or replace our Energy Servers by providing services under maintenance contractspursuant to these warranties and electricity salesthe fleet of our Energy Servers deployed pursuant to the Managed Services Program was performing at a lifetime average output of approximately 87%.
Power Purchase Agreement Programs
*Under the Third Party PPA arrangements, there is no link with an investment company, as we do not have an equity investment in these arrangements.
Under our PPA Entities.
Product Revenue
AllPrograms, we sell our Energy Servers to an Operating Company, which sells the electricity generated by the Energy Servers to the ultimate end customers pursuant to a PPA, energy services agreement, or similar contract. Because the end customer's payment is stated on a dollar-per-kilowatt-hour basis, we refer to these agreements as Power Purchase Agreements ("PPAs"). Currently, our offerings for PPA Programs primarily include our Third-Party PPA Programs pursuant to which we recognize revenue on acceptance. Through 2017, as part of our productPPA Programs, we had also offered the Bloom Electrons Program, which included an equity investment by us in the Operating Company and in which we recognized revenue isas the electricity was produced. For further discussion on our Bloom Electrons Programs, see Note 13, Power Purchase Agreement Programs, in Part I, Item 1, Financial Statements.
In our PPA Program, we enter into an Energy Server sales, operations and maintenance agreement ("EPC and O&M Agreement") with the Operating Company that will own the Energy Servers. The Operating Company then enters into the PPA with the end customer which purchases electricity generated fromby the saleEnergy Servers. The Operating Company receives all cash flows generated under the PPA(s), in addition to all investment tax credits, all accelerated tax depreciation benefits, and any other cash flows generated by the operation of the Energy Servers not allocated to the end customer under the PPA.
The sales of our Energy Servers to the Operating Company in connection with the various PPA Programs have many of the same terms and conditions as a direct sale. Payment of the purchase traditional leaseprice is generally broken down into multiple installments, which may include payments prior to shipment, upon shipment or delivery of the Energy Server, and managedupon acceptance of the Energy Server. Acceptance typically occurs when the Energy Server is installed and running at full power as
defined in the applicable EPC and O&M Agreement. A one-year service warranty is provided with the initial sale. After the expiration of the initial standard one-year warranty, the Operating Company has the option to extend our operations and maintenance services customers. under the EPC and O&M Agreement on an annual basis at a price determined at the time of purchase of our Energy Server, which may be renewed annually for each Energy Server for up to 30 years. After the standard one-year warranty period, the Operating Company has almost always exercised the option to renew our operations and maintenance obligations under the EPC and O&M Agreement.
We generally recognize product revenue from contractstypically provide output warranties and output guaranties to the Operating Company pursuant to the applicable EPC and O&M Agreement with the Operating Company. The end customer agreement between the Operating Company and the end customer also provides efficiency warranties and efficiency guaranties to the end user, and we provide a backstop of all of the Operating Company’s obligations under those agreements, including both the repair or replacement obligations pursuant to the warranties and any payment liabilities under the guaranties.
As of June 30, 2020, we had incurred no liabilities due to failure to repair or replace Energy Servers pursuant to these warranties. Our obligation to make payments for underperformance against the performance guaranties for PPA Program projects was capped at an aggregate total of approximately $106.5 million (including payments both for low output and for low efficiency) and our aggregate remaining potential liability under this cap was approximately $101.4 million.
Obligations to Operating Companies
In addition to our obligations to the end customers, our PPA Programs involve many obligations to the Operating Company that purchases our Energy Servers. These obligations are set forth in the applicable EPC and O&M Agreement(s), and may include some or all of the following obligations:
•designing, manufacturing, and installing the Energy Servers, and selling such Energy Servers to the Operating Company,
•obtaining all necessary permits and other governmental approvals necessary for the salesinstallation and operation of the Bloom Energy Servers, and maintaining such permits and approvals throughout the term of the EPC and O&M Agreements,
•operating and maintaining the Bloom Energy Servers in compliance with all applicable laws, permits and regulations,
•satisfying the efficiency and output warranties set forth in such EPC and O&M Agreements and the PPAs ("performance warranties"), and
•complying with any specific requirements contained in the PPAs with individual end-customers.
The EPC and O&M Agreements obligate us to repurchase the Energy Servers in the event the Energy Servers fail to comply with the performance warranties and in the event we otherwise breach the terms of the applicable EPC and O&M Agreements and we fail to remedy such failure or breach after a cure period, or in the event that a PPA terminates as a result of any failure by us to comply with the applicable EPC and O&M Agreements. In some PPA Program projects, our obligation to repurchase Energy Servers extends to the entire fleet of Energy Servers sold pursuant to the applicable EPC and O&M Agreements in the event such failure affects more than a specified number of Energy Servers.
In some PPA Programs, we have also agreed to pay liquidated damages to the applicable Operating Company in the event of delays in the manufacture and installation of our Energy Servers, either in the form of a cash payment or a reduction in the purchase price for the applicable Energy Servers.
Both the upfront purchase price for our Energy Servers and the ongoing fees for our operations and maintenance are paid on a fixed dollar-per-kilowatt basis.
Indemnification of Performance Warranty Expenses Under PPAs - In addition to the performance warranties and guaranties in the EPC and O&M Agreements, we also have agreed to indemnify certain Operating Companies for any expenses they incur to any of the end customers resulting from failures of the applicable Energy Servers to satisfy any of the performance warranties and guaranties set forth in the applicable PPAs.
Administration of Operating Companies - In each of the Bloom Electrons programs, we perform certain administrative services on behalf of the applicable Operating Company, including invoicing the end customers for amounts owed under the PPAs, administering the cash receipts of the Operating Company in accordance with the requirements of the financing arrangements, interfacing with applicable regulatory agencies, and other similar obligations. We are compensated for these services on a fixed dollar-per-kilowatt basis.
The Operating Company in each of the Bloom Electrons Programs (other than PPA I) has incurred debt in order to finance the acquisition of Energy Servers. The lenders for these projects are a combination of banks and/or institutional investors. In each case, the debt is secured by all of the assets of the applicable Operating Company, such assets being primarily comprised of the Energy Servers and a collateral assignment of each of the contracts to which the Operating Company is a party, including the O&M Agreement entered into with us and the off take agreements entered into with the Operating Company’s customers, and is senior to all other debt obligations of the Operating Company. As further collateral, the lenders receive a security interest in 100% of the membership interest of the Operating Company. However, as is typical in structured finance transactions of this nature, although the project debt is secured by all of the Operating Company’s assets, the lenders have no recourse to us or to any of the other equity investors in the project. The applicable debt agreements include provisions that implement a customary “payment waterfall” that dictates the priority in which the Operating Company will use its available funds to satisfy its payment obligations to us, the lenders, the tax equity investors and other third parties.
We have determined that we are the primary beneficiary in the PPA Entities, subject to reassessments performed as a result of upgrade transactions (see Note 13, Power Purchase Agreement Programs, in Part I, Item 1, Financial Statements.) Accordingly, we consolidate 100% of the assets, liabilities and operating results of these entities, including the Energy Servers and lease income, in our consolidated financial statements. We recognize the tax equity investors’ share of the net assets of the investment entities as noncontrolling interests in subsidiaries in our condensed consolidated balance sheet. We recognize the amounts that are contractually payable to these investors in each period as distributions to noncontrolling interests in our condensed consolidated statements of redeemable noncontrolling interest, stockholders' deficit and noncontrolling interest. Our condensed consolidated statements of cash flows reflect cash received from these investors as proceeds from investments by noncontrolling interests in subsidiaries. Our condensed consolidated statements of cash flows also reflect cash paid to these investors as distributions paid to noncontrolling interests in subsidiaries. We reflect any unpaid distributions to these investors as distributions payable to noncontrolling interests in subsidiaries on our condensed consolidated balance sheets. However, the PPA Entities are separate and distinct legal entities, and Bloom Energy Corporation may not receive cash or other distributions from the PPA Entities except in certain limited circumstances and upon the satisfaction of certain conditions, such as compliance with applicable debt service coverage ratios and the achievement of a targeted internal rate of return to the tax equity investors, or otherwise.
For further information about our PPA Programs, see Note 13, Power Purchase Agreement Programs, in Part I, Item 1, Financial Statements.
Delivery and Installation
The timing of delivery and installations of our products have a significant impact on the timing of the recognition of product and installation revenue. Many factors can cause a lag between the time that a customer signs a purchase order and our recognition of product revenue. These factors include the number of Energy Servers installed per site, local permitting and utility requirements, environmental, health and safety requirements, weather, and customer facility construction schedules. Many of these factors are unpredictable and their resolution is often outside of our or our customers’ control. Customers may also ask us to delay an installation for reasons unrelated to the foregoing, including delays in their obtaining financing. Further, due to unexpected delays, deployments may require unanticipated expenses to expedite delivery of materials or labor to ensure the installation meets the timing objectives. These unexpected delays and expenses can be exacerbated in periods in which we deliver and install a larger number of smaller projects. In addition, if even relatively short delays occur, there may be a significant shortfall between the revenue we expect to generate in a particular period and the revenue that we are able to recognize. For our installations, revenue and cost of revenue can fluctuate significantly on a periodic basis depending on the timing of acceptance and the type of financing used by the customer. As described in the Power Purchase Agreement Programs section above, we offered the Bloom Electrons purchase program through the end of 2016 and no longer offer this financing structure to potential customers.
International Channel Partners
Prior to 2018, we consummated a small number of sales outside the United States, including in India and Japan.
India. In India, sales activities are currently conducted by Bloom Energy (India) Pvt. Ltd., our wholly-owned indirect subsidiary; however, we are currently evaluating the Indian market to determine whether the use of channel partners would be a beneficial go-to-market strategy to grow our India market sales.
Japan. In Japan, sales are conducted pursuant to a Japanese joint venture established between us and subsidiaries of SoftBank Corp, called Bloom Energy Japan Limited ("Bloom Energy Japan"). Under this arrangement, we sell Energy Servers to Bloom Energy Japan and we recognize revenue once the Energy Servers leave the port in the United States. Bloom Energy Japan enters into the contract with the end customer and performs all installation work as well as some of the operations and maintenance work.
The Republic of Korea. In 2018, Bloom Energy Japan consummated a sale of Energy Servers in the Republic of Korea to Korea South-East Power Company. Following this sale, we achieve acceptance; thatentered into a Preferred Distributor Agreement with SK Engineering & Construction Co., Ltd. ("SK E&C") to enable us to sell directly into the Republic of Korea.
Under our agreement with SK E&C, SK E&C has a right of first refusal during the term of the agreement, with certain exceptions, to serve as distributor of Energy Servers for any fuel cell generation project in the Republic of Korea, and we have the right of first refusal to serve as SK E&C’s supplier of generation equipment for any Bloom Energy fuel cell project in the Republic of Korea. Under the terms of each purchase order, title, risk of loss and acceptance of the Energy Servers pass from us to SK E&C upon delivery at the named port of lading for shipment in the United States for the Energy Servers shipped in 2018 and thereafter upon delivery at the named port of unlading in the Republic of Korea, prior to unloading subject to final purchase order terms. The Preferred Distributor Agreement has an initial term expiring on December 31, 2021, and thereafter will automatically be renewed for three-year renewal terms unless either party terminates this agreement by prior written notice under certain circumstances.
Under the terms of the Preferred Distributor Agreement, we (or our subsidiary) contract directly with the customer to provide operations and maintenance services for the Energy Servers. We have established a subsidiary in the Republic of Korea, Bloom Energy Korea, LLC, to which we subcontract such operations and maintenance services. The terms of the operations and maintenance are negotiated on a case-by-case basis with each customer, but are generally expected to provide the customer with the option to receive services for at least 10 years, and for up to the life of the Energy Servers.
SK E&C Joint Venture Agreement. In September 2019, we entered into a joint venture agreement with SK E&C to establish a light-assembly facility in the Republic of Korea for sales of certain portions of our Energy Server for the stationary utility and commercial and industrial market in the Republic of Korea. The joint venture is majority controlled and managed by us. We expect the facility to be operational by mid-2020 subject to the completion of certain conditions precedent to the establishment of the joint venture company. Other than a nominal initial capital contribution by Bloom, the joint venture will be funded by SK E&C. SK E&C, who currently acts as a distributor for our Energy Servers for the stationary utility and commercial and industrial market in the Republic of Korea, will be the primary customer for the products assembled by the joint venture.
Community Distributed Generation Programs
In July 2015, the state of New York introduced its Community Distributed Generation program, which extends New York’s net metering program in order to allow utility customers to receive net metering credits for electricity generated by distributed generation assets located on the utility’s grid but not physically connected to the customer’s facility. This program allows for the use of multiple generation technologies, including fuel cells.
In December 2019, we entered into fuel cell sales, installation, operations and maintenance agreements with two developers for the deployment of fuel cells pursuant to this Community Distributed Generation program. These agreements have many of the same terms and conditions as a direct sale. Payment of the purchase price is generally broken down into multiple installments, which may include payments prior to shipment, upon shipment or delivery of the Energy Server, and upon acceptance of the Energy Server. Acceptance typically occurs when the system has beenEnergy Server is installed and running at full power as defined in each contract.
The amount A one-year service warranty is provided with the initial sale. After the expiration of product revenue we recognize in a given period is materially dependent on the volumeinitial standard one-year warranty, the owner has the option to renew our operations and sizemaintenance services for subsequent quarterly or annual periods for up to 30 years. We provide warranties and guaranties regarding both efficiency and output to the owners of installations of ourthe Energy Servers pursuant to the operations and onmaintenance services agreement with the typeOperating Company.
As of financing used byJune 30, 2020, we had not yet completed the customer.
Installation Revenue
Allsale of our installation revenue is generated from the installation of ourany Energy Servers in connection with the New York Community Distributed Generation program.
Key Operating Metrics
In addition to direct purchase, traditional leasethe measures presented in the condensed consolidated financial statements, we use the following key operating metrics to evaluate business activity, to measure performance, to develop financial forecasts and managed services customers. The amountto make strategic decisions:
•Product accepted - the number of installation revenue we recognize in a given period is materially dependent on the volume and size of installationscustomer acceptances of our Energy Servers in a givenany period. We recognize revenue when an acceptance is achieved. We use this metric to measure the volume of deployment activity. We measure each Energy Server manufactured, shipped and accepted in terms of 100 kilowatt equivalents.
•Billings for product accepted in the period and on - the type of financing used by the customer.
Service Revenue
Service revenue is generated from operations and maintenance services agreements that extend the standard one-year warranty service coverage beyond the initial one-year coverage for Energy Servers sold under direct purchase, traditional lease and managed services sales. Customers of our purchase and lease programs can renew their operating and maintenance services agreements on an annual basis for the lifetotal contracted dollar amount of the contract at prices predetermined at the timeproduct component of purchase of the Energy Server. We anticipate that almost all of our customers will continue to renew their operations and maintenance services agreements each year.
Electricity Revenue
Our PPA Entities purchase Energy Servers from us and sell the electricity produced by these systems to customers through long-term PPAs. Customers are required to purchase all of the electricity produced by the Energy Servers at agreed-upon rates over the course of the PPA’s term. We generally recognize revenue from such PPA Entities as the electricity is provided over the term of the agreement.
Cost of Revenue
Our total cost of revenue consists of cost of product revenue, cost of installation revenue, cost of service revenue and cost of electricity revenue. It includes personnel costs associated with our operations and global customer support organizations consisting of salaries, benefits, bonuses, stock-based compensation and allocated facilities costs.
Cost of Product Revenue
Cost of product revenue consists of costs of Energy Servers that are accepted in a period. We use this metric to gauge the dollar value of the product acceptances and to evaluate the change in dollar amount of acceptances between periods.
•Billings for installation on product accepted in the period - the total contracted dollar amount billable with respect to the installation component of all Energy Servers that are accepted. We use this metric to gauge the dollar value of the installations of our product acceptances and to evaluate the change in dollar value associated with the installation of our product acceptances between periods.
•Billings for annual maintenance service agreements - the dollar amount billable for one-year service contracts that have been initiated or renewed. We use this metric to measure the cumulative billings for all service contracts in any given period. As our installation base grows, we sellexpect our billings for annual maintenance service agreements to direct, traditional lease and managed services customers, includinggrow, as well.
•Product costs of materials, personnel costs, allocated costs, shipping costs, provisionsproduct accepted in the period (per kilowatt) - the average unit product cost for excess and obsolete inventory and the depreciation costs of our equipment. Because the sale of our Energy Servers includes a standard one-year warranty, cost of product revenue also includes estimated first-year warranty costs. Warranty costs for customers that purchase under managed services or the Bloom Electrons program are recognized as a cost of product revenue as they are incurred. We expect our cost of product revenue to increase in absolute dollars as we deliver and install more Energy Servers and our product revenue increases.
Cost of Installation Revenue
Cost of installation revenue consists of the costs to install the Energy Servers that we sellare accepted in a period. We use this metric to direct, traditional leaseprovide insight into the trajectory of product costs and, managed services customers, includingin particular, the effectiveness of cost reduction activities.
•Period costs of materialsmanufacturing expenses not included in product costs - the manufacturing and service providers, personnelrelated operating costs that are incurred to procure parts and manufacture Energy Servers that are not included as part of product costs. We use this metric to measure any costs incurred to run our manufacturing operations that are not capitalized (i.e., absorbed, such as stock-based compensation) into inventory and therefore, expensed to our condensed consolidated statement of operations in the period that they are incurred.
•Installation costs on product accepted (per kilowatt) - the average unit installation cost for Energy Servers that are accepted in a given period. This metric is used to provide insight into the trajectory of install costs and, allocated costs. in particular, to evaluate whether our installation costs are in line with our installation billings.
Comparison of the Three and Six Months Ended June 30, 2020 and 2019
Acceptances
We expect our cost of installation revenue to increase in absolute dollars as we deliver and install more Energy Servers, though it will be subject to variabilityuse acceptances as a resultkey operating metric to measure the volume of our completed Energy Server installation activity from period to period. We typically define an acceptance as when an Energy Server is installed and running at full power as defined in the foregoing.
Cost of Service Revenue
Cost of service revenue consists of costs incurred under maintenance service contracts for all customers including direct sales, traditional lease, managed services and PPA customers. Such costs include personnel costs for our customer support organization, allocated costs and extended maintenance-related product repair and replacement costs. We expect our cost of service revenue to increase in absolute dollars as our end-customer base of megawatts deployed grows, and we expect our cost of service revenue to fluctuate period by period depending oncontract or the timing of maintenance of Energy Servers.
Cost of Electricity Revenue
Cost of electricity revenue primarily consists offinancing agreements. For orders where a third party performs the depreciation of the cost ofinstallation, acceptances are generally achieved when the Energy Servers owned by our PPA Entities and the cost of gas purchased in connection with PPAs entered into by our first PPA Entity. are shipped.
The cost of depreciation of the Energy Servers is reduced by the amortization of any U.S. Treasury grant payment in lieu of the energy investment tax credit associated with these systems. We expect our cost of electricity revenue to increase in absolute dollars as our end-customer base of megawatts deployed grows.
Gross Profit (Loss)
Gross profit (loss) has been and will continue to be affected by a variety of factors, including the sales price of our products, manufacturing costs, the costs to maintain the systemsproduct acceptances in the field,periods were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended
June 30, | | | | Change | | | | Six Months Ended
June 30, | | | | Change | | |
| | | 2020 | | 2019 | | Amount | | % | | 2020 | | 2019 | | Amount | | % |
| | | | | | | | | | | | | | | | | |
Product accepted during the period
(in 100 kilowatt systems) | | 306 | | | 271 | | | 35 | | | 12.9 | % | | 562 | | | 506 | | | 56 | | | 11.1 | % |
Product accepted increased by approximately 35 systems and 56 systems, or 12.9% and 11.1%, for the mixthree and six months ended June 30, 2020 compared to the three and six months ended June 30, 2019, respectively. Acceptance volume increased as demand increased for our Energy Servers.
As discussed in the Purchase and Lease Options section above, our customers have several purchase options for our Energy Servers. The portion of financingacceptances attributable to each purchase option in the three and six months ended June 30, 2020 and 2019 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended
June 30, | | | | Six Months Ended
June 30, | | | | |
| | | 2020 | | 2019 | | 2020 | | 2019 | | |
| | | | | | | | | | | |
| Direct Purchase (including Third Party PPAs and International Channels) | | 100 | % | | 93 | % | | 99 | % | | 94 | % | | |
| Traditional Lease | | — | % | | 1 | % | | — | % | | — | % | | |
| Managed Services | | — | % | | 6 | % | | 1 | % | | 6 | % | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | 100 | % | | 100 | % | | 100 | % | | 100 | % | | |
As discussed in the Purchase and Lease Options section above, our customers have several purchase options used, and the mix of revenue between product, service and electricity. We expectfor our gross profit to fluctuate over time depending on the factors described above.
Operating Expenses
Research and Development
Research and development costs are expensed as incurred and consist primarily of personnel costs. Research and development expense also includes prototype related expenses and allocated facilities costs. We expect research and development expense to increase in absolute dollars as we continue to invest in our future products and services, and we expect our research and development expense to fluctuate as a percentageEnergy Servers. The portion of total revenue.
Sales and Marketing
Sales and marketing expense consists primarily of personnel costs, including commissions. We expense commission costs as earned. Sales and marketing expense also includes costs for market development programs, promotional and other marketing costs, travel costs, office equipment and software, depreciation, professional services and allocated facilities costs. We expect sales and marketing expenserevenue attributable to continue to increase in absolute dollars as we increase the size of our sales and marketing organizations and to expand our international presence, and we expect our sales and marketing expense to fluctuate as a percentage of total revenue.
General and Administrative
General and administrative expense consists of personnel costs, fees for professional services and allocated facilities costs. General and administrative personnel include our executive, finance, human resources, information technology, facilities, business development and legal organizations. We expect general and administrative expense to increase in absolute dollars due to additional legal fees and costs associated with accounting, insurance, investor relations, SEC and stock exchange compliance and other costs associated with being a public company, and we expect our general and administrative expense to fluctuate as a percentage of total revenue.
Stock-Based Compensation
We typically record stock-based compensation expense under the straight-line attribution method over the vesting term, which is generally five years, and record stock-based compensation expense for performance based awards using the graded-vesting method. Stock-based compensation expense is recorded net of estimated forfeitures such that expense is recorded only for those stock-based awards that are expected to vest. Stock-based compensation expense is recordedeach purchase option in the consolidated statements of operations based on the employees’ respective function.period was as follows:
Interest Expense | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended
June 30, | | | | Six Months Ended
June 30, | | |
| | | 2020 | | 2019 | | 2020 | | 2019 |
| | | | | | | | | |
| Direct Purchase (including Third Party PPAs and International Channels) | | 88 | % | | 84 | % | | 87 | % | | 83 | % |
| Traditional Lease | | 1 | % | | 1 | % | | 1 | % | | 1 | % |
| Managed Services | | 5 | % | | 5 | % | | 6 | % | | 5 | % |
| | | | | | | | |
| Bloom Electrons | | 6 | % | | 10 | % | | 6 | % | | 11 | % |
| | 100 | % | | 100 | % | | 100 | % | | 100 | % |
Interest expense primarily consists of interest charges associated with our secured line of credit, long-term debt facilities, financing obligations and capital lease obligations. We expect interest chargesBillings Related to decrease as a result of pay-downs of the debt obligations over the course of the debt arrangements.Our Products
Other Income (Expense), Net
Other expense, net primarily consists of gains or losses associated with foreign currency fluctuations, net and of income earned on our cash and cash equivalents holdings in interest-bearing accounts. We have historically invested our cash in money-market funds.
Gain/Loss on Revaluation of Warrant Liabilities
Warrants issued to investors and lenders that allow them to acquire our convertible preferred stock have been classified as liability instruments on our balance sheet. We record any changes in the fair value of these instruments between reporting dates as a separate line item in our statement of operations. As some of the warrants issued are mandatorily convertible to common stock subsequent to the completion of our IPO, they will no longer be recorded as a liability related to these mandatorily converted warrants.
Provision for Income Taxes
Provision for income taxes consists primarily of federal and state income taxes in the United States and income taxes in foreign jurisdictions in which we conduct business. We have provided a full valuation allowance on our deferred tax assets because we believe it is more likely than not that the deferred tax assets will not be realized. At December 31, 2017, we had federal and state net operating loss carryforwards of $1.7 billion and $1.5 billion, respectively, which will expire, if unused, beginning in 2022 and 2018, respectively.
Net Income (Loss) Attributable to Noncontrolling Interests
We determine the net income (loss)Total billings attributable to common stockholderseach revenue classification for the three and six months ended June 30, 2020 and 2019 was as follows (in thousands, except percentages):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended
June 30, | | | | Change | | | | Six Months Ended
June 30, | | | | Change | | |
| | | 2020 | | 2019 | | Amount | | % | | 2020 | | 2019 | | Amount | | % |
| | | | | | | | | | | | | | | | |
| Billings for product accepted in the period | | $ | 117,483 | | | $ | 165,081 | | | $ | (47,598) | | | (28.8) | % | | $ | 229,254 | | | $ | 271,810 | | | $ | (42,556) | | | (15.7) | % |
| Billings for installation on product accepted in the period | | 27,841 | | | 13,169 | | | 14,672 | | | 111.4 | % | | 42,452 | | | 27,632 | | | 14,820 | | | 53.6 | % |
| Billings for annual maintenance services agreements | | 18,915 | | | 15,158 | | | 3,757 | | | 24.8 | % | | 39,134 | | | 32,778 | | | 6,356 | | | 19.4 | % |
Billings for product accepted decreased by deducting from net income (loss) in a period the net income (loss) attributable to noncontrolling interests. We allocate profits and losses to the noncontrolling interests under the hypothetical liquidation at book value (HLBV) method. HLBV is a balance sheet-oriented approach for applying the equity method of accounting when there is a complex structure, such as our Investment Company structure.
Results of Operations - Three Months Ended June 30
Revenue
|
| | | | | | | | | | | | | | | |
| | | Three Months Ended
June 30, | | Change |
| | | 2018 | | 2017 | | Amount | | % |
| | | (dollars in thousands) |
| Product | | $ | 108,654 |
| | $ | 39,935 |
| | $ | 68,719 |
| | 172.1 | % |
| Installation | | 26,245 |
| | 14,354 |
| | 11,891 |
| | 82.8 | % |
| Service | | 19,975 |
| | 18,875 |
| | 1,100 |
| | 5.8 | % |
| Electricity | | 14,007 |
| | 13,619 |
| | 388 |
| | 2.8 | % |
| Total revenue | | $ | 168,881 |
| | $ | 86,783 |
| | $ | 82,098 |
| | 94.6 | % |
Total Revenue
Total revenue increased approximately $82.1$47.6 million, or 94.6%28.8%, for the three months ended June 30, 20182020, as compared to the three months ended June 30, 2017. There were four principal drivers of this revenue increase.
First,2019. The decrease is primarily due to a higher average selling price mix in the three months ended June 30, 2019, driven mainly by the PPA II upgrade that occurred in the three months ended June 30, 2019. Billings for installation on product acceptancesaccepted increased by approximately 19 systems, or 11.7%,$14.7 million for the three months ended June 30, 2018,2020, as compared to the three months ended June 30, 2017.
Second, we achieved a significantly higher mix of orders to customers where revenue is recognized on acceptance, compared to revenue from the Bloom Electrons and managed services financing programs where revenue is recognized over the term of the agreement. In the three months ended June 30, 2018, we recognized 100.0% of our orders at acceptance, whereas only 69.0% of total2019. Although product acceptances in the three months ended June 30, 2017 were recognized at acceptance.
Third, the ITC was reinstatedperiod increased 12.9%, billings for installation on February 9, 2018. ITC was not availableproduct accepted increased 111.4% due to the fuel cell industrymix in 2017, howeverinstallation billings driven by site complexity, site size, personalized applications, and customer option to complete the installation of our revenue in 2018 includes the benefit of the reinstatement. The total revenueEnergy Servers themselves. Billings for annual maintenance service agreements increased $3.8 million, or 24.8%, for the three months ended June 30, 2018 included $28.8 million of benefit from ITC, whereas the total revenue for the three months ended June 30, 2017 included $2.4 million of benefit, thus an increase in benefit from ITC to revenue of $26.4 million compared to the same period in 2017.
Lastly, the adoption of customer personalized applications such2020, as batteries and grid-independent solutions increased in the three months ended June 30, 2018 compared to the three months ended June 30, 2017. Products2019. This increase was driven primarily by the increase in our installed base.
Billings for product accepted decreased by approximately $42.6 million, or 15.7%, for the six months ended June 30, 2020, as compared to the six months ended June 30, 2019. The decrease is primarily due to a higher average selling price mix in the six months ended June 30, 2019, driven mainly by the PPA II upgrade that incorporate theseoccurred in the six months ended June 30, 2019. Billings for installation on product accepted increased $14.8 million for the six months ended June 30, 2020, as compared to the six months ended June 30, 2019. Although product acceptances in the period increased 11.1%, billings for installation on product accepted increased 53.6% due to the mix in installation billings driven by site complexity, site size, personalized applications, have, on average, higher revenue thanand customer option to complete the installation of our standard platform products that do not incorporate these personalized applications.Energy Servers themselves. Billings for annual maintenance service agreements increased $6.4 million, or 19.4%, for the six months ended June 30, 2020, as compared to the six months ended June 30, 2019. This increase was driven primarily by the increase in our installed base.
Costs Related to Our Products
Total product related costs for the three and six months ended June 30, 2020 and 2019 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended
June 30, | | | | Change | | | | Six Months Ended
June 30, | | | | Change | | |
| | 2020 | | 2019 | | Amount | | % | | 2020 | | 2019 | | Amount | | % |
| | | | | | | | | | | | | | | | | |
| Product costs of product accepted in the period | | $2,409 /kW | | $3,045 /kW | | $(636) /kW | | (20.9) | % | | $2,456 /kW | | $3,120 /kW | | $(664) /kW | | (21.3) | % |
| Period costs of manufacturing related expenses not included in product costs (in thousands) | | $ | 4,913 | | | $ | 3,321 | | | $ | 1,592 | | | 47.9 | % | | $ | 11,267 | | | $ | 10,258 | | | $ | 1,009 | | | 9.8 | % |
| Installation costs on product accepted in the period | | $1,200 /kW | | $627 /kW | | $573 /kW | | 91.4 | % | | $1,011/kW | | $650/kW | | $361/kW | | 55.5 | % |
Product Revenue
Product revenue increasedcosts of product accepted decreased by approximately $68.7 million,$636 per kilowatt, or 172.1%20.9%, for the three months ended June 30, 2018,2020, as compared to the three months ended June 30, 2017. This increase2019. The product cost reduction was driven generally by our ongoing cost reduction efforts to reduce material costs in conjunction with our suppliers and our reduction in labor and overhead costs through improved processes and automation at our manufacturing facilities.
Product costs of product accepted decreased by approximately $664 per kilowatt, or 21.3%, for the factors impacting total revenuesix months ended June 30, 2020, as mentioned above.compared to the six months ended June 30, 2019. The product cost reduction was driven generally by our ongoing cost reduction efforts to reduce material costs in conjunction with our suppliers and our reduction in labor and overhead costs through improved processes and automation at our manufacturing facilities.
Installation Revenue
Installation revenuePeriod costs of manufacturing related expenses increased by approximately $11.9$1.6 million, or 82.8%47.9%, from $14.4 million for the three months ended June 30, 2017 to $26.2 million for the three months ended June 30, 2018. This increase was driven by the factors impacting total revenue2020, as mentioned above.
Product and Installation Revenue Combined
Product and installation revenue combined increased approximately $80.6 million, or 148.5%, to $134.9 million for the three months ended June 30, 2018 from $54.3 million for the three months ended June 30, 2017. Depending on the customer purchase option elected by our customers, the product, installation and electricity revenue for that contract will either be recognized up front at acceptance or ratably over the life of the contract. The ratable portion of the product and install revenue increased approximately $0.6 million, to $6.9 million for the three months ended June 30, 2018 from $6.3 million for the three months ended June 30, 2017. This increase was primarily due to the increase in ratable acceptances through 2017.
The upfront portion of the product and install revenue increased approximately $80.0 million, to $128.0 million for the three months ended June 30, 2018 from $48.0 million for the three months ended June 30, 2017. This increase in upfront product and install revenue was primarily due to the increase in upfront acceptances to 181 in the three months ended June 30, 2018 from 111 in the three months ended June 30, 2017. The upfront product and install average selling price increased to
$7,093 per kilowatt for the three months ended June 30, 2018, from $4,317 per kilowatt for the three months ended June 30, 2017 primarily driven by higher ITC and the increased sale of customer personalized applications.
Service Revenue
Service revenue increased approximately $1.1 million, or 5.8%, for the three months ended June 30, 2018, compared to the three months ended June 30, 2017.2019. This increase was driven primarily by additional one-time expenses incurred due to the increase in the numberCOVID-19.
Period costs of annual maintenance contract renewals drivenmanufacturing related expenses increased by our increase in total megawatts deployed.
Electricity Revenue
Electricity revenue increased approximately $0.4$1.0 million, or 2.8%9.8%, for the six months ended June 30, 2020, as compared to the six months ended June 30, 2019. This increase was driven primarily by additional one-time expenses incurred due to COVID-19.
Installation costs on product accepted increased by approximately $573 per kilowatt, or 91.4%, for the three months ended June 30, 2018,2020, as compared to the three months ended June 30, 20172019. Each customer site is different and installation costs can vary due to normal fluctuations in system performance.
Costa number of Revenue
|
| | | | | | | | | | | | | | | |
| | | Three Months Ended
June 30, | | Change |
| | | 2018 | | 2017 | | Amount | | % |
| | | (dollars in thousands) |
| Cost of revenue: | | | | | | | | |
| Product | | $ | 70,802 |
| | $ | 47,545 |
| | $ | 23,257 |
| | 48.9 | % |
| Installation | | 37,099 |
| | 14,855 |
| | 22,244 |
| | 149.7 | % |
| Service | | 19,260 |
| | 21,308 |
| | (2,048 | ) | | (9.6 | )% |
| Electricity | | 8,949 |
| | 8,881 |
| | 68 |
| | 0.8 | % |
| Total cost of revenue | | $ | 136,110 |
| | $ | 92,589 |
| | $ | 43,521 |
| | 47.0 | % |
Total Costfactors, including site complexity, size, location of Revenue
Total cost of revenue increased approximately $43.5 million, or 47.0%, for the three months ended June 30, 2018, compared to the three months ended June 30, 2017. This increase in cost of revenue was primarily attributable to higher product and install cost of revenue which was driven by an increase in the product acceptances and a higher mix of orders to customers in which cost of revenue is recognized on acceptance. Additionally there was an increase in the sale of customergas, personalized applications, forand customer option to complete the three months ended June 30, 2018, and thus an increase in costinstallation of product and install revenue. This increase in product and install cost of revenue was partially offset by lower service cost of revenue.
Cost of Product Revenue
Cost of product revenue increased approximately $23.3 million, or 48.9%, for the three months ended June 30, 2018, compared to the three months ended June 30, 2017. This increase was driven by the factors impacting total cost of revenue as mentioned above.
Cost of Installation Revenue
Cost ofour Energy Servers themselves. As such, installation revenue increased approximately $22.2 million, or 149.7%, for the three months ended June 30, 2018, compared to the three months ended June 30, 2017. This increase was driven by the factors impacting total cost of revenue as mentioned above.
Cost of Product Revenue and Cost of Installation Revenue Combined
Combined product and install cost of revenue increased approximately $45.5 million, or 72.9%, to $107.9 million for the three months ended June 30, 2018, from $62.4 million for the three months ended June 30, 2017. The ratable portion of the product and install cost of revenue increased approximately $0.6 million to $4.9 million for the three months ended June 30, 2018, from $4.3 million for the three months ended June 30, 2017. This increase was due to the increase in ratable acceptances through 2017. The product and install cost of revenue includes stock based compensation which remained fairly constant at $1.7 million for both the three months ended June 30, 2018 and the three months ended June 30, 2017. The remaining upfront portion of the product and install cost of revenue, excluding stock based compensation, increased approximately $44.8 million to $101.2 million for the three months ended June 30, 2018 from $56.4 million for the three months ended June 30, 2017. This increase in upfront product and install cost of revenue was primarily due to the increase in upfront acceptances to 181 in the three months ended June 30, 2018 from 111 in the three months ended June 30, 2017. The upfront product and install average cost of revenue on a per kilowatt basis also described as total install system cost (TISC)can vary significantly from period-to-period.
Installation costs on product accepted increased to $5,607by approximately $361 per kilowatt, for
the three months ended June 30, 2018 from $5,073 per kilowatt for the three months ended June 30, 2017. The increase was primarily driven by the increase in the sale of customer personalized applications which have a higher per unit cost.
Cost of Service Revenue
Cost of service revenue decreased approximately $2.0 million, or 9.6%, for the three months ended June 30, 2018, compared to the three months ended June 30, 2017. This decrease was primarily due to a lower number of power module replacements driven by the maintenance cycle of our Energy Servers.
Cost of Electricity Revenue
Cost of electricity revenue increased approximately $0.1 million, or 0.8%, for the three months ended June 30, 2018, compared to the three months ended June 30, 2017.
Gross Profit (Loss)
|
| | | | | | | | | | | | |
| | | Three Months Ended
June 30, | | Change |
| | | 2018 | | 2017 | |
| | | (dollars in thousands) |
| Gross Profit: | | | | | | |
| Product | | $ | 37,852 |
| | $ | (7,610 | ) | | $ | 45,462 |
|
| Installation | | (10,854 | ) | | (501 | ) | | (10,353 | ) |
| Service | | 715 |
| | (2,433 | ) | | 3,148 |
|
| Electricity | | 5,058 |
| | 4,738 |
| | 320 |
|
| Total gross profit (loss) | | $ | 32,771 |
| | $ | (5,806 | ) | | $ | 38,577 |
|
| | | | | | | |
| Gross Profit percentage: | | | | | | |
| Product | | 35 | % | | (19 | )% | |
|
|
| Installation | | (41 | )% | | (3 | )% | |
|
|
| Service | | 4 | % | | (13 | )% | |
|
|
| Electricity | | 36 | % | | 35 | % | |
|
|
| Total gross profit (loss) percentage | | 19 | % | | (7 | )% | |
|
|
Total Gross Profit
Gross profit improved $38.6 million in the three months ended June 30, 2018 compared to the three months ended June 30, 2017. This improvement was generally a result of higher product margins due to the increase in product acceptances, a higher mix of orders recognized at acceptance and the renewal of ITC.
Product Gross Profit
Product gross profit improved $45.5 million in the three months ended June 30, 2018 compared to the three months ended June 30, 2017. This improvement was due to the increase in product acceptances, a higher mix of orders recognized at acceptance and the renewal of ITC.
Installation Gross Profit
Installation gross profit decreased $10.4 million in the three months ended June 30, 2018 compared to the three months ended June 30, 2017. This reduction in profit was due to higher install cost from the initial installations with the new customer personalized applications. Our installation costs are driven by the complexity of each site at which we are installing an Energy Server as well as the size of each installation, which can cause variability in installation costs from quarter-to-quarter.
Service Gross Profit
Service gross profit improved $3.1 million in the three months ended June 30, 2018 compared to the three months ended June 30, 2017. This improvement was driven by lower service cost of revenue primarily due to a lower number of power module replacements driven by the maintenance cycle of our Energy Servers.
Electricity Gross Profit
Electricity gross profit improved $0.3 million in the three months ended June 30, 2018, compared to the three months ended June 30, 2017 due to fluctuations in system performance.
Operating Expenses
|
| | | | | | | | | | | | | | | |
| | | Three Months Ended
June 30, | | Change |
| | | 2018 | | 2017 | | Amount | | % |
| | | (dollars in thousands) |
| Research and development | | $ | 14,413 |
| | $ | 12,368 |
| | $ | 2,045 |
| | 16.5 | % |
| Sales and marketing | | 8,254 |
| | 8,663 |
| | (409 | ) | | (4.7 | )% |
| General and administrative | | 15,359 |
| | 14,325 |
| | 1,034 |
| | 7.2 | % |
| Total operating expenses | | $ | 38,026 |
| | $ | 35,356 |
| | $ | 2,670 |
| | 7.6 | % |
Total Operating Expenses
Total operating expenses increased $2.7 million, or 7.6% in the three months ended June 30, 2018, compared to the three months ended June 30, 2017. This increase was primarily due to increase in research and development and general and administrative expenses.
Research and Development
Research and development expenses increased approximately $2.0 million, or 16.5%, in the three months ended June 30, 2018 compared to the three months ended June 30, 2017. This increase was primarily due to compensation related expenses related to hiring and investments for next generation technology development.
Sales and Marketing
Sales and marketing expenses decreased approximately $0.4 million, or 4.7%, in the three months ended June 30, 2018 compared to the three months ended June 30, 2017. This decrease was primarily due to improvement in managing pre-sales expenses by $0.9 million, partially offset by higher consulting expenses of $0.3 million for market and customer financing expansion and higher compensation related expenses of $0.2 million.
General and Administrative
General and administrative expenses increased approximately $1.0 million, or 7.2%, in the three months ended June 30, 2018 compared to the three months ended June 30, 2017. The increase in general and administrative expenses was due to an increase in hiring, public company readiness, legal and information technology related expenses.
Stock-Based Compensation
|
| | | | | | | | | | | | | | | |
| | | Three Months Ended
June 30, | | Change |
| | | 2018 | | 2017 | | Amount | | % |
| | | (dollars in thousands) |
| Cost of revenue | | $ | 1,971 |
| | $ | 1,879 |
| | $ | 92 |
| | 4.9 | % |
| Research and development | | 1,739 |
| | 1,377 |
| | 362 |
| | 26.3 | % |
| Sales and marketing | | 1,214 |
| | 1,379 |
| | (165 | ) | | (12.0 | )% |
| General and administrative | | 2,894 |
| | 3,383 |
| | (489 | ) | | (14.5 | )% |
| Total stock-based compensation | | $ | 7,818 |
| | $ | 8,018 |
| | $ | (200 | ) | | (2.5 | )% |
Total stock-based compensation decreased $0.2 million, or 2.5% in the three months ended June 30, 2018, compared to the three months ended June 30, 2017.
Other Income and Expense
|
| | | | | | | | | | | | |
| | | Three Months Ended
June 30, | | Change |
| | | 2018 | | 2017 | |
| | | (dollars in thousands) |
| Interest expense | | $ | (26,167 | ) | | $ | (25,554 | ) | | $ | (613 | ) |
| Other income (expense), net | | 559 |
| | 14 |
| | 545 |
|
| Loss on revaluation of warrant liabilities and embedded derivatives | | (19,197 | ) | | (668 | ) | | (18,529 | ) |
| Total | | $ | (44,805 | ) | | $ | (26,208 | ) | | $ | (18,597 | ) |
Total Other Income and Expense
Total other income and expense increased $18.6 million, or 71.0% in the three months ended June 30, 2018 compared to the three months ended June 30, 2017. This increase was primarily due to the increase in loss on revaluation of warrant liabilities and embedded derivatives.
Interest Expense
Interest expense increased $0.6 million, or 2.4% in the three months ended June 30, 2018 compared to the three months ended June 30, 2017. This increase was primarily due to the increase in the outstanding unpaid principal of the 6% Notes.
Other Income (Expense)
Total other expense increased $0.5 million in the three months ended June 30, 2018 compared to the three months ended June 30, 2017. This increase was due to an increase in foreign currency translation expenses and other miscellaneous items.
Revaluation of Warrant Liabilities and Embedded Derivatives
For the three months ended June 30, 2018, the loss on revaluation of warrant liabilities and embedded derivative increased by $18.5 million compared to the three months ended June 30, 2017. This was due to an increase in our derivative valuation adjustment of $23.0 million offset by a decrease in our warrant valuation of $4.5 million, both of which are driven by the Company's valuation at the end of the period. Changes in the valuation of the conversion feature derivative is dependent on changes in the value of our common stock.
Provision for Income Taxes
|
| | | | | | | | | | | | | | | |
| | | Three Months Ended
June 30, | | Change |
| | | 2018 | | 2017 | | Amount | | % |
| | | (dollars in thousands) |
| Income tax provision | | $ | 128 |
| | $ | 228 |
| | $ | (100 | ) | | (43.9 | )% |
Income tax provision decreased approximately $0.1 million, or 43.9%, in the three months ended June 30, 2018 compared to the three months ended June 30, 2017 and was primarily due to fluctuations in tax on income earned by international entities due to the general growth of our business in international locations.
Net Income (Loss) Attributable to Noncontrolling Interests
|
| | | | | | | | | | | | | | | |
| | | Three Months Ended
June 30, | | Change |
| | | 2018 | | 2017 | | Amount | | % |
| | | (dollars in thousands) |
| Net loss attributable to noncontrolling interests and redeemable noncontrolling interests | | $ | (4,512 | ) | | $ | (4,123 | ) | | $ | (389 | ) | | 9.4 | % |
Total loss attributable to noncontrolling interests increased $0.4 million, or 9.4%, in the three months ended June 30, 2018 compared to the three months ended June 30, 2017.
Net Loss Attributable to Common Shareholders
|
| | | | | | | | | | | | | | | |
| | | Three Months Ended
June 30, | | Change |
| | | 2018 | | 2017 | | Amount | | % |
| | | (dollars in thousands) |
| Net loss attributable to common shareholders | | $ | (45,677 | ) | | $ | (63,475 | ) | | $ | 17,798 |
| | (28.0 | )% |
Net loss attributable to common shareholders decreased $17.8 million, or 28.0%, in the three months ended June 30, 2018 compared to the three months ended June 30, 2017. This improvement was driven by the increase in gross profit by $38.6 million, partially offset by the increased loss on revaluation of warrant liabilities and embedded derivatives by $18.5 million.
Results of Operations - Six Months Ended June 30
Revenue
|
| | | | | | | | | | | | | | | |
| | | Six Months Ended
June 30, | | Change |
| | | 2018 | | 2017 | | Amount | | % |
| | | (dollars in thousands) |
| Product | | $ | 229,961 |
| | $ | 67,600 |
| | $ | 162,361 |
| | 240.2 | % |
| Installation | | 40,363 |
| | 26,647 |
| | 13,716 |
| | 51.5 | % |
| Service | | 39,882 |
| | 37,466 |
| | 2,416 |
| | 6.4 | % |
| Electricity | | 28,036 |
| | 27,267 |
| | 769 |
| | 2.8 | % |
| Total revenue | | $ | 338,242 |
| | $ | 158,980 |
| | $ | 179,262 |
| | 112.8 | % |
Total Revenue
Total revenue increased approximately $179.3 million, or 112.8%55.5%, for the six months ended June 30, 2018,2020, as compared to the six months ended June 30, 2017. There were four principal drivers of this revenue increase.
First, product acceptances increased by approximately 66 systems, or 23.5%, for the six months ended June 30, 2018, compared to the three months ended June 30, 2017.
Second, we achieved a significantly higher mix of orders through direct sales to customers where revenue2019. Each customer site is recognized on acceptance, compared to revenue from the Bloom Electronsdifferent and managed services financing programs where revenue is recognized over the term of the agreement. In the six months ended June 30, 2018, we recognized 100.0% of our orders at acceptance, whereas only 63.0% of total acceptances in the six months ended June 30, 2017 were recognized at acceptance.
Third, the ITC was reinstated on February 9, 2018. ITC was not available to the fuel cell industry in 2017, however our revenue in 2018 includes the benefit of the reinstatement. The total revenue for the six months ended June 30, 2018 included $91.2 million of benefit from ITC, whereas the total revenue for the six months ended June 30, 2017 included $4.8 million of benefit, thus an increase in benefit to revenue from ITC of $86.4 million compared to the same period in 2017. The $91.2 million benefit of ITC in the six months ended June 30, 2018 included $45.5 million benefit of the retroactive ITC for 2017 acceptances.
Lastly, the adoption of customer personalized applications such as batteries and grid-independent solutions increased in the six months ended June 30, 2018 compared to the six months ended June 30, 2017. Products that incorporate these personalized applications have, on average, higher revenue than our standard platform products that do not incorporate these personalized applications.
Product Revenue
Product revenue increased approximately $162.4 million, or 240.2%, for the six months ended June 30, 2018, compared to the six months ended June 30, 2017. This increase was driven by the factors impacting total revenue as mentioned above.
Installation Revenue
Install revenue increased approximately $13.7 million, or 51.5%, from $26.6 million for the six months ended June 30, 2017 to $40.4 million for the six months ended June 30, 2018. This increase was driven by the factors impacting total revenue as mentioned above, partially offset by the lower installation revenue associated with one large customer in the six months
ended June 30, 2018 where the installation was performed by the customer, therefore, we did not have any installation revenue for that customer.
Service Revenue
Service revenue increased approximately $2.4 million, or 6.4% for the six months ended June 30, 2018, compared to the six months ended June 30, 2017. This was primarily due to the increase in the number of annual maintenance contract renewals driven by the increase in total megawatts deployed.
Electricity Revenue
Electricity revenue increased approximately $0.8 million, or 2.8%, for the six months ended June 30, 2018, compared to the six months ended June 30, 2017, due to normal fluctuations in system performance.
Cost of Revenue
|
| | | | | | | | | | | | | | | |
| | | Six Months Ended
June 30, | | Change |
| | | 2018 | | 2017 | | Amount | | % |
| | | (dollars in thousands) |
| Cost of revenue: | | | | | | | | |
| Product | | $ | 151,157 |
| | $ | 86,400 |
| | $ | 64,757 |
| | 75.0 | % |
| Installation | | 47,537 |
| | 28,301 |
| | 19,236 |
| | 68.0 | % |
| Service | | 43,513 |
| | 39,526 |
| | 3,987 |
| | 10.1 | % |
| Electricity | | 19,598 |
| | 19,757 |
| | (159 | ) | | (0.8 | )% |
| Total cost of revenue | | 261,805 |
| | 173,984 |
| | 87,821 |
| | 50.5 | % |
| Gross profit (loss) | | $ | 76,437 |
| | $ | (15,004 | ) | | $ | 91,441 |
| | (609.4 | )% |
Total Cost of Revenue
Total cost of revenue increased approximately $87.8 million, or 50.5%, for the six months ended June 30, 2018, compared to the six months ended June 30, 2017. This increase in cost of revenue was primarily attributable to higher product and install cost of revenue which was driven by an increase in the product acceptances and a higher mix of orders to customers in which cost of revenue is recognized on acceptance. Additionally there was an increase in the sale of customer personalized applications for the six months ended June 30, 2018, and thus an increase in cost of revenue.
Cost of Product Revenue
Cost of product revenue increased approximately $64.8 million, or 75.0%, for the six months ended June 30, 2018, compared to the six months ended June 30, 2017.This increase was driven by the factors impacting total cost of revenue as mentioned above. Additionally, a one-time impact of $9.4 million was included in the cost of product revenue for the six months ended June 30, 2018 which was associated with supplier agreements that required us to forego previously negotiated discounts if ITC was renewed.
Cost of Installation Revenue
Cost of installation revenue increased approximately $19.2 million, or 68.0%, for the six months ended June 30, 2018, compared to the six months ended June 30, 2017.This increase was driven by the factors impacting total cost of revenue as mentioned above, partially offset by the lower cost of install associated with one large customer in the six months ended June 30, 2018 where the installation was performed by the customer, therefore, we did not have any installation cost for that customer.
Cost of Service Revenue
Cost of service revenue increased approximately $4.0 million, or 10.1%, for the six months ended June 30, 2018, compared to the six months ended June 30, 2017.This increase was primarilycosts can vary due to a higher number of power module replacements driven byfactors, including site complexity, size, location of gas, personalized applications, and customer option to complete the maintenance cycleinstallation of our Energy Servers.Servers themselves. As such, installation on a per kilowatt basis can vary significantly from period-to-period.
Cost of Electricity Revenue
Cost of electricity revenue decreased approximately $0.2 million, or 0.8%, for the six months ended June 30, 2018, compared to the six months ended June 30, 2017.
Gross Profit (Loss)
|
| | | | | | | | | | | | |
| | | Six Months Ended
June 30, | | Change |
| | | 2018 | | 2017 | |
| | | (dollars in thousands) |
| Gross Profit: | | | | | | |
| Product | | $ | 78,804 |
| | $ | (18,800 | ) | | $ | 97,604 |
|
| Installation | | (7,174 | ) | | (1,654 | ) | | (5,520 | ) |
| Service | | (3,631 | ) | | (2,060 | ) | | (1,571 | ) |
| Electricity | | 8,438 |
| | 7,510 |
| | 928 |
|
| Total gross profit (loss) | | $ | 76,437 |
| | $ | (15,004 | ) | | $ | 91,441 |
|
| | | | | | | |
| Gross Profit percentage: | | | | | | |
| Product | | 34 | % | | (28 | )% | |
|
|
| Installation | | (18 | )% | | (6 | )% | |
|
|
| Service | | (9 | )% | | (5 | )% | |
|
|
| Electricity | | 30 | % | | 28 | % | |
|
|
| Total gross profit (loss) percentage | | 23 | % | | (9 | )% | |
|
|
Total Gross Profit
Gross profit improved $91.4 million, in the six months ended June 30, 2018, compared to the six months ended June 30, 2017. This improvement was generally a result of higher product margins due to the increase in product acceptances, a higher mix of orders recognized at acceptance and the renewal of ITC.
Product Gross Profit
Product gross profit improved $97.6 million in the six months ended June 30, 2018, compared to the six months ended June 30, 2017. This improvement was due to the increase in product acceptances, a higher mix of orders recognized at acceptance (versus ratable) and the renewal of ITC.
Installation Gross Profit
Installation gross profit decreased $5.5 million in the six months ended June 30, 2018, compared to the six months ended June 30, 2017. This reduction in profit was due to higher install cost from the initial installations with the new customer personalized applications. Our installation costs are driven by the complexity of each site at which we are installing an Energy Server as well as the size of each installation, which can cause variability in installation costs from quarter-to-quarter.
Service Gross Profit
Service gross profit (loss) worsened by $1.6 million in the six months ended June 30, 2018, compared to the six months ended June 30, 2017. This improvement was driven by higher service cost of revenue primarily due to a higher number of power module replacements driven by the maintenance cycle of our Energy Servers.
Electricity Gross Profit
Electricity gross profit improved $0.9 million, or 12.3% in the six months ended June 30, 2018, compared to the six months ended June 30, 2017 due to normal fluctuations in system performance.
Operating Expenses
|
| | | | | | | | | | | | | | | |
| | | Six Months Ended
June 30, | | Change |
| | | 2018 | | 2017 | | Amount | | % |
| | | (dollars in thousands) |
| Research and development | | $ | 29,144 |
| | $ | 23,591 |
| | $ | 5,553 |
| | 23.5 | % |
| Sales and marketing | | 16,516 |
| | 16,508 |
| | 8 |
| | — | % |
| General and administrative | | 30,347 |
| | 27,204 |
| | 3,143 |
| | 11.6 | % |
| Total operating expenses | | $ | 76,007 |
| | $ | 67,303 |
| | $ | 8,704 |
| | 12.9 | % |
Total Operating Expenses
Total operating expenses increased $8.7 million, or 12.9% in the six months ended June 30, 2018, compared to the six months ended June 30, 2017. This increase was primarily due to an increase in research and development and general and administrative expenses.
Research and Development
Research and development expenses increased approximately $5.6 million, or 23.5%, in the six months ended June 30, 2018, compared to the six months ended June 30, 2017. This increase was primarily due to compensation related expenses related to hiring and investments for next generation technology development.
Sales and Marketing
Sales and marketing expenses remained largely unchanged in the six months ended June 30, 2018, compared to the six months ended June 30, 2017.
General and Administrative
General and administrative expenses increased approximately $3.1 million, or 11.6%, in the six months ended June 30, 2018, compared to the six months ended June 30, 2017. The increase in general and administrative expenses was due to an increase in hiring, public company readiness, legal and information technology related expenses.
Stock-Based Compensation
|
| | | | | | | | | | | | | | | |
| | | Six Months Ended
June 30, | | Change |
| | | 2018 | | 2017 | | Amount | | % |
| | | (in thousands) |
| Cost of revenue | | $ | 3,869 |
| | $ | 3,637 |
| | $ | 232 |
| | 6.4 | % |
| Research and development | | 3,376 |
| | 2,706 |
| | 670 |
| | 25 | % |
| Sales and marketing | | 2,166 |
| | 2,620 |
| | (454 | ) | | (17 | )% |
| General and administrative | | 6,362 |
| | 5,700 |
| | 662 |
| | 12 | % |
| Total share-based compensation | | $ | 15,773 |
| | $ | 14,663 |
| | $ | 1,110 |
| | 7.6 | % |
Total stock-based compensation increased $1.1 million, or 7.6% in the six months ended June 30, 2018, compared to the six months ended June 30, 2017.
Other Income and Expense
|
| | | | | | | | | | | | |
| | | Six Months Ended
June 30, | | Change |
| | | 2018 | | 2017 | |
| | | (dollars in thousands) |
| Interest expense | | $ | (49,204 | ) | | $ | (49,917 | ) | | $ | 713 |
|
| Other income (expense), net | | (70 | ) | | 133 |
| | (203 | ) |
| Loss on revaluation of warrant liabilities and embedded derivatives | | (23,231 | ) | | (453 | ) | | (22,778 | ) |
| Total | | $ | (72,505 | ) | | $ | (50,237 | ) | | $ | (22,268 | ) |
Total Other Expense
Total other expense increased by $22.3 million in the six months ended June 30, 2018 compared to the six months ended June 30, 2017. This increase was primarily due to the increase in loss on revaluation of warrant liabilities and embedded derivatives.
Interest Expense
Interest expense decreased $0.7 million in the six months ended June 30, 2018 compared to the six months ended June 30, 2017. This decrease was primarily due to lower amortization expense of our debt derivatives.
Other Income (Expense)
Total other income (expense) was reduced by $0.2 million in the six months ended June 30, 2018 compared to the six months ended June 30, 2017. This change was due to an increase in foreign currency translation expenses and other miscellaneous items.
Revaluation of Warrant Liabilities
For the six months ended June 30, 2018, the loss on revaluation of warrant liabilities and embedded derivative increased by $22.8 million when compared to the six months ended June 30, 2017. This was due to an increase in our derivative valuation adjustment of $30.6 million, offset by a decrease in our warrant valuation of $7.8 million, both of which are driven by the Company's valuation at the end of the period. Changes in the valuation of the conversion feature derivative is dependent on changes in the value of our common stock.
Provision for Income Taxes
|
| | | | | | | | | | | | | | | |
| | | Six Months Ended
June 30, | | Change |
| | | 2018 | | 2017 | | Amount | | % |
| | | (dollars in thousands) |
| Income tax provision | | $ | 461 |
| | $ | 442 |
| | $ | 19 |
| | 4.3 | % |
Income tax provision remained largely unchanged in the six months ended June 30, 2018 compared to the six months ended June 30, 2017 and was primarily due to fluctuations in tax on income earned by international entities due to the general growth of our business in international locations.
Net Income (Loss) Attributable to Noncontrolling Interests
|
| | | | | | | | | | | | | | | |
| | | Six Months Ended
June 30, | | Change |
| | | 2018 | | 2017 | | Amount | | % |
| | | (dollars in thousands) |
| Net loss attributable to noncontrolling interests and redeemable noncontrolling interests | | $ | (9,143 | ) | | $ | (9,979 | ) | | $ | 836 |
| | (8.4 | )% |
Total loss attributable to noncontrolling interests decreased $0.8 million, or 8.4%, in the six months ended June 30, 2018 compared to the six months ended June 30, 2017.
Net Loss Attributable to Common Shareholders
|
| | | | | | | | | | | | | | | |
| | | Six Months Ended
June 30, | | Change |
| | | 2018 | | 2017 | | Amount | | % |
| | | (dollars in thousands) |
| Net loss attributable to common shareholders | | $ | (63,393 | ) | | $ | (123,007 | ) | | $ | 59,614 |
| | (48.5 | )% |
Net loss attributable to common shareholders decreased $59.6 million, or 48.5%, in the six months ended June 30, 2018 compared to the six months ended June 30, 2017. This improvement was driven by the increase in gross profit by $91.4 million, partially offset by the increased loss on revaluation of warrant liabilities and embedded derivatives by $22.8 million and increase in operating expenses by $8.7 million.
Liquidity and Capital Resources
We have implemented measures to preserve cash and enhance liquidity, including suspending salary increases and bonuses, instituting a company-wide hiring freeze, eliminating business travel, reducing capital expenditures, and delaying or eliminating discretionary spending. We are also focused on managing our working capital needs, maintaining as much flexibility as possible around timing of taking and paying for inventory and manufacturing our product while managing potential changes or delays in installations.
In March 2020, we extended the terms of the 10% Convertible Notes and the 10% Constellation Note to December 2021. Since then, the 10% Constellation Note was converted into equity and the potential liabilities associated with the 10% Constellation Notes have been extinguished. This relieves some pressure on our liquidity position in the near term. While we will likely need to access the capital markets to raise sufficient capital to redeem the 10% Convertible Notes, we do not expect that it will be necessary to access capital markets for cash to operate our business for the next 12 months, unless the impact of COVID-19 to our business and financial position is more extensive than expected. Capital markets have been volatile and there is no assurance that we would have access to capital markets at a reasonable cost, or at all, at times when capital is needed. In addition, our existing debt has restrictive covenants that limit our ability to raise new debt or to sell assets, which would limit our ability to access liquidity by those means without obtaining consent from existing noteholders. The redemption penalty on our 10% Convertible Notes starting in October 2020 could also adversely affect our financial position if we are unable to access capital markets to refinance them on reasonable terms. Refer to Note 7, Outstanding Loans and Security Agreements; Management’s Discussion and Analysis of Financial Condition and Results of Operations, Liquidity and Capital Resources; and Risk Factors – Risks Relating to Our Liquidity – Our substantial indebtedness, and restrictions imposed by the agreements governing our and our PPA Entities’ outstanding indebtedness, may limit our financial and operating activities and may adversely affect our ability to incur additional debt to fund future needs, and We may not be able to generate sufficient cash to meet our debt service obligations, for more information regarding the terms of and risks associated with our debt.
Operations and maintenance cash flows for certain PPAs, direct purchases and leases are pledged to the 10% Senior Secured Notes and 10.25% Senior Secured Notes. If there is delay in payment from customers, or if a customer does not renew a contract with us that we expect to be renewed, our ability to service existing debt would be adversely affected, which could trigger a default if non-payment extends beyond the grace period. Even if we are able to sustain debt service payments, if we do not meet certain minimum debt service coverage ratio levels specified in our debt agreements, excess cash after the debt has been serviced could not be released to support our operations and would negatively affect our liquidity position.
Sales
In some markets, we have experienced an increase in time to obtain new business as our customers deal with the impact of the COVID-19 pandemic. Decision makers in organizations such as education and entertainment have shifted their focus to the immediate needs of the pandemic, thus delaying their purchase decisions and capital outlays. While there may ultimately be a reduction in electricity needs due to decrease in economic activity, the current impact generally equates to a longer transaction cycle.
Our ability to continue to expand our business both domestically and internationally and develop customer relationships also has been negatively impacted by current travel restrictions. Our marketing efforts historically have often involved customer visits to our manufacturing centers in California or Delaware, which we have suspended.
On the other hand, a significant portion of our customers are hospitals, healthcare companies, retailers and data centers. These industries are composed of essential businesses that still need the resiliency and reliability offered by our products. We have seen an increase in demand for our products in these sectors where the COVID-19 pandemic has highlighted the benefits of always-on, on-site power in times of disaster and uncertainty. In addition, the pandemic has had no significant effect on our business in the Republic of Korea.
We have also had some unique opportunities to deploy our systems on an emergency basis to support temporary hospitals. We believe deploying clean electrical power with no oxides of nitrogen (NOx) or sulfur (SOx) emissions, especially as atmospheric pollutants, is important for facilities preparing to treat a respiratory disease like COVID-19. As a result of this opportunity to introduce our products to more healthcare providers, demand for our products at some permanent hospitals has also increased.
Customer Financing
COVID-19 has not yet had any significant impact on our ability to obtain financing for our customers’ use of our products, but we are finding it more difficult to find financiers who are able to monetize tax credit. A majority of the installations we have planned in the United States in 2020 have obtained financing. However, we have actively been working with new sources of capital that could finance projects for our 2021 installations. We believe the current environment may increase the time to solidify new relationships, and thus negatively impact the time required to achieve funding. In addition, our ability to obtain financing for our Energy Servers partly depends on the creditworthiness of our customers. Some of our customers’ credit ratings have recently fallen, which may make it difficult for us to obtain financing for their use of an Energy Server. Our recent experience has been that financing parties have capital to deploy and are interested in financing our Energy Servers and, at present, cash flow and results of operations including revenue have not been impacted by our inability to obtain financing for customer installations.
Installations of Energy Servers
The COVID-19 pandemic has caused delays that affected nearly all of our installations with varying degrees of severity. Since we do not recognize revenue on the sales of our products until installation and acceptance, installation delays have a negative impact on our results of operations including revenue. Since we generally earn cash as we progress through the installation process, delays to installation activity also adversely affects our cash flows.
While our installation activity has been deemed “essential business” and allowed to proceed in many jurisdictions, the essential business designations for our activities (and those of our suppliers and other third party organizations that are critical to our success) has been inconsistent from region to region and across the various third parties upon whom we are critically dependent to complete our installations. As an example, in New York City, one of our installations was deemed essential while the other was not deemed essential and the utilities on whom we rely for water, gas and electric inter-connections were also not uniformly affected. This resulted in all of the projects in New York City being adversely affected to some extent. As another example, while the State of Massachusetts designated construction as an essential business, some local authorities in Massachusetts did not apply the same designation, resulting in delays and additional compliance costs.
In addition, we have experienced delays and interruptions to our installations where customers have shut down or otherwise limited access to their facilities.
Some of our backlog can only be deployed when the customer brings on sufficient load for our systems. Facility closings and diminished economic activity delay that load coming online, leading customers to postpone the completion of installations.
We use general contractors and sub-contractors, and need supplies of various types of ancillary equipment, for our installations. Some of our suppliers have had COVID-19 outbreaks among their workforces, which have caused installation delays. In addition, the availability and productivity of contractors, sub-contractors, and suppliers has generally been negatively impacted by social distancing requirements and other safety measures.
Nearly all of our installations completed in the quarter ended June 30, 2020 were impacted by COVID-19 to some extent and some installations were unable to achieve acceptance in light of the delays which impacted our cash flows and results of operation including revenue for the quarter ended June 30, 2020. As examples, our pre-contract installation planning activity was affected by access to potential customer sites, our permitting activity was affected in virtually all jurisdictions by delays in the permitting process as various cities and municipalities shut down or implemented limited services in response to COVID-19, and our utility related work was impacted as our gas and electric utility suppliers facing challenges brought on by COVID-19. We expect disruptions like those noted above to continue with the current COVID-19 restrictions.
Supply Chain
We have experienced COVID-19 related delays from certain vendors and suppliers, however, we have been able to find and qualify alternative suppliers and our production to date has not been impacted. At present, our supply chain has stabilized; however, if spikes in COVID-19 occur in regions in which our supply chain operates we could experience a delay in materials which could in turn impact production and installations and our cash flow and results of operations including revenue.
Manufacturing
As an essential business, we have continued to manufacture Energy Servers, but have adopted strict measures to keep our employees safe. These measures have decreased productivity to an extent, but our deployments, maintenance and installations have not yet been constrained by our current pace of manufacturing. As described above, we have established protocols to minimize the risk of COVID-19 transmission within our manufacturing facilities and follow all CDC guidelines when notified of possible exposures. We also are now instituting testing of anyone who comes into any of our facilities. Even with these
precautions, it is possible an asymptomatic individual could enter our facilities and transmit the virus to others. We have had a couple positive tests and in such cases, we have followed CDC Guidelines.To date, it has not impacted our production.
If we become aware of any cases of COVID-19 among any of our employees, we notify those with whom the person is known to have been in contact, send the exposed employees home for at least 14 days and require each employee to be tested negative before returning to work. Certain roles within our facilities involve greater mobility throughout our facilities and potential exposure to more employees. In the event one of such employees suffers from COVID-19, or if we otherwise believe that a significant number of employees have been exposed and sent home, particularly in our manufacturing facilities, our production could be significantly impacted. Furthermore, since our manufacturing process requires tasks performed at both our California facility and Delaware facility, significant exposure at either facility would have a substantial impact on our overall production, and could adversely affect our cash flow and results of operations including revenue.
Purchase and Lease Options
Initially, we only offered our Energy Servers on a direct purchase basis, in which the customer purchases the product directly from us. In order to expand our offerings to customers who lack the financial capability to purchase our Energy Servers directly (including customers who are unable to monetize the tax credits available to purchasers of our Energy Servers) and/or who prefer to lease the product or contract for our services on a pay-as-you-go model, we subsequently developed the traditional lease ("Traditional Lease"), Managed Services, and power purchase agreement ("PPA") programs ("PPA Programs").
Our capacity to offer our Energy Servers through any of these financed arrangements depends in large part on the ability of the financing party or parties involved to monetize the related investment tax credits, accelerated tax depreciation and other incentives. Interest rate fluctuations may also impact the attractiveness of any financing offerings for our customers, and currency exchange fluctuations may also impact the attractiveness of international offerings. The Traditional Lease, Managed Services and PPA Program options are limited by the creditworthiness of the customer. Additionally, the Managed Services and Traditional Lease options, as with all leases, are also limited by the customer’s willingness to commit to making fixed payments regardless of the performance of the Energy Servers or our performance of our obligations under the customer agreement.
In each of our purchase options, we typically perform the functions of a project developer, including identifying end customers and financiers, leading the negotiations of the customer agreements and financing agreements, securing all necessary permitting and interconnections approvals, and overseeing the design and construction of the project up to and including commissioning the Energy Servers.
Under each purchase option, we provide warranties and performance guaranties regarding our Energy Servers’ efficiency and output. We refer to a “warranty” as a commitment where the failure of the Energy Servers to satisfy the stated performance level obligates us to repair or replace the Energy Servers as necessary to improve performance. If we fail to complete such repair or replacement, or if repair or replacement is impossible, we may be obligated to repurchase the Energy Servers from the customer or financier. We refer to a “guaranty” as a commitment where the failure of the Energy Servers to satisfy the stated performance level obligates us to make a payment to compensate the beneficiary of such guaranty for the resulting increased cost or diminution in benefits resulting from such failure. Our obligation to make payments under the guaranty is always contractually capped and represents a contingency linked to our services obligation with no economic incentive for us to default and force an exercise of the payment obligation.
Under direct purchase and Traditional Lease, the warranties and guaranties are typically included in the price of our Energy Server for the first year. The warranties and guaranties may be renewed annually at the customer’s option, as an operations and maintenance services agreement, at predetermined prices for a period of up to 30 years. Historically, our customers and financiers have almost always exercised their option to renew the warranties and guaranties under these operations and maintenance services agreements.
Under the Managed Services Program, the warranties and guaranties are included for the fixed period specified in the customer agreement. This period is typically 10 years, which may be extended at the option of the parties for additional years.
Under the PPA Programs, we typically provide warranties and guaranties regarding our Energy Servers’ efficiency to the customer (i.e., the end user of the electricity generated by our Energy Servers, who is also responsible for the purchase of the fuel required for our Energy Servers’ operations), and we provide warranties and guaranties regarding our Energy Servers’ output to the financier(s) that purchases our Energy Servers. The warranties and guaranties are typically included in the price of our Energy Server for the first year and may be renewed annually at the financier’s option, as an operations and maintenance services agreement, at predetermined prices for a period of up to 30 years. Historically, our financiers have almost always exercised their option to renew the warranties and guaranties under these operations and maintenance services agreements. We
also provide a fixed schedule of prices for each year of the term of our agreements with our customers and none of our customers have failed to renew our operations and maintenance agreements.
The substantial majority of bookings made in recent periods are pursuant to the PPA and the Managed Services Programs.
Each of our financing structures is described in further detail below.
Traditional Lease
Under the Traditional Lease arrangement, the customer enters into a lease directly with a financier, which pays us for our Energy Servers purchased pursuant to a sales agreement (see the description of the Financing Agreement below). We recognize product and installation revenue upon acceptance. After the standard one-year warranty period, our customers have almost always exercised the option to enter into operations and maintenance services agreements with us, under which we receive annual service payments from the customer. The price for the annual operations and maintenance services is set at the time we enter into the Financing Agreement. The term of a lease in a Traditional Lease ranges from five to eight years.
Under a Financing Agreement, we are generally paid the full price of our Energy Servers as if sold as a purchase by the customer based on four milestones. The four payment milestones are typically as follows: (i) 15% upon execution of the financier's entry into the lease with a customer, (ii) 25% on the day that is 180 days prior to delivery of the Energy Servers, (iii) 40% upon shipment of the Energy Servers, and (iv) 20% upon acceptance of the Energy Servers. The financier receives title to the Energy Servers upon installation at the customer site and the financier has risk of loss while our Energy Server is in operation on the customer’s site.
The Financing Agreement provides for the installation of our Energy Servers and includes a standard one-year warranty, to the financier, which includes the performance guaranties described below, with the warranty offered on an annually renewing basis at the discretion of, and to, the customer. The customer must provide fuel for the Bloom Energy Servers to operate.
Our direct lease deployments typically provide for warranties and guaranties of both the efficiency and output of our Energy Servers, all of which are written in favor of the customer and contained in the operations and maintenance services agreement. These warranties and guaranties may be measured on a monthly, annual, cumulative or other basis. As of June 30, 2020, we had incurred no liabilities due to failure to repair or replace our Energy Servers pursuant to these warranties. Our obligation to make payments for underperformance against the performance guaranties for Traditional Lease projects was capped contractually under the sales agreements between us and each customer at an aggregate total of approximately $6.0 million (including payments both for low output and for low efficiency), and our aggregate remaining potential liability under this cap was approximately $4.1 million.
Remarketing at Termination of Lease
In the event the customer does not renew or purchase our Energy Servers to the end of any customer lease, we may remarket any such Energy Servers to a third party. Any proceeds of such sale would be allocated between us and the applicable financing partner as agreed between them at the time of such sale.
Managed Services Financing
Under our Managed Services Programs, we enter into a Managed Services Agreement with a customer, pursuant to which the customer is able to use the Energy Server for a certain term. Under the Managed Services Agreement, the customer makes a monthly payment for the use of the Energy Server. The customer payment typically has two components: (i) a fixed monthly capacity-based payment and (ii) a performance-based payment based on the output of electricity that month from the Energy Server. The fixed capacity-based payments made by the customer under the Managed Services Agreement are applied toward our obligation to pay down our liability under the master lease with the financier. The performance payment is transferred to us as compensation for operations and maintenance services and recorded as services revenue within the condensed consolidated statements of operations. In some cases, the customer’s monthly payment consists solely of the first component, a fixed monthly capacity-based payment.
Once a financier is identified and the Energy Server’s installation is complete, we sell the Energy Server contemplated by the Managed Services Agreement directly to a financier and the financier, as lessor, leases it back to us, as lessee, pursuant to a master lease in a sale-leaseback transaction. The proceeds from the sale are recorded as a financing obligation within the condensed consolidated balance sheets. Any ongoing operations and maintenance service payments are scheduled in the Managed Services Agreement in the form of the performance-based payment described above. The financier typically pays the financing proceeds for the Energy Server contemplated by the Managed Services Agreement on or shortly after acceptance.
The fixed capacity payments made by the customer under the Managed Services Agreement are recognized as electricity revenue when billed and applied toward our obligation to pay the financing obligation under the master lease. Our Managed Services financings have historically shifted customer credit risk to the financier, as lessor, by providing in the master lease agreement that we have no liability for payment of rent except in certain enumerated circumstances, including in the event we are in breach of the Managed Services Agreement between us and the customer.
The duration of the master lease in a Managed Services financing is typically 10 years. The term of the master lease is typically the same as the term of the related Managed Services Agreement, but in some cases the term of the master lease is shorter than that of the Managed Services Agreement.
Our Managed Services deployments typically provide only for warranties of both the efficiency and output of the Energy Server(s), all of which are written in favor of the customer and contained in the operations and maintenance services agreement. These warranties may be measured on a monthly, annual, cumulative or other basis. Managed Services projects typically do not
include guaranties above the warranty commitments, but in projects where the customer agreement includes a service payment for our operations and maintenance, that payment is typically proportionate to the output generated by the Energy Server(s) and our pricing assumes service revenues at the 95% output level. This means that our service revenues may be lower than expected if output is less than 95% and higher if output exceeds 95%. As of June 30, 2020, we had incurred no liabilities due to failure to repair or replace our Energy Servers pursuant to these warranties and the fleet of our Energy Servers deployed pursuant to the Managed Services Program was performing at a lifetime average output of approximately 87%.
Power Purchase Agreement Programs
*Under the Third Party PPA arrangements, there is no link with an investment company, as we do not have an equity investment in these arrangements.
Under our PPA Programs, we sell our Energy Servers to an Operating Company, which sells the electricity generated by the Energy Servers to the ultimate end customers pursuant to a PPA, energy services agreement, or similar contract. Because the end customer's payment is stated on a dollar-per-kilowatt-hour basis, we refer to these agreements as Power Purchase Agreements ("PPAs"). Currently, our offerings for PPA Programs primarily include our Third-Party PPA Programs pursuant to which we recognize revenue on acceptance. Through 2017, as part of our PPA Programs, we had also offered the Bloom Electrons Program, which included an equity investment by us in the Operating Company and in which we recognized revenue as the electricity was produced. For further discussion on our Bloom Electrons Programs, see Note 13, Power Purchase Agreement Programs, in Part I, Item 1, Financial Statements.
In our PPA Program, we enter into an Energy Server sales, operations and maintenance agreement ("EPC and O&M Agreement") with the Operating Company that will own the Energy Servers. The Operating Company then enters into the PPA with the end customer which purchases electricity generated by the Energy Servers. The Operating Company receives all cash flows generated under the PPA(s), in addition to all investment tax credits, all accelerated tax depreciation benefits, and any other cash flows generated by the operation of the Energy Servers not allocated to the end customer under the PPA.
The sales of our Energy Servers to the Operating Company in connection with the various PPA Programs have many of the same terms and conditions as a direct sale. Payment of the purchase price is generally broken down into multiple installments, which may include payments prior to shipment, upon shipment or delivery of the Energy Server, and upon acceptance of the Energy Server. Acceptance typically occurs when the Energy Server is installed and running at full power as
defined in the applicable EPC and O&M Agreement. A one-year service warranty is provided with the initial sale. After the expiration of the initial standard one-year warranty, the Operating Company has the option to extend our operations and maintenance services under the EPC and O&M Agreement on an annual basis at a price determined at the time of purchase of our Energy Server, which may be renewed annually for each Energy Server for up to 30 years. After the standard one-year warranty period, the Operating Company has almost always exercised the option to renew our operations and maintenance obligations under the EPC and O&M Agreement.
We typically provide output warranties and output guaranties to the Operating Company pursuant to the applicable EPC and O&M Agreement with the Operating Company. The end customer agreement between the Operating Company and the end customer also provides efficiency warranties and efficiency guaranties to the end user, and we provide a backstop of all of the Operating Company’s obligations under those agreements, including both the repair or replacement obligations pursuant to the warranties and any payment liabilities under the guaranties.
As of June 30, 2020, we had incurred no liabilities due to failure to repair or replace Energy Servers pursuant to these warranties. Our obligation to make payments for underperformance against the performance guaranties for PPA Program projects was capped at an aggregate total of approximately $106.5 million (including payments both for low output and for low efficiency) and our aggregate remaining potential liability under this cap was approximately $101.4 million.
Obligations to Operating Companies
In addition to our obligations to the end customers, our PPA Programs involve many obligations to the Operating Company that purchases our Energy Servers. These obligations are set forth in the applicable EPC and O&M Agreement(s), and may include some or all of the following obligations:
•designing, manufacturing, and installing the Energy Servers, and selling such Energy Servers to the Operating Company,
•obtaining all necessary permits and other governmental approvals necessary for the installation and operation of the Bloom Energy Servers, and maintaining such permits and approvals throughout the term of the EPC and O&M Agreements,
•operating and maintaining the Bloom Energy Servers in compliance with all applicable laws, permits and regulations,
•satisfying the efficiency and output warranties set forth in such EPC and O&M Agreements and the PPAs ("performance warranties"), and
•complying with any specific requirements contained in the PPAs with individual end-customers.
The EPC and O&M Agreements obligate us to repurchase the Energy Servers in the event the Energy Servers fail to comply with the performance warranties and in the event we otherwise breach the terms of the applicable EPC and O&M Agreements and we fail to remedy such failure or breach after a cure period, or in the event that a PPA terminates as a result of any failure by us to comply with the applicable EPC and O&M Agreements. In some PPA Program projects, our obligation to repurchase Energy Servers extends to the entire fleet of Energy Servers sold pursuant to the applicable EPC and O&M Agreements in the event such failure affects more than a specified number of Energy Servers.
In some PPA Programs, we have also agreed to pay liquidated damages to the applicable Operating Company in the event of delays in the manufacture and installation of our Energy Servers, either in the form of a cash payment or a reduction in the purchase price for the applicable Energy Servers.
Both the upfront purchase price for our Energy Servers and the ongoing fees for our operations and maintenance are paid on a fixed dollar-per-kilowatt basis.
Indemnification of Performance Warranty Expenses Under PPAs - In addition to the performance warranties and guaranties in the EPC and O&M Agreements, we also have agreed to indemnify certain Operating Companies for any expenses they incur to any of the end customers resulting from failures of the applicable Energy Servers to satisfy any of the performance warranties and guaranties set forth in the applicable PPAs.
Administration of Operating Companies - In each of the Bloom Electrons programs, we perform certain administrative services on behalf of the applicable Operating Company, including invoicing the end customers for amounts owed under the PPAs, administering the cash receipts of the Operating Company in accordance with the requirements of the financing arrangements, interfacing with applicable regulatory agencies, and other similar obligations. We are compensated for these services on a fixed dollar-per-kilowatt basis.
The Operating Company in each of the Bloom Electrons Programs (other than PPA I) has incurred debt in order to finance the acquisition of Energy Servers. The lenders for these projects are a combination of banks and/or institutional investors. In each case, the debt is secured by all of the assets of the applicable Operating Company, such assets being primarily comprised of the Energy Servers and a collateral assignment of each of the contracts to which the Operating Company is a party, including the O&M Agreement entered into with us and the off take agreements entered into with the Operating Company’s customers, and is senior to all other debt obligations of the Operating Company. As further collateral, the lenders receive a security interest in 100% of the membership interest of the Operating Company. However, as is typical in structured finance transactions of this nature, although the project debt is secured by all of the Operating Company’s assets, the lenders have no recourse to us or to any of the other equity investors in the project. The applicable debt agreements include provisions that implement a customary “payment waterfall” that dictates the priority in which the Operating Company will use its available funds to satisfy its payment obligations to us, the lenders, the tax equity investors and other third parties.
We have determined that we are the primary beneficiary in the PPA Entities, subject to reassessments performed as a result of upgrade transactions (see Note 13, Power Purchase Agreement Programs, in Part I, Item 1, Financial Statements.) Accordingly, we consolidate 100% of the assets, liabilities and operating results of these entities, including the Energy Servers and lease income, in our consolidated financial statements. We recognize the tax equity investors’ share of the net assets of the investment entities as noncontrolling interests in subsidiaries in our condensed consolidated balance sheet. We recognize the amounts that are contractually payable to these investors in each period as distributions to noncontrolling interests in our condensed consolidated statements of redeemable noncontrolling interest, stockholders' deficit and noncontrolling interest. Our condensed consolidated statements of cash flows reflect cash received from these investors as proceeds from investments by noncontrolling interests in subsidiaries. Our condensed consolidated statements of cash flows also reflect cash paid to these investors as distributions paid to noncontrolling interests in subsidiaries. We reflect any unpaid distributions to these investors as distributions payable to noncontrolling interests in subsidiaries on our condensed consolidated balance sheets. However, the PPA Entities are separate and distinct legal entities, and Bloom Energy Corporation may not receive cash or other distributions from the PPA Entities except in certain limited circumstances and upon the satisfaction of certain conditions, such as compliance with applicable debt service coverage ratios and the achievement of a targeted internal rate of return to the tax equity investors, or otherwise.
For further information about our PPA Programs, see Note 13, Power Purchase Agreement Programs, in Part I, Item 1, Financial Statements.
Delivery and Installation
The timing of delivery and installations of our products have a significant impact on the timing of the recognition of product and installation revenue. Many factors can cause a lag between the time that a customer signs a purchase order and our recognition of product revenue. These factors include the number of Energy Servers installed per site, local permitting and utility requirements, environmental, health and safety requirements, weather, and customer facility construction schedules. Many of these factors are unpredictable and their resolution is often outside of our or our customers’ control. Customers may also ask us to delay an installation for reasons unrelated to the foregoing, including delays in their obtaining financing. Further, due to unexpected delays, deployments may require unanticipated expenses to expedite delivery of materials or labor to ensure the installation meets the timing objectives. These unexpected delays and expenses can be exacerbated in periods in which we deliver and install a larger number of smaller projects. In addition, if even relatively short delays occur, there may be a significant shortfall between the revenue we expect to generate in a particular period and the revenue that we are able to recognize. For our installations, revenue and cost of revenue can fluctuate significantly on a periodic basis depending on the timing of acceptance and the type of financing used by the customer. As described in the Power Purchase Agreement Programs section above, we offered the Bloom Electrons purchase program through the end of 2016 and no longer offer this financing structure to potential customers.
International Channel Partners
Prior to 2018, we consummated a small number of sales outside the United States, including in India and Japan.
India. In India, sales activities are currently conducted by Bloom Energy (India) Pvt. Ltd., our wholly-owned indirect subsidiary; however, we are currently evaluating the Indian market to determine whether the use of channel partners would be a beneficial go-to-market strategy to grow our India market sales.
Japan. In Japan, sales are conducted pursuant to a Japanese joint venture established between us and subsidiaries of SoftBank Corp, called Bloom Energy Japan Limited ("Bloom Energy Japan"). Under this arrangement, we sell Energy Servers to Bloom Energy Japan and we recognize revenue once the Energy Servers leave the port in the United States. Bloom Energy Japan enters into the contract with the end customer and performs all installation work as well as some of the operations and maintenance work.
The Republic of Korea. In 2018, Bloom Energy Japan consummated a sale of Energy Servers in the Republic of Korea to Korea South-East Power Company. Following this sale, we entered into a Preferred Distributor Agreement with SK Engineering & Construction Co., Ltd. ("SK E&C") to enable us to sell directly into the Republic of Korea.
Under our agreement with SK E&C, SK E&C has a right of first refusal during the term of the agreement, with certain exceptions, to serve as distributor of Energy Servers for any fuel cell generation project in the Republic of Korea, and we have the right of first refusal to serve as SK E&C’s supplier of generation equipment for any Bloom Energy fuel cell project in the Republic of Korea. Under the terms of each purchase order, title, risk of loss and acceptance of the Energy Servers pass from us to SK E&C upon delivery at the named port of lading for shipment in the United States for the Energy Servers shipped in 2018 and thereafter upon delivery at the named port of unlading in the Republic of Korea, prior to unloading subject to final purchase order terms. The Preferred Distributor Agreement has an initial term expiring on December 31, 2021, and thereafter will automatically be renewed for three-year renewal terms unless either party terminates this agreement by prior written notice under certain circumstances.
Under the terms of the Preferred Distributor Agreement, we (or our subsidiary) contract directly with the customer to provide operations and maintenance services for the Energy Servers. We have established a subsidiary in the Republic of Korea, Bloom Energy Korea, LLC, to which we subcontract such operations and maintenance services. The terms of the operations and maintenance are negotiated on a case-by-case basis with each customer, but are generally expected to provide the customer with the option to receive services for at least 10 years, and for up to the life of the Energy Servers.
SK E&C Joint Venture Agreement. In September 2019, we entered into a joint venture agreement with SK E&C to establish a light-assembly facility in the Republic of Korea for sales of certain portions of our Energy Server for the stationary utility and commercial and industrial market in the Republic of Korea. The joint venture is majority controlled and managed by us. We expect the facility to be operational by mid-2020 subject to the completion of certain conditions precedent to the establishment of the joint venture company. Other than a nominal initial capital contribution by Bloom, the joint venture will be funded by SK E&C. SK E&C, who currently acts as a distributor for our Energy Servers for the stationary utility and commercial and industrial market in the Republic of Korea, will be the primary customer for the products assembled by the joint venture.
Community Distributed Generation Programs
In July 2015, the state of New York introduced its Community Distributed Generation program, which extends New York’s net metering program in order to allow utility customers to receive net metering credits for electricity generated by distributed generation assets located on the utility’s grid but not physically connected to the customer’s facility. This program allows for the use of multiple generation technologies, including fuel cells.
In December 2019, we entered into fuel cell sales, installation, operations and maintenance agreements with two developers for the deployment of fuel cells pursuant to this Community Distributed Generation program. These agreements have many of the same terms and conditions as a direct sale. Payment of the purchase price is generally broken down into multiple installments, which may include payments prior to shipment, upon shipment or delivery of the Energy Server, and upon acceptance of the Energy Server. Acceptance typically occurs when the Energy Server is installed and running at full power as defined in each contract. A one-year service warranty is provided with the initial sale. After the expiration of the initial standard one-year warranty, the owner has the option to renew our operations and maintenance services for subsequent quarterly or annual periods for up to 30 years. We provide warranties and guaranties regarding both efficiency and output to the owners of the Energy Servers pursuant to the operations and maintenance services agreement with the Operating Company.
As of June 30, 2020, we had not yet completed the sale of any Energy Servers in connection with the New York Community Distributed Generation program.
Key Operating Metrics
In addition to the measures presented in the condensed consolidated financial statements, we use the following key operating metrics to evaluate business activity, to measure performance, to develop financial forecasts and to make strategic decisions:
•Product accepted - the number of customer acceptances of our Energy Servers in any period. We recognize revenue when an acceptance is achieved. We use this metric to measure the volume of deployment activity. We measure each Energy Server manufactured, shipped and accepted in terms of 100 kilowatt equivalents.
•Billings for product accepted in the period - the total contracted dollar amount of the product component of all Energy Servers that are accepted in a period. We use this metric to gauge the dollar value of the product acceptances and to evaluate the change in dollar amount of acceptances between periods.
•Billings for installation on product accepted in the period - the total contracted dollar amount billable with respect to the installation component of all Energy Servers that are accepted. We use this metric to gauge the dollar value of the installations of our product acceptances and to evaluate the change in dollar value associated with the installation of our product acceptances between periods.
•Billings for annual maintenance service agreements - the dollar amount billable for one-year service contracts that have been initiated or renewed. We use this metric to measure the cumulative billings for all service contracts in any given period. As our installation base grows, we expect our billings for annual maintenance service agreements to grow, as well.
•Product costs of product accepted in the period (per kilowatt) - the average unit product cost for the Energy Servers that are accepted in a period. We use this metric to provide insight into the trajectory of product costs and, in particular, the effectiveness of cost reduction activities.
•Period costs of manufacturing expenses not included in product costs - the manufacturing and related operating costs that are incurred to procure parts and manufacture Energy Servers that are not included as part of product costs. We use this metric to measure any costs incurred to run our manufacturing operations that are not capitalized (i.e., absorbed, such as stock-based compensation) into inventory and therefore, expensed to our condensed consolidated statement of operations in the period that they are incurred.
•Installation costs on product accepted (per kilowatt) - the average unit installation cost for Energy Servers that are accepted in a given period. This metric is used to provide insight into the trajectory of install costs and, in particular, to evaluate whether our installation costs are in line with our installation billings.
Comparison of the Three and Six Months Ended June 30, 2020 and 2019
Acceptances
We use acceptances as a key operating metric to measure the volume of our completed Energy Server installation activity from period to period. We typically define an acceptance as when an Energy Server is installed and running at full power as defined in the customer contract or the financing agreements. For orders where a third party performs the installation, acceptances are generally achieved when the Energy Servers are shipped.
The product acceptances in the periods were as follows:
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| | | Three Months Ended
June 30, | | | | Change | | | | Six Months Ended
June 30, | | | | Change | | |
| | | 2020 | | 2019 | | Amount | | % | | 2020 | | 2019 | | Amount | | % |
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Product accepted during the period
(in 100 kilowatt systems) | | 306 | | | 271 | | | 35 | | | 12.9 | % | | 562 | | | 506 | | | 56 | | | 11.1 | % |
Product accepted increased by approximately 35 systems and 56 systems, or 12.9% and 11.1%, for the three and six months ended June 30, 2020 compared to the three and six months ended June 30, 2019, respectively. Acceptance volume increased as demand increased for our Energy Servers.
As discussed in the Purchase and Lease Options section above, our customers have several purchase options for our Energy Servers. The portion of acceptances attributable to each purchase option in the three and six months ended June 30, 2020 and 2019 was as follows:
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| | | Three Months Ended
June 30, | | | | Six Months Ended
June 30, | | | | |
| | | 2020 | | 2019 | | 2020 | | 2019 | | |
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| Direct Purchase (including Third Party PPAs and International Channels) | | 100 | % | | 93 | % | | 99 | % | | 94 | % | | |
| Traditional Lease | | — | % | | 1 | % | | — | % | | — | % | | |
| Managed Services | | — | % | | 6 | % | | 1 | % | | 6 | % | | |
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| | 100 | % | | 100 | % | | 100 | % | | 100 | % | | |
As discussed in the Purchase and Lease Options section above, our customers have several purchase options for our Energy Servers. The portion of total revenue attributable to each purchase option in the period was as follows:
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| | | Three Months Ended
June 30, | | | | Six Months Ended
June 30, | | |
| | | 2020 | | 2019 | | 2020 | | 2019 |
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| Direct Purchase (including Third Party PPAs and International Channels) | | 88 | % | | 84 | % | | 87 | % | | 83 | % |
| Traditional Lease | | 1 | % | | 1 | % | | 1 | % | | 1 | % |
| Managed Services | | 5 | % | | 5 | % | | 6 | % | | 5 | % |
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| Bloom Electrons | | 6 | % | | 10 | % | | 6 | % | | 11 | % |
| | 100 | % | | 100 | % | | 100 | % | | 100 | % |
Billings Related to Our Products
Total billings attributable to each revenue classification for the three and six months ended June 30, 2020 and 2019 was as follows (in thousands, except percentages):
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| | | Three Months Ended
June 30, | | | | Change | | | | Six Months Ended
June 30, | | | | Change | | |
| | | 2020 | | 2019 | | Amount | | % | | 2020 | | 2019 | | Amount | | % |
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| Billings for product accepted in the period | | $ | 117,483 | | | $ | 165,081 | | | $ | (47,598) | | | (28.8) | % | | $ | 229,254 | | | $ | 271,810 | | | $ | (42,556) | | | (15.7) | % |
| Billings for installation on product accepted in the period | | 27,841 | | | 13,169 | | | 14,672 | | | 111.4 | % | | 42,452 | | | 27,632 | | | 14,820 | | | 53.6 | % |
| Billings for annual maintenance services agreements | | 18,915 | | | 15,158 | | | 3,757 | | | 24.8 | % | | 39,134 | | | 32,778 | | | 6,356 | | | 19.4 | % |
Billings for product accepted decreased by approximately $47.6 million, or 28.8%, for the three months ended June 30, 2020, as compared to the three months ended June 30, 2019. The decrease is primarily due to a higher average selling price mix in the three months ended June 30, 2019, driven mainly by the PPA II upgrade that occurred in the three months ended June 30, 2019. Billings for installation on product accepted increased $14.7 million for the three months ended June 30, 2020, as compared to the three months ended June 30, 2019. Although product acceptances in the period increased 12.9%, billings for installation on product accepted increased 111.4% due to the mix in installation billings driven by site complexity, site size, personalized applications, and customer option to complete the installation of our Energy Servers themselves. Billings for annual maintenance service agreements increased $3.8 million, or 24.8%, for the three months ended June 30, 2020, as compared to the three months ended June 30, 2019. This increase was driven primarily by the increase in our installed base.
Billings for product accepted decreased by approximately $42.6 million, or 15.7%, for the six months ended June 30, 2020, as compared to the six months ended June 30, 2019. The decrease is primarily due to a higher average selling price mix in the six months ended June 30, 2019, driven mainly by the PPA II upgrade that occurred in the six months ended June 30, 2019. Billings for installation on product accepted increased $14.8 million for the six months ended June 30, 2020, as compared to the six months ended June 30, 2019. Although product acceptances in the period increased 11.1%, billings for installation on product accepted increased 53.6% due to the mix in installation billings driven by site complexity, site size, personalized applications, and customer option to complete the installation of our Energy Servers themselves. Billings for annual maintenance service agreements increased $6.4 million, or 19.4%, for the six months ended June 30, 2020, as compared to the six months ended June 30, 2019. This increase was driven primarily by the increase in our installed base.
Costs Related to Our Products
Total product related costs for the three and six months ended June 30, 2020 and 2019 was as follows:
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| | | Three Months Ended
June 30, | | | | Change | | | | Six Months Ended
June 30, | | | | Change | | |
| | 2020 | | 2019 | | Amount | | % | | 2020 | | 2019 | | Amount | | % |
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| Product costs of product accepted in the period | | $2,409 /kW | | $3,045 /kW | | $(636) /kW | | (20.9) | % | | $2,456 /kW | | $3,120 /kW | | $(664) /kW | | (21.3) | % |
| Period costs of manufacturing related expenses not included in product costs (in thousands) | | $ | 4,913 | | | $ | 3,321 | | | $ | 1,592 | | | 47.9 | % | | $ | 11,267 | | | $ | 10,258 | | | $ | 1,009 | | | 9.8 | % |
| Installation costs on product accepted in the period | | $1,200 /kW | | $627 /kW | | $573 /kW | | 91.4 | % | | $1,011/kW | | $650/kW | | $361/kW | | 55.5 | % |
Product costs of product accepted decreased by approximately $636 per kilowatt, or 20.9%, for the three months ended June 30, 2020, as compared to the three months ended June 30, 2019. The product cost reduction was driven generally by our ongoing cost reduction efforts to reduce material costs in conjunction with our suppliers and our reduction in labor and overhead costs through improved processes and automation at our manufacturing facilities.
Product costs of product accepted decreased by approximately $664 per kilowatt, or 21.3%, for the six months ended June 30, 2020, as compared to the six months ended June 30, 2019. The product cost reduction was driven generally by our ongoing cost reduction efforts to reduce material costs in conjunction with our suppliers and our reduction in labor and overhead costs through improved processes and automation at our manufacturing facilities.
Period costs of manufacturing related expenses increased by approximately $1.6 million, or 47.9%, for the three months ended June 30, 2020, as compared to the three months ended June 30, 2019. This increase was driven primarily by additional one-time expenses incurred due to COVID-19.
Period costs of manufacturing related expenses increased by approximately $1.0 million, or 9.8%, for the six months ended June 30, 2020, as compared to the six months ended June 30, 2019. This increase was driven primarily by additional one-time expenses incurred due to COVID-19.
Installation costs on product accepted increased by approximately $573 per kilowatt, or 91.4%, for the three months ended June 30, 2020, as compared to the three months ended June 30, 2019. Each customer site is different and installation costs can vary due to a number of factors, including site complexity, size, location of gas, personalized applications, and customer option to complete the installation of our Energy Servers themselves. As such, installation on a per kilowatt basis can vary significantly from period-to-period.
Installation costs on product accepted increased by approximately $361 per kilowatt, or 55.5%, for the six months ended June 30, 2020, as compared to the six months ended June 30, 2019. Each customer site is different and installation costs can vary due to a number of factors, including site complexity, size, location of gas, personalized applications, and customer option to complete the installation of our Energy Servers themselves. As such, installation on a per kilowatt basis can vary significantly from period-to-period.
Results of Operations
A discussion regarding the comparison of our financial condition and results of operations for the three and six months ended June 30, 2020 and 2019is presented below (in thousands, except percentage data).
Comparison of the Three and Six Months Ended June 30, 2020 and 2019
Revenue
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| | | Three Months Ended
June 30, | | | | Change | | | | Six Months Ended
June 30, | | | | Change | | |
| | | 2020 | | 2019 | | Amount | | % | | 2020 | | 2019 | | Amount | | % |
| | | | As Restated | | | | | | | | As Restated | | | | |
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| Product | | $ | 116,197 | | | $ | 144,081 | | | $ | (27,884) | | | (19.4) | % | | $ | 215,756 | | | $ | 235,007 | | | $ | (19,251) | | | (8.2) | % |
| Installation | | 29,839 | | | 13,076 | | | 16,763 | | | 128.2 | % | | 46,457 | | | 25,295 | | | 21,162 | | | 83.7 | % |
| Service | | 26,208 | | | 23,026 | | | 3,182 | | | 13.8 | % | | 51,355 | | | 46,493 | | | 4,862 | | | 10.5 | % |
| Electricity | | 15,612 | | | 20,143 | | | (4,531) | | | (22.5) | % | | 30,987 | | | 40,532 | | | (9,545) | | | (23.5) | % |
| Total revenue | | $ | 187,856 | | | $ | 200,326 | | | $ | (12,470) | | | (6.2)% | | $ | 344,555 | | | $ | 347,327 | | | $ | (2,772) | | | (0.8) | % |
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Total Revenue
Total revenue decreased approximately $12.5 million, or 6.2%, for the three months ended June 30, 2020, as compared to the three months ended June 30, 2019. This decrease was driven primarily driven by the decrease in product revenue for the three months ended June 30, 2020, as compared to the three months ended June 30, 2019, offset partially by the increase in installation revenue. The product revenue decrease is primarily due to a higher average selling price mix in the three months ended June 30, 2019, driven mainly by the PPA II upgrade that occurred in the three months ended June 30, 2019.
Total revenue decreased approximately $2.8 million, or 0.8%, for the six months ended June 30, 2020, as compared to the six months ended June 30, 2019. This decrease was primarily driven by the decrease in product revenue and electricity revenue for the six months ended June 30, 2020, as compared to the six months ended June 30, 2019, offset partially by the increase in installation revenue. The product revenue decrease is primarily due to a higher average selling price mix in the six months ended June 30, 2019, driven mainly by the PPA II upgrade that occurred in the six months ended June 30, 2019.
Product Revenue
Product revenue decreased approximately $27.9 million, or 19.4%, for the three months ended June 30, 2020, as compared to the three months ended June 30, 2019. The product revenue decrease was primarily due to a higher average selling price mix in the three months ended June 30, 2019, driven mainly by the PPA II upgrade that occurred in the three months ended June 30, 2019.
Product revenue decreased approximately $19.3 million, or 8.2%, for the six months ended June 30, 2020, as compared to the six months ended June 30, 2019. The product revenue decrease was, again, primarily due to a higher average selling price mix in the six months ended June 30, 2019, driven mainly by the PPA II upgrade that occurred in the six months ended June 30, 2019.
Installation Revenue
Installation revenue increased by approximately $16.8 million, or 128.2%, for the three months ended June 30, 2020, as compared to the three months ended June 30, 2019. This increase was driven by the increase in product acceptances of approximately 35 systems, or 12.9%, for the three months ended June 30, 2020 and due to the change in mix of installations driven site complexity, site size, and customer option to complete the installation of our Energy Servers themselves.
Installation revenue increased approximately $21.2 million, or 83.7%, for the six months ended June 30, 2020, as compared to the six months ended June 30, 2019. This increase was driven by the increase in product acceptances of approximately 56 systems, or 11.1%, for the six months ended June 30, 2020 and due to the change in mix of installations driven by site complexity, site size, and customer option to complete the installation of our Energy Servers themselves.
Service Revenue
Service revenue increased approximately $3.2 million, or 13.8%, for the three months ended June 30, 2020, as compared to the three months ended June 30, 2019. This was primarily due to the increase in the number of annual maintenance contract renewals driven by our growing fleet of installed Energy Servers.
Service revenue increased by approximately $4.9 million, or 10.5% for the six months ended June 30, 2020, as compared to the six months ended June 30, 2019. This was primarily due to the increase in the number of annual maintenance contract renewals driven by our growing fleet of installed Energy Servers.
Electricity Revenue
Electricity revenue decreased by approximately $4.5 million, or 22.5%, for the three months ended June 30, 2020, as compared to the three months ended June 30, 2019, due to a reduction in electricity revenues resulting from the decommissioning and upgrade of PPA II in the three months ended June 30, 2019. Electricity revenue was driven by our former Bloom Electrons program, which included PPA II, as well as from our Managed Services agreements. When PPAs associated with our Bloom Electrons program are decommissioned, we no longer recognize electricity revenue for them.
Electricity revenue decreased by approximately $9.5 million, or 23.5%, for the six months ended June 30, 2020, as compared to the six months ended June 30, 2019, due to a reduction in electricity revenues resulting from the decommissioning and an upgrade of PPA II in the six months ended June 30, 2019. Electricity revenue was driven by our former Bloom Electrons program, which included PPA II, as well as from our Managed Services agreements. When PPAs associated with our Bloom Electrons program are decommissioned, we no longer recognize electricity revenue for them.
Cost of Revenue
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| | | Three Months Ended
June 30, | | | | Change | | | | Six Months Ended
June 30, | | | | Change | | |
| | | 2020 | | 2019 | | Amount | | % | | 2020 | | 2019 | | Amount | | % |
| | | | As Restated | | | | | | | | As Restated | | | | |
| | | (dollars in thousands) | | | | | | | | (dollars in thousands) | | | | | | |
| Cost of revenue: | | | | | | | | | | | | | | | | |
| Product | | $ | 83,127 | | | $ | 113,228 | | | $ | (30,101) | | | (26.6) | % | | $ | 155,616 | | | $ | 202,000 | | | $ | (46,384) | | | (23.0) | % |
| Installation | | 38,287 | | 17,685 | | 20,602 | | | 116.5 | % | | 59,066 | | | 33,445 | | | 25,621 | | | 76.6 | % |
| Service | | 28,652 | | | 18,763 | | | 9,889 | | | 52.7 | % | | 59,622 | | | 46,684 | | | 12,938 | | | 27.7 | % |
| Electricity | | 11,541 | | 22,300 | | (10,759) | | | (48.2) | % | | 24,071 | | | 35,284 | | | (11,213) | | | (31.8) | % |
| Total cost of revenue | | $ | 161,607 | | | $ | 171,976 | | | $ | (10,369) | | | (6.0)% | | $ | 298,375 | | | $ | 317,413 | | | $ | (19,038) | | | (6.0)% |
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Total Cost of Revenue
Total cost of revenue decreased by approximately $10.4 million, or 6.0%, for the three months ended June 30, 2020, as compared to the three months ended June 30, 2019. Included as a component of total cost of revenue, stock-based compensation decreased approximately $5.8 million for the three months ended June 30, 2020, as compared to the three months ended June 30, 2019. Cost of revenue for the three months ended June 30, 2019 included $33.7 million of one-time expenses associated with the PPA II upgrade. Total cost of revenue, excluding stock-based compensation and the one-time expenses, increased approximately $29.1 million, or 22.8%, for the three months ended June 30, 2020, as compared to the three months ended June 30, 2019 due to the 12.9% increase in product acceptances and higher cost of installation revenue due to the change in mix of installations.
Total cost of revenue decreased by approximately $19.0 million, or 6.0%, for the six months ended June 30, 2020, as compared to the six months ended June 30, 2019. Included as a component of total cost of revenue, stock-based compensation decreased approximately $18.6 million, or 64.5%, for the six months ended June 30, 2020, as compared to the six months ended June 30, 2019. Cost of revenue for the six months ended June 30, 2019 included $33.7 million of one-time expenses associated with the PPA II upgrade. Total cost of revenue, excluding stock-based compensation and the one-time expenses, increased approximately $33.3 million, or 13.1%, for the six months ended June 30, 2020, as compared to the six months ended June 30, 2019 due to the 11.1% increase in product acceptances and higher cost of installation revenue due to the change in mix of installations.
Cost of Product Revenue
Cost of product revenue decreased by approximately $30.1 million, or 26.6%, for the three months ended June 30, 2020, as compared to the three months ended June 30, 2019. Stock-based compensation, which is included as a component of cost of product revenue, decreased approximately $3.9 million for the three months ended June 30, 2020, as compared to the three months ended June 30, 2019. Cost of product revenue for the three months ended June 30, 2019 included $25.6 million of one-time expenses associated with the PPA II upgrade. Cost of product revenue, excluding stock-based compensation and the one-time expenses, decreased approximately $0.6 million, or 0.7%, for the three months ended June 30, 2020, as compared to the three months ended June 30, 2019 despite a 12.9% increase in product acceptances due to ongoing cost reduction efforts to reduce material, labor and overhead costs.
Cost of product revenue decreased by approximately $46.4 million, or 23.0%, for the six months ended June 30, 2020, as compared to the six months ended June 30, 2019. Stock-based compensation, which is included as a component of cost of product revenue, decreased approximately $15.8 million for the six months ended June 30, 2020, as compared to the six months ended June 30, 2019. Cost of product revenue for the six months ended June 30, 2019 included $25.6 million of one-time expenses associated with the PPA II upgrade. Cost of product revenue, excluding stock-based compensation and the one-time expenses, decreased approximately $4.9 million, or 3.2%, for the six months ended June 30, 2020, as compared to the six months ended June 30, 2019 despite an 11.1% increase in product acceptances due to ongoing cost reduction efforts to reduce material, labor and overhead costs.
Cost of Installation Revenue
Cost of installation revenue increased by approximately $20.6 million, or 116.5%, for the three months ended June 30, 2020, as compared to the three months ended June 30, 2019, primarily due to the increase in product acceptances of approximately 35 systems, or 12.9%, for the three months ended June 30, 2020 and due to the change in mix of installations driven by site complexity, size, local ordinance requirements, location of utility interconnect, and customer option to complete the installation of our Energy Servers themselves.
Cost of installation revenue increased by approximately $25.6 million, or 76.6%, for the six months ended June 30, 2020, as compared to the six months ended June 30, 2019, primarily due to the increase in product acceptances of approximately 56 systems, or 11.1%, for the six months ended June 30, 2020 and due to the change in mix of installations driven by site complexity, size, local ordinance requirements, location of utility interconnect and, the customer's option to complete the installation of our Energy Servers themselves.
Cost of Service Revenue
Cost of service revenue increased by approximately $9.9 million, or 52.7%, for the three months ended June 30, 2020, as compared to the three months ended June 30, 2019. This increase in service cost was primarily due to more power module replacements required in the fleet as our fleet of installed Energy Servers grows with acceptances and additional extended service contracts are executed and renewed.
Cost of service revenue increased by approximately $12.9 million, or 27.7%, for the six months ended June 30, 2020, as compared to the six months ended June 30, 2019. This increase in service cost was primarily due to more power module replacements required in the fleet as our fleet of installed Energy Servers grows with acceptances and additional extended service contracts are executed and renewed.
Cost of Electricity Revenue
Cost of electricity revenue decreased by approximately $10.8 million, or 48.2%, for the three months ended June 30, 2020, as compared to the three months ended June 30, 2019, mainly due to the decommissioning and upgrade of PPA II in the three months ended June 30, 2019, offset by the increase in Managed Services Agreements acceptances and their associated costs of electricity revenue recognized over the period of the related agreement.
Cost of electricity revenue decreased by approximately $11.2 million, or 31.8%, for the six months ended June 30, 2020, as compared to the six months ended June 30, 2019, mainly due to the decommissioning and upgrade of PPA II in the six months ended June 30, 2019, offset by the increase in Managed Services Agreements acceptances and their associated costs of electricity revenue recognized over the period of the related agreement.
Gross Profit (Loss)
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| | | Three Months Ended
June 30, | | | | Change | | Six Months Ended
June 30, | | | | Change | | |
| | | 2020 | | 2019 | | | | 2020 | | 2019 | | | | |
| | | | As Restated | | | | | | As Restated | | | | |
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| Gross profit: | | | | | | | | | | | | | | |
| Product | | $ | 33,070 | | | $ | 30,853 | | | $ | 2,217 | | | $ | 60,140 | | | $ | 33,007 | | | $ | 27,133 | | | |
| Installation | | (8,449) | | | (4,609) | | | (3,840) | | | (12,609) | | | (8,150) | | | (4,459) | | | |
| Service | | (2,444) | | | 4,263 | | | (6,707) | | | (8,266) | | | (191) | | | (8,075) | | | |
| Electricity | | 4,071 | | | (2,157) | | | 6,228 | | | 6,916 | | | 5,248 | | | 1,668 | | | |
| Total gross profit | | $ | 26,249 | | | $ | 28,350 | | | $ | (2,101) | | | $ | 46,180 | | | $ | 29,914 | | | $ | 16,266 | | | |
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| Gross margin: | | | | | | | | | | | | | | |
| Product | | 28 | % | | 21 | % | | | | 28 | % | | 14 | % | | | | |
| Installation | | (28) | % | | (35) | % | | | | (27) | % | | (32) | % | | | | |
| Service | | (9) | % | | 19 | % | | | | (16) | % | | — | % | | | | |
| Electricity | | 26 | % | | (11) | % | | | | 22 | % | | 13 | % | | | | |
| Total gross margin | | 14 | % | | 14 | % | | | | 13 | % | | 9 | % | | | | |
Total Gross Profit
Gross profit decreased $2.1 million in the three months ended June 30, 2020, as compared to the three months ended June 30, 2019. Stock-based compensation, which is included as a component of total cost of revenue, decreased approximately $5.8 million for the three months ended June 30, 2020, as compared to the three months ended June 30, 2019. Total gross profit, excluding stock-based compensation, decreased approximately $7.9 million, or 20.3%, for the three months ended June 30, 2020, as compared to the three months ended June 30, 2019 due to the higher margin site mix of installations driven primarily by the PPA II upgrade in the three months ended June 30, 2019.
Gross profit improved $16.3 million in the six months ended June 30, 2020, as compared to the six months ended June 30, 2019. Stock-based compensation, which is included as a component of total cost of revenue, decreased approximately $18.6 million for the six months ended June 30, 2020, as compared to the six months ended June 30, 2019. Total gross profit, excluding stock-based compensation, decreased approximately $2.3 million, or 4.0%, for the six months ended June 30, 2020, as compared to the six months ended June 30, 2019, despite an 11.1% increase in product acceptances due to the higher margin site mix of installations driven primarily by the PPA II upgrade in the six months ended June 30, 2019.
Product Gross Profit
Product gross profit increased $2.2 million in the three months ended June 30, 2020, as compared to the three months ended June 30, 2019. Excluding stock-based compensation, product gross profit decreased $1.7 million, or 4.5%, in the three months ended June 30, 2020, as compared to the three months ended June 30, 2019. The product gross profit decrease in the three months ended June 30, 2020, as compared to the three months ended June 30, 2019 was primarily due to a higher margin site mix in the three months ended June 30, 2019, driven primarily by the PPA II upgrade that occurred in the three months ended June 30, 2019.
Product gross profit increased $27.1 million in the six months ended June 30, 2020, as compared to the six months ended June 30, 2019. Excluding stock-based compensation, product gross profit increased $11.3 million, or 20.4%, in the six months ended June 30, 2020, as compared to the six months ended June 30, 2019. This increase was generally due to the increase in product acceptances and lower product cost driven by ongoing cost reduction activities.
Installation Gross Loss
Installation gross loss increased $3.8 million in the three months ended June 30, 2020, as compared to the three months ended June 30, 2019. Excluding stock-based compensation, install gross loss increased $5.0 million, or 183.7%, in the three months ended June 30, 2020, as compared to the three months ended June 30, 2019 driven by the change in mix of installations driven by site complexity, size, local ordinance requirements, location of utility interconnect and, customer option to complete the installation of our Energy Servers themselves.
Installation gross loss increased $4.5 million in the six months ended June 30, 2020, as compared to the six months ended June 30, 2019. Excluding stock-based compensation, install gross loss increased $6.7 million, or 153.9%, in the six months ended June 30, 2020, as compared to the six months ended June 30, 2019, driven by the change in mix of installations driven by site complexity, size, local ordinance requirements, location of utility interconnect and, the customer's option to complete the installation of our Energy Servers themselves.
Service Gross Profit (Loss)
Service gross profit (loss) worsened $6.7 million in the three months ended June 30, 2020, as compared to the three months ended June 30, 2019. This decline was primarily due to an increase in service cost driven primarily by the timing of our service schedule for power module replacements required in our fleet of installed Energy Servers.
Service gross loss increased $8.1 million in the six months ended June 30, 2020, as compared to the six months ended June 30, 2019. This increase was primarily due to an increase in service cost driven primarily by the timing of our service schedule for power module replacements required in our fleet of installed Energy Servers.
Electricity Gross Profit (Loss)
Electricity gross profit (loss) improved $6.2 million, or 288.8%, in the three months ended June 30, 2020, as compared to the three months ended June 30, 2019, mainly due to the decommissioning and upgrade of PPA II in the three months ended June 30, 2019.
Electricity gross profit increased $1.7 million, or 31.8%, in the six months ended June 30, 2020, as compared to the six months ended June 30, 2019, mainly due to the decommissioning and upgrade of PPA II in the six months ended June 30, 2019.
Operating Expenses
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| | | Three Months Ended
June 30, | | | | Change | | | | Six Months Ended
June 30, | | | | Change | | |
| | | 2020 | | 2019 | | Amount | | % | | 2020 | | 2019 | | Amount | | % |
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| | | (dollars in thousands) | | | | | | | | (dollars in thousands) | | | | | | |
| Research and development | | $ | 19,377 | | | $ | 29,772 | | | $ | (10,395) | | | (34.9) | % | | $ | 42,656 | | | $ | 58,631 | | | $ | (15,975) | | | (27.2) | % |
| Sales and marketing | | 11,427 | | | 18,194 | | | (6,767) | | | (37.2) | % | | 25,376 | | | 38,567 | | | (13,191) | | | (34.2) | % |
| General and administrative | | 24,945 | | | 43,662 | | | (18,717) | | | (42.9) | % | | 54,043 | | | 82,736 | | | (28,693) | | | (34.7) | % |
| Total operating expenses | | $ | 55,749 | | | $ | 91,628 | | | $ | (35,879) | | | (39.2) | % | | $ | 122,075 | | | $ | 179,934 | | | $ | (57,859) | | | (32.2) | % |
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Total Operating Expenses
Total operating expenses decreased $35.9 million, or 39.2%, in the three months ended June 30, 2020, as compared to the three months ended June 30, 2019. Included as a component of total operating expenses, stock-based compensation expenses decreased approximately $26.9 million for the three months ended June 30, 2020, as compared to the three months ended June 30, 2019. The decrease in stock-based compensation expense was primarily attributable to a lower stock-based compensation charge attributed to a one-time employee grant of restricted stock units ("RSUs") awarded prior to IPO with a performance condition of an IPO of the Company's securities. These RSUs have a two-year vesting period starting on the day of IPO and were issued as an employee retention vehicle to bring our stock-based compensation in line with our peer group. These RSUs completed their vesting in July of 2020, and stock-based compensation charge associated with these RSUs decreased quarter-over-quarter until the final vesting date. In addition to the one-time grant, stock-based compensation expense includes some previously granted RSUs with vesting beginning upon the completion of our IPO. Total operating expenses, excluding stock-based compensation, decreased approximately $8.9 million, or 17.6%, in the three months ended June 30, 2020, as compared to the three months ended June 30, 2019. This decrease was primarily due to a $5.9 million one-time expense in the three months ended June 30, 2019 associated with the PPA II upgrade.
Total operating expenses decreased $57.9 million, or 32.2%, in the six months ended June 30, 2020, as compared to the six months ended June 30, 2019. Included as a component of total operating expenses, stock-based compensation expenses decreased approximately $58.9 million for the six months ended June 30, 2020, as compared to the six months ended June 30, 2019. The decrease in stock-based compensation expense was primarily attributable to a lower stock-based compensation charge attributed to a one-time employee grant of RSUs awarded prior to IPO with a performance condition of an IPO of the Company's securities. These RSUs have a two-year vesting period starting on the day of IPO and were issued as an employee retention vehicle to bring our stock-based compensation in line with our peer group. These RSUs completed their vesting in July of 2020, and the stock-based compensation charge associated with these RSUs decreased quarter-over-quarter until the final vesting date. In addition to the one-time grant, the stock-based compensation expenses include some previously granted RSUs with vesting beginning upon the completion of our IPO. Total operating expenses, excluding stock-based compensation expense, increased approximately $1.1 million, or 1.2%, in the six months ended June 30, 2020, as compared to the six months ended June 30, 2019. This increase was primarily due to compensation related expenses associated with hiring new employees, investments for next generation technology, and fees for restatement related expenses in 2020 offset by a $5.9 million one-time expense in six months ended June 30, 2019 associated with the PPA II upgrade.
Research and Development
Research and development expenses decreased approximately $10.4 million, or 34.9%, in the three months ended June 30, 2020, as compared to the three months ended June 30, 2019. Included as a component of research and development expenses, stock-based compensation expenses decreased by approximately $7.5 million for the three months ended June 30, 2020, as compared to the three months ended June 30, 2019. Total research and development expenses, excluding stock-based compensation expenses, decreased by approximately $2.9 million, or 16.5%, for the three months ended June 30, 2020, as compared to the three months ended June 30, 2019. This decrease was primarily due to timing of investments made in our next generation technology development, sustaining engineering projects for the current Energy Server platform, and investments made for customer personalized applications, such as microgrids, and new fuel solutions utilizing biogas.
Research and development expenses decreased by approximately $16.0 million, or 27.2%, in the six months ended June 30, 2020, as compared to the six months ended June 30, 2019. Included as a component of research and development expenses, stock-based compensation expenses decreased by approximately $15.6 million for the six months ended June 30, 2020, as compared to the six months ended June 30, 2019. Total research and development expenses, excluding stock-based compensation, decreased by approximately $0.3 million, or 1.0%, for the six months ended June 30, 2020, as compared to the six months ended June 30, 2019.
Sales and Marketing
Sales and marketing expenses decreased by approximately $6.8 million, or 37.2%, in the three months ended June 30, 2020, as compared to the three months ended June 30, 2019. Included as a component of sales and marketing expenses, stock-based compensation expenses decreased by approximately $6.7 million for the three months ended June 30, 2020, as compared to the three months ended June 30, 2019. Total sales and marketing expenses, excluding stock-based compensation, decreased by approximately $0.1 million, or 0.7%, for the three months ended June 30, 2020, as compared to the three months ended June 30, 2019.
Sales and marketing expenses decreased by approximately $13.2 million, or 34.2%, in the six months ended June 30, 2020, as compared to the six months ended June 30, 2019. Included as a component of sales and marketing expenses, stock-based compensation expenses decreased by approximately $14.3 million for the six months ended June 30, 2020, as compared to the six months ended June 30, 2019. Total sales and marketing expenses, excluding stock-based compensation, increased by approximately $1.1 million, or 6.2%, for the six months ended June 30, 2020, as compared to the six months ended June 30, 2019. This increase was primarily due to compensation expenses related to hiring new employees and expenses related to efforts to increase demand and raise market awareness of our Energy Server solutions, expanding outbound communications, as well as efforts to attract new customer financing partners.
General and Administrative
General and administrative expenses decreased by approximately $18.7 million, or 42.9%, in the three months ended June 30, 2020, as compared to the three months ended June 30, 2019. Included as a component of general and administrative expenses, stock-based compensation expenses decreased by approximately $12.7 million for the three months ended June 30, 2020, as compared to the three months ended June 30, 2019. Total general and administrative expenses, excluding stock-based compensation, decreased by approximately $6.0 million, or 25.0%, for the three months ended June 30, 2020, as compared to the three months ended June 30, 2019. This decrease was due to a $5.9 million one-time expense in the three months ended June 30, 2019 associated with the PPA II upgrade.
General and administrative expenses decreased by approximately $28.7 million, or 34.7%, in the six months ended June 30, 2020, as compared to the six months ended June 30, 2019. Included as a component of general and administrative expenses, stock-based compensation expenses decreased by approximately $29.0 million for the six months ended June 30, 2020, as compared to the six months ended June 30, 2019. Total general and administrative expenses, excluding stock-based compensation, increased by approximately $0.3 million, or 0.7%, for the six months ended June 30, 2020, as compared to the six months ended June 30, 2019. The increase in general and administrative expenses was mainly due to increased personnel costs and fees for restatement related expenses in 2020, offset by a $5.9 million one-time expense in the six months ended June 30, 2019 associated with the PPA II upgrade.
Stock-Based Compensation
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| | | Three Months Ended
June 30, | | | | Change | | | | Six Months Ended
June 30, | | | | Change | | |
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| Cost of revenue | | $ | 4,736 | | | $ | 10,538 | | | $ | (5,802) | | | (55.1) | % | | $ | 10,243 | | | $ | 28,850 | | | $ | (18,607) | | | (64.5) | % |
| Research and development | | 4,714 | | | 12,218 | | | (7,504) | | | (61.4) | % | | 10,810 | | | 26,448 | | | (15,638) | | | (59.1) | % |
| Sales and marketing | | 2,234 | | | 8,935 | | | (6,701) | | | (75.0) | % | | 6,124 | | | 20,447 | | | (14,323) | | | (70.0) | % |
| General and administrative | | 6,947 | | | 19,673 | | | (12,726) | | | (64.7) | % | | 14,473 | | | 43,441 | | | (28,968) | | | (66.7) | % |
| Total stock-based compensation | | $ | 18,631 | | | $ | 51,364 | | | $ | (32,733) | | | (63.7) | % | | $ | 41,650 | | | $ | 119,186 | | | $ | (77,536) | | | (65.1) | % |
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Total stock-based compensation decreased $32.7 million, or 63.7%, in the three months ended June 30, 2020, as compared to the three months ended June 30, 2019. Of the $18.6 million in stock-based compensation for the three months ended June 30, 2020, approximately $4.8 million was related to one-time employee grants of RSUs that were issued at the time of our IPO and that have a two-year vesting period. These RSUs provided us an employee retention vehicle to bring our stock-based compensation in line with our peer group. In addition, the stock-based compensation included some previously granted RSUs that vested upon the completion of our IPO.
Total stock-based compensation decreased $77.5 million, or 65.1%, in the six months ended June 30, 2020, as compared to the six months ended June 30, 2019. Of the $41.7 million in stock-based compensation for the six months ended June 30, 2020, approximately $11.5 million was related to one-time employee grants of RSUs that were issued at the time of our IPO and that have a two-year vesting period. These RSUs provided us an employee retention vehicle to bring our stock-based compensation in line with our peer group. In addition, the stock-based compensation included some previously granted RSUs that vested upon the completion of our IPO.
Other Income and Expense
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| | | Three Months Ended
June 30, | | | | Change | | Six Months Ended
June 30, | | | | Change | | |
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| Interest income | | $ | 332 | | | $ | 1,700 | | | $ | (1,368) | | | $ | 1,151 | | | $ | 3,585 | | | $ | (2,434) | | | |
| Interest expense | | (14,374) | | | (22,722) | | | 8,348 | | | (35,128) | | | (44,522) | | | 9,394 | | | |
| Interest expense, related parties | | (794) | | | (1,606) | | | 812 | | | (2,160) | | | (3,218) | | | 1,058 | | | |
| Other income (expense), net | | (3,913) | | | (222) | | | (3,691) | | | (3,921) | | | 43 | | | (3,964) | | | |
| Loss on extinguishment of debt | | — | | | — | | | — | | | (14,098) | | | — | | | (14,098) | | | |
| Gain (loss) on revaluation of embedded derivatives | | 412 | | | (540) | | | 952 | | | 696 | | | (1,080) | | | 1,776 | | | |
| Total | | $ | (18,337) | | | $ | (23,390) | | | $ | 5,053 | | | $ | (53,460) | | | $ | (45,192) | | | $ | (8,268) | | | |
Total Other Expense
Total other expense decreased $5.1 million in the three months ended June 30, 2020, as compared to the three months ended June 30, 2019. This decrease was primarily due to reduction in interest expenses.
Total other expense increased $8.3 million in the six months ended June 30, 2020, as compared to the six months ended June 30, 2019. This increase was primarily due to the loss on extinguishment of debt of $14.1 million.
Interest Income
Interest income decreased $1.4 million in the three months ended June 30, 2020, as compared to the three months ended June 30, 2019. This decrease was primarily due to the decrease in cash balances.
Interest income decreased $2.4 million in the six months ended June 30, 2020, as compared to the six months ended June 30, 2019. This decrease was primarily due to the decrease in cash balances.
Interest Expense
Interest expense decreased $8.3 million in the three months ended June 30, 2020, as compared to the three months ended June 30, 2019. This decrease was primarily due a one-time credit of $4.3 million due to premium amortization on the convertible notes, and a decrease in interest expense with the debt buy-out due to the PPA II and PPA IIIb upgrades.
Interest expense decreased $9.4 million in the six months ended June 30, 2020, as compared to the six months ended June 30, 2019. This decrease was primarily due a one-time credit of $4.3 million due to premium amortization on the convertible notes, and a decrease in interest expense with the debt buy-out due to the PPA II and PPA IIIb upgrades.
Interest Expense, Related Parties
Interest expense, related parties decreased $0.8 million the three months ended June 30, 2020, as compared to the three months ended June 30, 2019 due to the normal interest amortization.
Interest expense, related parties decreased $1.1 million the six months ended June 30, 2020, as compared to the six months ended June 30, 2019 due to the normal interest amortization.
Other Income (Expense), net
Other income (expense), net worsened $3.7 million in the three months ended June 30, 2020, as compared to the three months ended June 30, 2019, due to an impairment in our investment in the Bloom Energy Japan joint venture.
Other income (expense), net worsened $4.0 million in the six months ended June 30, 2020, as compared to the six months ended June 30, 2019, due to an impairment in our investment in the Bloom Energy Japan joint venture.
Loss on Extinguishment of Debt
There was no debt extinguishment in the three months ended June 30, 2020. Loss on extinguishment of debt of $14.1 million was recorded in the six months ended June 30, 2020. There was no debt extinguishment in the three and six months ended June 30, 2019.
Gain (Loss) on Revaluation of Embedded Derivatives
Gain (loss) on revaluation of embedded derivatives improved $1.0 million in the three months ended June 30, 2020, as compared to the three months ended June 30, 2019. This improvement was primarily due to the change in fair value of our sales contracts of embedded EPP derivatives valued using historical grid prices and available forecasts of future electricity prices to estimate future electricity prices.
Gain (loss) on revaluation of embedded derivatives improved $1.8 million in the six months ended June 30, 2020, as compared to the six months ended June 30, 2019. This improvement was primarily due to the change in fair value of our sales contracts of embedded EPP derivatives valued using historical grid prices and available forecasts of future electricity prices to estimate future electricity prices.
Provision for Income Taxes
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June 30, | | | | Change | | |
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| Income tax provision | | $ | 141 | | | $ | 258 | | | $ | (117) | | | (45.3) | % | | $ | 265 | | | $ | 466 | | | $ | (201) | | | (43.1) | % |
Income tax provision decreased in the three months ended June 30, 2020, as compared to the three months ended June 30, 2019, and was primarily due to fluctuations in the effective tax rates on income earned by international entities.
Income tax provision decreased in the six months ended June 30, 2020, as compared to the six months ended June 30, 2019, and was primarily due to fluctuations in the effective tax rates on income earned by international entities.
Net Loss Attributable to Noncontrolling Interests and Redeemable Noncontrolling Interests
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June 30, | | | | Change | | | | Six Months Ended
June 30, | | | | Change | | |
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| Less: net loss attributable to noncontrolling interests and redeemable noncontrolling interests | | 5,466 | | | 5,015 | | | $ | 451 | | | 9.0 | % | | $ | 11,159 | | | $ | 8,847 | | | $ | 2,312 | | | 26.1 | % |
Total loss attributable to noncontrolling interests increased $0.5 million, or 9.0%, in the three months ended June 30, 2020, as compared to the three months ended June 30, 2019. The net loss increased due to increased losses in our PPA Entities which are allocated to our noncontrolling interests.
Total loss attributable to noncontrolling interests increased $2.3 million, or 26.1%, in the six months ended June 30, 2020, as compared to the six months ended June 30, 2019. The net loss increased due to increased losses in our PPA Entities which are allocated to our noncontrolling interests.
Liquidity and Capital Resources
As of June 30, 2020, we had an accumulated deficit of approximately $2.4$3.1 billion. We financehave financed our operations, including the costs of acquisition and installation of our Energy Servers, mainly through a variety of financing arrangements and PPA Entities, credit facilities from banks, sales of our preferredcommon stock, debt financings and cash generated from our operations. As of June 30, 2018,2020, we had $1.0 billion$416.0 million of total outstanding recourse debt, $229.7 million of non-recourse debt and long term$27.3 million of other long-term liabilities. See Note 6 - 7, Outstanding Loans and Security Agreements, in Part I, Item 1, Financial Statements for a complete description of our outstanding debt. As of June 30, 20182020 and December 31, 2017,2019, we had cash and cash equivalents and short-term investments of $107.3$144.1 million and $130.6$202.8 million, respectively. We believeIn March 2020, we successfully extended the maturity of our outstanding 10% Convertible Notes, our 10% Constellation Note and additionally entered into a note purchase agreement to issue $70.0 million of 10.25% Senior Secured Notes due 2027 in a private placement that was subsequently completed on May 1, 2020. The combination of our existing cash and cash equivalents, the extension of the 10% Convertible Notes to December 2021, the conversion of the 10% Constellation Note in May 2020, and short-term investments willthe proceeds from the 10.25% Senior Secured Notes are expected to be sufficient to meet our operatingoperational and capital cash flow capital requirements and other cash flow needs and we do not expect that it will be necessary to access capital markets for at leastcash to operate our business for the next 12 months. OurIf the impact of COVID-19 to our business and financial position is more extensive than expected, we may access capital markets opportunistically to continue to improve our capital structure and to address outstanding debt principal repayments that are due in December 2021 if market conditions are favorable. As of June 30, 2020, the current portion of our total debt is $26.1 million.
For additional information refer to Note 7, Outstanding Loans and Security Agreements, in Item 1, Financial Statements.
Additionally, the impact of COVID-19 on our ability to execute our business strategy and on our financial position and results of operation is uncertain.Our future capitalcash flow requirements may vary materially from those currently planned and will depend on many factors, including our rate of revenue growth, the timing and extent of spending on research and development efforts and other business initiatives, the rate of growth in the volume of system builds, the expansion of sales and marketing activities, market acceptance of our products, the timing of receipt by us of distributions from our PPA Entities and overall economic conditions.conditions including the impact of COVID-19 on our future operations, as described in the COVID-19 Pandemic section above. We do not expect to receive significant cash distributions from our PPA Entities. To the extent that current and anticipated future sources of liquidity are insufficientFor additional information refer to fund our future business activities and requirements, we may be required to seek additional debt or equity financing.
In July 2018, and subsequent to the date of the financial statements included Note 13, Power Purchase Agreement Programs, in this Quarterly Report on Form 10-Q, we successfully completed an initial public stock offering with the sale of 20,700,000 shares of our Class A common stock at a price of $15.00 per share, resulting in cash proceeds of $284.3 million net of underwriting discounts, commissions and estimated offering costs. We intend to use the net proceeds from this offering for general corporate purposes including research and development and sales and marketing activities, general and administrative matters and capital expenditures. Part I, Item 1, Financial Statements.
Cash Flows - Six Months Ended June 30
Cash Used
A summary of theour sources and uses of cash, cash equivalents and restricted cash for the Company for the six months ended June 30, 2018 and 2017 is as follows (in thousands):
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June 30, | | | | | | | | |
| | | 2020 | | 2019 | | | | | | |
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| Operating activities | | $ | (40,235) | | | $ | 103,616 | | | | | | | |
| Investing activities | | (19,560) | | | 79,911 | | | | | | | |
| Financing activities | | 6,536 | | | (92,946) | | | | | | | |
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June 30, | | Change |
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| Operating activities | | $ | (18,585 | ) | | $ | (79,575 | ) | | $ | 60,990 |
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| Investing activities | | 9,673 |
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| Financing activities | | (21,828 | ) | | 77,156 |
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| Net cash used | | $ | (30,740 | ) | | $ | (4,684 | ) | | $ | (26,056 | ) |
Our use of cash (net) was $30.7 million and $4.7 million for the six months ended June 30, 2018 and 2017, respectively. In the six months ended June 30, 2018, cash used by operating activities decreased (improved) by $61.0
million to cash used of $18.6 million from cash used of $79.6 million in the six months ended June 30, 2017. The improvement in cash used by operating activities for the six months ended June 30, 2018 was due to a $15.9 million positive operating cash flow for the three months ended June 30, 2018. In the six months ended June 30, 2018,Net cash provided by investing activities increased by $11.9 million to cash provided of $9.7 million from cash used of $2.3 million in the same period in 2017. In the six months ended June 30, 2018, cash used by financing activities decreased by $99.0 million to cash used of $21.8 million from cash provided of $77.2 million in the same period in 2017.
Net cash used by(used in) our variable interest entities (the PPA Entities) which are incorporated into the condensed consolidated statementstatements of cash flows for the three months ended June 30, 2020 and 2019 is as follows (in thousands):
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June 30, | | | | | | | | |
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| Net cash provided by PPA operating activities | | $ | 15,016 | | | $ | 139,364 | | | | | | | |
| Net cash used in PPA financing activities | | (13,649) | | | (118,805) | | | | | | | |
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1 The PPA Entities' operating and financing cash flows are a subset of our consolidated cash flows and represents the stand-alone cash flows prepared in accordance with U.S. GAAP. Operating activities consist principally of cash used to run the operations of the PPA Entities, the purchase of Energy Servers from us and principal reductions in loan balances. Financing activities consist primarily of changes in debt carried by our PPAs, and payments from and distributions to noncontrolling partnership interests. We believe this presentation of net cash provided by (used in) PPA activities is useful to provide the reader with the impact to consolidated cash flows of the PPA Entities in which we have only a minority interest.
Operating Activities
Net cash used in operating activities for the six months ended June 30, 20182020 was $40.2 million and 2017was primarily the result of net cash loss of $44.3 million partially offset the net decrease in working capital of $4.1 million. Net cash loss is as follows (in thousands):
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| | | | | | | | | | | | |
| | | Six Months Ended
June 30, | | Change |
| | | 2018 | | 2017 | |
| | | | | | | |
| PPA Entities* | | | | |
| Net cash used in purchase of PPA property, plant and equipment in investing activities | | $ | — |
| | $ | — |
| | $ | — |
|
| Net cash provided by (used in) PPA operating activities | | $ | 21,470 |
| | $ | 12,791 |
| | $ | 8,679 |
|
| Net cash provided by (used in) PPA financing activities | | $ | (23,706 | ) | | $ | (13,791 | ) | | $ | (9,915 | ) |
| |
* | The PPA Entities' operating cash flows, which is a subsetprimarily comprised of our consolidated cash flows and represents the stand-alone cash flows prepared in accordance with US GAAP, consists principally of cash used to run the operations of the PPA Entities, the purchase of Energy Servers from us and principal reductions in loan balances. We believe this presentation of net cash provided by (used in) PPA activities is useful to provide the reader with the impact to consolidated cash flows of the PPA Entities in which we have only a minority interest. |
Operating Activities
In the six months ended June 30, 2018, we used approximately $18.6 million of cash in operating activities. This use of cash resulted primarily from a net operating loss of $63.4$129.6 million, which included netadjusted for non-cash chargesbenefit items including: (i) depreciation and amortization of $73.5 million and$25.9 million; (ii) impairment of equity method investment of $4.2 million; (iii) a non-cash loss attributable to non-controlling interests of $9.1 million. Non-cash items include depreciation of approximately $21.6 million, aon revaluation of derivative contracts of $28.6 million,$0.1 million; (iv) stock-based compensation of $15.8 million$41.7 million; and amortization(v) net loss on extinguishment of debt discount of $12.0 million, partially offset$14.1 million; net of (vi) recovery of debt issuance cost of $0.5 million. Net cash provided by a revaluation of preferred stock warrants of $7.5 million. Cash usedchanges in operating activitiesworking capital consisted primarily of an increase in inventorydecreases in: (i) customer financing receivable and other of $46.2 million,$2.5 million; (ii) prepaid expenses and increase inother current assets of $7.3 million; plus increases in: (iii) accounts receivablepayable of $6.5 million, a decrease in$8.8 million; (iv) accrued expenses and other current liabilities of $13.7 million; and (v) deferred revenue and customer deposits of approximately $31.8 million relating to upfront milestone payments received$2.9 million. These sources of cash from customers, an increase in other current liabilities of $12.8 million, partiallyworking capital were mostly offset by a decrease inincreases in: (i) accounts receivable of $11.8 million; (ii) inventories of $3.5 million; (iii) deferred cost of revenue of $48.8 million$10.0 million; and an increase in(iii) other long-term assets of $3.6 million; plus a decrease in: (iv) other long-term liabilities of $18.7$2.1 million.
In the six months ended June 30, 2017, we used approximately $79.6 million in operating activities. This use of cash resulted primarily from a net operating loss of $123.0 million, which included net non-cash charges of $59.8 million and a non-cash loss attributable to non-controlling interests of $10.0 million. Non-cash items include depreciation of approximately $23.6 million, stock-based compensation of $14.7 million and amortization of debt discount of $20.6 million. Cash used in operating activities consisted primarily of an increase in inventory of $17.6 million, an increase in accounts receivable of $5.3 million and an increase in deferred cost of revenue of $34.9 million and a decrease in accounts payable of $13.3 million, partially offset by an increase in other long term liabilities of $24.9 million, and an increase in deferred revenue and customer deposits of approximately $35.9 million relating to upfront milestone payments received from customers.
Net cash used inprovided by operating activities improved by $61.0 million for the six months ended June 30, 2018 when compared to the six months ended June 30, 2017. This increase2019 was primarily$103.6 million and was the result of an improvementnet cash earnings of $7.7 million plus net decrease in ourworking capital of $95.9 million. Net cash earnings is primarily comprised of a net loss of $59.6 million. The$195.7 million, adjusted for non-cash charges ofbenefit items including: (i) depreciation and amortization of approximately $37.0 million; (ii) write-off of property, plant and equipment, net of $2.7 million; (iii) Write-off of PPA II decommissioned assets of 25.6 million; (iv) debt make-whole payment reclassification of $5.9 million; (v) revaluation of derivatives contracts of $1.6 million; (vi) stock-based compensation were similar in both periods, as was the loss attributable to noncontrolling interests. We had an increase in the non-cash revaluation of derivative contracts$119.2 million; and (vii) amortization of $29.9 million as a resultdebt issuance cost of the$11.3 million. Net cash provided by changes in our stock price. Significant changes in cash used includes an increase inworking capital consisted primarily of decreases in: (i) accounts receivable of $49.7 million; (ii) inventory of $28.6 million due to an increase in the production volume when compared to 2017's increase in inventory, a substantial increase in the payment$22.2 million; (iii) customer financing receivable and other of $2.7 million; and (iv) prepaid expenses and other current assets of $10.2 million; plus increases in: (v) accrued expenses and other current liabilities as compared to a decrease of payments in the previous year's six months, and a significant decrease in$5.6 million; (vi) deferred revenue and customer deposits compared to an increase in the six month period in 2017. Cash provided by operating activities was most affected by
this year's decrease in deferred revenueof $51.9 million; and customer deposits when compared to last year's increase, this year's accounts payable increase when compared to the six month period in 2017's decrease, both(vi) other long term liabilities of which$4.7 million. These sources of cash from working capital were partially offset by a lesser increase in long term liabilities for the six months ended June 30, 2018 when compared to the six months ended June 30, 2017.increases in: (i) deferred cost of revenue of $38.8 million; and (ii) other long-term assets of $0.3 million; plus decreases in: (iii) accounts payable of $5.5 million; and (iv) accrued warranty of $6.7 million.
Investing Activities
OurNet cash used in investing activities consist primarily of capital expenditures which include our expenditures to maintain or increase the scope of our manufacturing operations. These capital expenditures also include leasehold improvements to our office space, purchases of office equipment, IT infrastructure equipment and furniture and fixtures.
Inin the six months ended June 30, 2018, we generated approximately $9.72020 was $19.6 million in cash from investing activities. This cash inflow is primarily from cash provided by investment activities of $11.3 million (net), partially offset by $1.6 million used forentirely related to the purchase of capital assets.
In the six months ended June 30, 2017, we used approximately $2.3 million in investing activities for the purchase of capitallong-lived assets.
Net cash provided by investing activities improved by $11.9 million for the six months ended June 30, 2018 when compared to the six months ended June 30, 2017. Our use of cash in the six months ended June 30, 20182019 was $79.9 million, which was primarily the result of net proceeds from maturities of marketable securities of $104.5 million, partially offset by $24.6 million used for the purchase of property, plant and equipment did not change significantly when compared to the same period in 2017. The change is primarily due to significant investment activitylong-lived assets.
Financing Activities
Net cash provided by financing activities in the six months ended June 30, 2018 as a result2020 was $6.5 million which included borrowings from issuance of the maturationdebt of marketable securities$70.0 million, borrowings from issuance of debt to related parties of $30.0 million and subsequent reinvestment, whereas we had noneproceeds from issuance of common stock of $5.2 million. This was partially offset by repayment of debt of $84.4 million, debt issuance costs of $3.4 million, repayment of financing obligations of $5.1 million, and distributions paid to our PPA Equity Investors of $5.8 million.
Net cash used in the same periodfinancing activities in 2017.
Financing Activities
In the six months ended June 30, 2018, we used approximately $21.82019 was $92.9 million of net cash for financing activities. This cash outflowand resulted primarily from distributions paid to our PPA Equity Investors of approximately $11.6$7.8 million, and repayments of $9.8 million of long-term debt of $85.2 million, the debt make-whole payment reclassification of $5.9 million, payments to noncontrolling and a revolving lineredeemable noncontrolling interests of credit.
In the six months ended June 30, 2017, we generated approximately $77.2$18.7 million, from financing activities. We had netand distributions to noncontrolling and redeemable noncontrolling interests of $7.8 million, partially offset by proceeds of approximately $93.9 million from the issuance of debtcommon stock of $8.3 million and the net proceeds from noncontrolling interestsfinancing obligations of $13.7$16.3 million.
Outstanding Loans and Security Agreements
The following is a summary of our debt as of June 30, 2020 (in thousands):
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| | | Unpaid
Principal
Balance | | Net Carrying Value | | | | | | Unused
Borrowing
Capacity | | | | | | | | |
| | | | | Current | | Long-
Term | | Total | | | | | | | | | | |
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| LIBOR + 4% term loan due November 2020 | | $ | 714 | | | $ | 697 | | | $ | — | | | $ | 697 | | | $ | — | | | | | | | | | |
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| 10% convertible promissory notes due December 2021 | | 249,299 | | | — | | | 263,405 | | | 263,405 | | | — | | | | | | | | | |
| 10% notes due July 2024 | | 86,000 | | | 14,000 | | | 69,497 | | | 83,497 | | | — | | | | | | | | | |
| 10.25% notes due March 2027 | | 70,000 | | | | | 68,437 | | | 68,437 | | | | | | | | | | | |
| Total recourse debt | | 406,013 | | | 14,697 | | | 401,339 | | | 416,036 | | | — | | | | | | | | | |
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| 7.5% term loan due September 2028 | | 35,675 | | | 2,567 | | | 30,078 | | | 32,645 | | | — | | | | | | | | | |
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| 6.07% senior secured notes due March 2030 | | 79,466 | | | 3,511 | | | 75,054 | | | 78,565 | | | — | | | | | | | | | |
| LIBOR + 2.5% term loan due December 2021 | | 119,472 | | | 5,289 | | | 113,184 | | | 118,473 | | | — | | | | | | | | | |
| Letters of Credit due December 2021 | | — | | | — | | | — | | | — | | | 968 | | | | | | | | | |
| Total non-recourse debt | | 234,613 | | | 11,367 | | | 218,316 | | | 229,683 | | | 968 | | | | | | | | | |
| Total debt | | $ | 640,626 | | | $ | 26,064 | | | $ | 619,655 | | | $ | 645,719 | | | $ | 968 | | | | | | | | | |
Recourse debt refers to debt that Bloom Energy Corporation has an obligation to pay. Non-recourse debt refers to debt that is recourse to only specified assets or our subsidiaries. The differences between the unpaid principal balances and the net carrying values apply to debt discounts and deferred financing costs. We were in compliance with all financial covenants as of June 30, 2020 and December 31, 2019.
Recourse Debt Facilities
LIBOR + 4% Term Loan due November 2020 - The weighted average interest rate as of June 30, 2020 and December 31, 2019 was 4.5% and 6.3%, respectively. As of June 30, 2020 and December 31, 2019, the unpaid principal balance of debt outstanding was $0.7 million offsetand $1.6 million, respectively, and we are in compliance with all covenants.
10% Constellation Convertible Promissory Note due 2021- On March 31, 2020, we entered into an Amended and Restated Subordinated Secured Convertible Note Modification Agreement (the “Constellation Note Modification Agreement”) which amended the terms of the 5% Constellation Note to extend the maturity date to December 31, 2021 and increased the interest rate from 5% to 10% ("10% Constellation Note"). We further amended the 10% Constellation Note by distributionsreducing the strike price on the conversion feature from $38.64 per share to $8.00 per share.
When we evaluated the Constellation Note Modification Agreement in accordance with ASC 470-60, Debt - Troubled Debt Restructurings by Debtors, and 470-50, Debt - Modifications and Extinguishments, we concluded that the amendment did not constitute a troubled debt restructuring and, furthermore, the amendment qualified as a substantial modification as a result of the increase in the fair value of the conversion feature due to the reduced strike price. As a result, on March 31, 2020, the 10% Constellation Note, which consisted of $33.1 million in principal and $3.8 million in accrued and unpaid interest, was extinguished and the 10% Constellation Note was recorded at their fair market value which equaled $40.7 million. The difference between the fair market value of the 10% Constellation Note and the carrying value of the 5% Constellation Note of $3.8 million was recorded as a loss on extinguishment of debt in the condensed consolidated statement of operations.
On June 18, 2020, Constellation NewEnergy, Inc. exchanged their entire 10% Constellation Note at the conversion price of $8.00 per share into 4.7 million shares of Class A common stock. At the time of this exchange the unamortized premium of $3.4 million was recorded as an adjustment to additional paid-in capital.
10% Convertible Promissory Notes due December 2021 - On March 31, 2020, we entered into an Amendment Support Agreement (the “Amendment Support Agreement”) with the noteholders of our outstanding 6% Convertible Notes pursuant to which such Noteholders agreed to extend the maturity date of the outstanding 6% Convertible Notes to December 1, 2021 and increase the interest rate from 6% to 10%, ("10% Convertible Notes"). Additionally, the debt is convertible at the option of the Noteholders into common stock at any time through the maturity date and we further amended the 10% Convertible Notes by reducing the strike price on the conversion feature from $11.25 to $8.00 per share. In conjunction with entering into the
Amendment Support Agreement, on March 31, 2020, we also entered into a Convertible Note Purchase Agreement (the “10% Convertible Note Purchase Agreement”) and issued an additional $30.0 million aggregate principal amount of 10% Convertible Notes to Foris Ventures, LLC, a new Noteholder and New Enterprise Associates 10, Limited Partnership, an existing Noteholder. The 10% Convertible Notes and the $30.0 million new 10% Convertible Notes were all reflected in the Amended and Restated Indenture between the Company and U.S. Bank National Association dated April 20, 2020. The Amendment Support Agreement required that we repay at least $70.0 million of the 10% Convertible Notes on or before September 1, 2020. In return, collateral was released to support the collateral required under the 10.25% Senior Secured Notes, and 50% of the proceeds from the consummation of certain transactions, including equity offerings or additional indebtedness, will be applied to redeem the 10% Convertible Notes at a redemption price equal to 100% of the principal amount of the 10% Convertible Notes, plus accrued and unpaid interest, plus a certain percentage, determined based on the time of redemption of the aggregate sum of all discounted remaining scheduled interest payments. The discount rate to determine the present value would decrease, creating a redemption penalty, if redemption were to occur after October 21, 2020. On May 1, 2020, we repaid $70.0 million of the 10% Convertible Notes and accrued and unpaid interest and recorded an adjustment to the unamortized debt premium of $4.3 million.
We evaluated the Amendment Support Agreement in accordance with ASC 470-60, Debt - Troubled Debt Restructurings by Debtors, and 470-50, Debt - Modifications and Extinguishments, and concluded that the amendment did not constitute a troubled debt restructuring and, furthermore, the amendment qualified as a substantial modification as a result of the increase in the fair value of the conversion feature due to the reduced strike price. As a result, on March 31, 2020, we recorded a $10.3 million loss on extinguishment of debt in the condensed consolidated statement of operations, which was calculated as the difference between the reacquisition price of the 6% Convertible Notes and the carrying value of the 6% Convertible Notes. The total carrying value of the 6% Convertible Notes equaled $279.0 million which consisted of $289.3 million in principal and $1.4 million in accrued and unpaid interest reduced by $10.7 million in unamortized discount and $1.0 million in unamortized debt issuance costs. The total reacquisition price of the 6% Convertible Notes equaled $289.3 million which consisted of the $340.7 million fair value of the 10% Convertible Notes, $1.4 million in accrued and unpaid interest, and $1.2 million of fees paid to our PPA Equity InvestorsNoteholders as part of approximately $17.7 million.the amendment, reduced by $24.0 million, the fair value at March 31, 2020 of the embedded derivative relating to the equity classified conversion feature that is reclassified from additional paid-in capital at the time of the extinguishment, $20.0 million cash received from the additional 10% Convertible Notes that were issued to New Enterprise Associates 10, Limited Partnership, and the $10.0 million issuance to Foris Ventures, LLC.
Net cash from financing activities decreased by $99.0The new net carrying amount of the 10% Convertible Notes of $263.4 million, which consists of the $249.3 million principal of the 10% Convertible Notes, $14.1 million net of premium paid for the six months ended10% Convertible Notes and debt issuance costs was classified as non-current as of June 30, 2018 when compared2020. Furthermore, the $14.1 million deemed premium net of debt issuance cost is being amortized over the term of the 10% Convertible Notes using the effective interest method.
10% Notes due July 2024 - The outstanding unpaid principal balance of the 10%Notesof $14.0 million and $14.0 million were classified as current as of June 30, 2020 and December 31, 2019, respectively, and the net carrying amount of the 10%Notes of $69.5 million and $76.0 million were classified as non-current as of June 30, 2020 and December 31, 2019, respectively. The accrued unpaid interest balance on the 10%Notes was $3.6 million and $3.9 million as on June 30, 2020 and December 31, 2019respectively.
10.25% Senior Secured Notes due March 2027 - On May 1, 2020, we issued $70.0 million of 10.25% Senior Secured Notes due 2027 (the “10.25% Senior Secured Notes”) in a private placement (the “Senior Secured Notes Private Placement”). The 10.25% Senior Secured Notes are governed by an indenture (the “Senior Secured Notes Indenture”) entered into among us, the guarantors party thereto and U.S. Bank National Association, in its capacity as trustee and collateral agent. The 10.25% Senior Secured Notes are secured by certain of our operations and maintenance agreements that previously were part of the security for the 6% Convertible Notes. We used the proceeds of this issuance to repay $70.0 million of our 10% Convertible Notes on May 1, 2020. The 10.25% Senior Secured Notes are supported by a $150.0 million indenture between us and US Bank National Association which contains an accordion feature for an additional $80.0 million of notes that can be issued within the next eighteen months.
Interest on the 10.25% Senior Secured Notes is payable on March 31, June 30, September 30 and December 31 of each year, commencing June 30, 2020. The 10.25% Senior Secured Notes Indenture contains customary events of default and covenants relating to, among other things, the incurrence of new debt, affiliate transactions, liens and restricted payments. On or after March 27, 2022, we may redeem all of the 10.25% Senior Secured Notes at a price equal to 108% of the principal amount of the 10.25% Senior Secured Notes plus accrued and unpaid interest, with such optional redemption prices decreasing to 104% on and after March 27, 2023, 102% on and after March 27, 2024 and 100% on and after March 27, 2026. Before March 27, 2022, we may redeem the 10.25% Senior Secured Notes upon repayment of a make-whole premium. If we experience a change
of control, we must offer to purchase for cash all or any part of each holder’s 10.25% Senior Secured Notes at a purchase price equal to 101% of the principal amount of the 10.25% Senior Secured Notes, plus accrued and unpaid interest. The outstanding unpaid principal of the 10.25% Senior Secured Notes of $70.0 million was classified as non-current as of June 30, 2020.
Non-recourse Debt Facilities
7.5% Term Loan due September 2028 - In December 2012 and later amended in August 2013, PPA IIIa entered into a $46.8 million credit agreement to help fund the purchase and installation of our Energy Servers. The loan bears a fixed interest rate of 7.5% payable quarterly. The loan requires quarterly principal payments which began in March 2014. The credit agreement requires us to maintain a debt service reserve for all funded systems, the balance of which was $3.8 million and $3.8 million as of June 30, 2020 and December 31, 2019, respectively, and which was included as part of long-term restricted cash in the condensed consolidated balance sheets. The loan is secured by all assets of PPA IIIa.
6.07% Senior Secured Notes due March 2025 - The notes bear a fixed interest rate of 6.07% per annum payable quarterly which began in December 2015 and ends in March 2030. The notes are secured by all the assets of the PPA IV. The Note Purchase Agreement requires us to maintain a debt service reserve, the balance of which was $8.3 million as of June 30, 2020 and $8.0 million as of December 31, 2019, and which was included as part of long-term restricted cash in the condensed consolidated balance sheets. The notes are secured by all the assets of the PPA IV.
LIBOR + 2.5% Term Loan due December 2021 - The outstanding debt balance of the Term Loan of $5.3 million and $5.1 million were classified as current and $113.2 million and $115.3 million were classified as non-current as of June 30, 2020 and December 31, 2019, respectively.
In accordance with the credit agreement, PPA V was issued a floating rate debt based on LIBOR plus a margin, paid quarterly. The applicable margins used for calculating interest expense are 2.25% for years 1-3 following the Term Conversion Date and 2.5% thereafter. For the Lenders’ commitments to the six months endedloan and the commitments to the LC loan, the PPA V also pays commitment fees at 0.50% per annum over the outstanding commitments, paid quarterly. The loan is secured by all the assets of the PPA V and requires quarterly principal payments which began in March 2017. In connection with the floating-rate credit agreement, in July 2015 PPA V entered into pay-fixed, receive-float interest rate swap agreements to convert its floating-rate loan into a fixed-rate loan.
Letters of Credit due December 2021 - In June 2015, PPA V entered into a $131.2 million term loan due December 2021. The agreement also included commitments to a LC facility with the aggregate principal amount of $6.4 million, later adjusted down to $6.2 million. The amount reserved under the letter of credit as of June 30, 2017, primarily the result2020 and December 31, 2019 was $5.2 million and $5.0 million, respectively. The unused capacity as of $100.0June 30, 2020 and December 31, 2019 was $1.0 million borrowedand $1.2 million, respectively.
Contractual Obligations and Other Commitments
The following table summarizes our contractual obligations and the receiptdebt of $13.7 million in proceeds from noncontrolling interests in the six months endedour consolidated PPA entities that is non-recourse to Bloom as of June 30, 2017 whereas2020:
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| | Payments Due By Period | | | | | | | | |
| | Total | | Less than
1 Year | | 1-3 Years | | 3-5 Years | | More than
5 Years |
| | (in thousands) | | | | | | | | |
| Contractual Obligations and Other Commitments: | | | | | | | | | | |
Recourse debt1 | | $ | 406,013 | | | $ | 14,714 | | | $ | 299,753 | | | $ | 63,992 | | | $ | 27,554 | |
Non-recourse debt2 | | 234,614 | | | 13,878 | | | 130,293 | | | 21,912 | | | 68,531 | |
| Operating leases | | 57,062 | | | 9,167 | | | 14,271 | | | 12,836 | | | 20,788 | |
| Service arrangements | | 2,594 | | | 1,297 | | | 1,297 | | | — | | | — | |
| Financing obligations | | 294,076 | | | 38,288 | | | 79,324 | | | 77,523 | | | 98,941 | |
| Natural gas fixed price forward contracts | | 5,185 | | | 4,000 | | | 1,185 | | | — | | | — | |
| Grant for Delaware facility | | 10,469 | | | — | | | 10,469 | | | — | | | — | |
| Interest rate swap | | 17,881 | | | 2,098 | | | 5,288 | | | 4,657 | | | 5,838 | |
| Supplier purchase commitments | | 1,721 | | | 1,099 | | | 622 | | | — | | | — | |
| Renewable energy credit obligations | | 708 | | | 592 | | | 116 | | | — | | | — | |
| Asset retirement obligations | | 500 | | | 500 | | | — | | | — | | | — | |
| Total | | $ | 1,030,823 | | | $ | 85,633 | | | $ | 542,618 | | | $ | 180,920 | | | $ | 221,652 | |
1Our 10% Convertible Notes and our credit agreements related to the amounts were nonebuilding of our facility in Newark, Delaware each contain cross-default or cross-acceleration provisions. See “Recourse Debt Facilities” above for more details.
2Each of the debt facilities entered into by PPA IIIa, PPA IV and none, respectively, in the same period in 2018.PPA V contain cross-default provisions. See “Non-recourse Debt Facilities” above for more details.
Off-Balance Sheet Arrangements
We include in our condensed consolidated financial statements all assets and liabilities and results of operations of our PPA Entities that we have entered into and over which we have substantial control. For additional information, see Note 13, Power Purchase Agreement Programs, in Item 1, Financial Statements.
We have not entered into any other transactions that have generated relationships with unconsolidated entities or financial partnerships or special purpose entities. Accordingly, as of June 30, 2018,2020 and 2019, we do not have anyhad no off-balance sheet arrangements.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposedThere were no significant changes to our quantitative and qualitative disclosures about market risk during the first six months of fiscal year ended December 31, 2020. Please refer to Part II, Item 7A. Quantitative and Qualitative Disclosures about Market Risk included in our Annual Report on Form 10-K for our fiscal year ended December 31, 2019 for a more complete discussion of the market risks as part of our ongoing business operations, primarily by exposure to changes in interest rates, in commodity fuel prices and in foreign currency.we encounter.
Interest Rates
Our cash and cash equivalents are invested in money market funds and our short-term investments are invested in U.S. Treasury bills. Due to the short-term nature of our cash equivalents and short-term investments, we believe that we do not have any material revenue exposure to changes in fair value as a result of changes in interest rates. Additionally, given the low levels of interest earned on money market funds and U.S. Treasury bills, any exposure to market rate interest fluctuations would not have a material effect on our operating results or financial condition.We are exposed to interest rate risk related to our indebtedness that bears interest based on a floating LIBOR rate. We generally hedge such interest rate risks with the use of hedging instruments. Changes in interest rates which may affect our indebtedness are generally offset by interest rate swaps. For our fixed-rate debt, interest rate changes do not affect our earnings or cash flows. We do not believe that an increase or decrease in interest rates by a hypothetical 10% would have a material effect on our operating results or financial condition.
Commodity Price Risk
We are subject to commodity price risk arising from price movements for natural gas that we supply to customers to operate our Energy Servers under certain power purchase agreements. We manage this risk by entering into forward commodity contracts associated with the cost of natural gas as economic hedges. As a result, we do not believe that a hypothetical 10% change in commodity prices would have a material effect on our operating results or financial condition.
Foreign Currency Risk
Our sales contracts are primarily denominated in U.S. dollars and, therefore, substantially all of our revenue is not subject to foreign currency market risk. As a result, we do not believe that a hypothetical 10% change in foreign currency exchange rates would have a material effect on our operating results or financial condition.
However, an increasing portion of our operating expenses is incurred outside the United States, is denominated in foreign currencies and is subject to such risk. Although not yet material, if we are not able to successfully hedge against the risks associated with currency fluctuations in our future activities, our financial condition and operating results could be adversely affected.
ITEM 4 - CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in
our reports made as defined in Rules 13-a-15(e) and 15d-15(e)that we file or submit under the Securities Exchange Act, of 1934, as amended, is
recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that such
information is accumulated and communicated to our management, including our Chief Executive Officer (our principal executive officer) and Chief Financial
Officer (our principal financial officer) as appropriate, to allow for timely decisions regarding required disclosure.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934), as amended (the Exchange Act), as of June 30, 2018.2020. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of June 30, 20182020, our disclosure controls and procedures were not effective because of the material weakness described below.
Material Weakness
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. We identified a material weakness, whereby we did not design and maintain an effective control environment with a sufficient complement of resources with an appropriate level of accounting knowledge, expertise and training to provide reasonable assurance that information required to be disclosedevaluate the accounting for and disclosure of complex or non-routine transactions commensurate with our financial reporting requirements. This material weakness resulted in errors in the reports we fileaccounting for certain transactions, which resulted in a restatement of our consolidated financial statements as of and submit underfor the Exchange Act is recorded, processed, summarizedyear ended December 31, 2018, as of and reportedfor the three month period ended March 31, 2019, as of and when required,for the three and that such information is accumulatedsix month periods ended June 30, 2019 and communicated2018 and as of and for the three and nine month periods ended September 30, 2019 and 2018, and revisions to our management, includingconsolidated financial statements as of and for the year ended December 31, 2017 and as of and for the three month period ended March 31, 2018. This material weakness will also result in revisions to our Chief Executive Officerconsolidated financial statements as of and Chief Financial Officer,for the years ended December 31, 2019 and 2018, when those periods are next reported.
Additionally, this material weakness could result in a misstatement of substantially all account balances or disclosures that would result in a material misstatement to allow timely decisions regarding its required disclosure.the annual or interim consolidated financial statements that would not be prevented or detected.
Remediation Activities
We are currently in the process of remediating the material weakness and have taken and continue to take steps that we believe will address the underlying causes of the material weakness, which resulted from an insufficient complement of resources with an appropriate level of accounting knowledge, expertise and training to evaluate the accounting for and disclosure of complex or non-routine transactions commensurate with our financial reporting requirements. Steps we are taking include increasing the use of qualified internal and third-party technical resources with accounting expertise on complex or non-routine transactions who are providing accounting interpretation guidance to assist us in identifying and addressing any issues that affect our consolidated financial statements.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the period covered by this Quarterly Report on Form 10-Qquarter ended June 30, 2020 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitation on Effectiveness of Controls and Procedures
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. A controls system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the controls system are met. Further, the design of a controls system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all controls systems, no evaluation of controls can provide absolute assurance that all controls issues and instances of fraud, if any, within our company have been detected. Accordingly, our disclosure controls and procedures provide reasonable assurance of achieving their objectives.
Part II - Other Information
ITEM 1 - LEGAL PROCEEDINGS
For a discussion of legal proceedings, see "Legal Matters" under Note 1314 - Commitments and Contingencies, in the notes to our condensed consolidated financial statements. Part I, Item 1, Financial Statements. We are, and from time to time we may become, involved in legal proceedings or be subject to claims arising in the ordinary course of our business. We are not presently a party to any other legal proceedings that in the opinion of our
management and if determined adversely to us, would individually or taken together have a material adverse effect on our business, operating results, financial condition or cash flows.
ITEM 1A - RISK FACTORS
A descriptionInvesting in our securities involves a high degree of the risks and uncertainties associated with our business is set forth below.risk. You should carefully consider the risks and uncertainties described below, as well as the other information in this Quarterly Report on Form 10-Q, including our condensed consolidated financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” TheOperations” before you decide to purchase our securities. Many of these risks and uncertainties are beyond our control, and the occurrence of any of the events or developments described below, or of additional risks and uncertainties not presently known to us or that we currently deem immaterial, could materially and adversely affect our business, financial condition, operating results and prospects. In such an event, the market price of our Class A common stock could decline and you could lose all or part of your investment.
This Risk Factor section is divided by topic for ease of reference as follows: Risks Relating to Our Business, Industry and Sales; Risks Related to Our Products and Manufacturing; Risks Relating to Government Incentive Programs; Risks Related to Legal Matters and Regulations; Risks Relating to Our Intellectual Property; Risks Relating to Our Financial Condition and Operating Results; Risks Related to Our Liquidity; Risks Related to Our Operations; and Risks Related to Ownership of Our Common Stock.
Risks Relating to Our Business, Industry and Sales
The distributed generation industry is an emerging market and distributed generation may not receive widespread market acceptance.
The distributed generation industry is still relatively nascent in an otherwise mature and heavily regulated industry, and we cannot be sure that potential customers will accept distributed generation broadly, or our Energy Server products specifically. Enterprises may be unwilling to adopt our solution over traditional or competing power sources for any number of reasons including the perception that our technology or our company is unproven, they lack confidence in our business model, the perceived unavailability of back-up service providers to operate and maintain the Energy Servers, and lack of awareness of our product or their perception of regulatory or political headwinds. Because distributed generation is an emerging industry, broad acceptance of our products and services is subject to a high level of uncertainty and risk. If the market develops more slowly than we anticipate, our business will be harmed.
Our limited operating history and our nascent industry make evaluating our business and future prospects difficult.
From our inception in 2001 through 2008,2009, we were focused principally on research and development activities relating to our Energy Server technology. We did not deploy our first Energy Server and did not recognize any revenue until 2008.2009. Since that initial deployment, our business has expanded significantly over a comparatively short time, given the characteristics of the electric power industry. As a result, we have a limited history operating our business at its current scale, and therefore a limited history upon which you can base an investment decision.
Ourscale. Furthermore, our Energy Server is a new type of product in the nascent distributed energy industry. PredictingConsequently, predicting our future revenue and appropriately budgeting for our expenses is difficult, and we have limited insight into trends that may emerge and affect our business. If actual results differ from our estimates or if we adjust our estimates in future periods, our operating results and financial position could be materially and adversely affected. You should consider our prospects in light of the risks
Our products involve a lengthy sales and uncertainties that emerging companies encounter when introducinginstallation cycle and if we fail to close sales on a new product into a nascent industry.
The distributed generation industry is an emerging marketregular and distributed generation may not receive widespread market acceptance.
The distributed generation industry is still relatively nascent, and we cannot be sure that potential customers will accept distributed generation more broadly, or our Energy Server products more specifically. Enterprises may be unwilling to adopt our solution over traditional or competing power sources for any number of reasons including the perception that our technology is unproven, lack of confidence intimely basis, our business model, unavailabilitycould be harmed.
Our sales cycle is typically 12 to 18 months but can vary considerably. In order to make a sale, we must typically provide a significant level of back-up service providerseducation to operateprospective customers regarding the use and maintain the Energy Servers, and lack of awarenessbenefits of our product. Because this is an emerging industry, broad acceptanceproduct and our technology. The period between initial discussions with a potential customer and the eventual sale of our products and services are subject toeven a high level of uncertainty and risk. If the market develops more slowly than we anticipate, our business will be harmed.
We have incurred significant losses in the past and we do not expect to be profitable for the foreseeable future.
Since our inception in 2001, we have incurred significant net losses and have used significant cash in our business. As of June 30, 2018, we had an accumulated deficit of $2.4 billion. We expect to continue to expand our operations, including by investing in manufacturing, sales and marketing, research and development, staffing systems and infrastructure to support our growth. We anticipate that we will incur net losses on a US GAAP basis for the foreseeable future. Our ability to achieve profitability in the future will dependsingle product typically depends on a number of factors, including:including the potential customer’s budget and decision as to the type of financing it chooses to use as well
as the arrangement of such financing. Prospective customers often undertake a significant evaluation process which may further extend the sales cycle. Once a customer makes a formal decision to purchase our product, the fulfillment of the sales volume;
increasingorder by us requires a substantial amount of time. Generally, the time between the entry into a sales to existing customerscontract with a customer and attracting new customers;
attracting and retaining financing partners who are willing to provide financing for sales on a timely basis and with attractive terms;
continuing to improve the useful lifeinstallation of our fuel cell technology and reducing our warranty servicing costs;
reducing the cost of producing our Energy Servers;
improving the efficiency and predictability of our installation process;
improving the effectiveness of ourServers can range from nine to twelve months or more. This lengthy sales and marketing activities;installation cycle is subject to a number of significant risks over which we have little or no control. Because of both the long sales and long installation cycles, we may expend significant resources without having certainty of generating a sale.
attractingThese lengthy sales and retaining key talent ininstallation cycles increase the risk that an installation may be delayed and/or may not be completed. In some instances, a competitive marketplace.
Even if we do achieve profitability,customer can cancel an order for a particular site prior to installation, and we may be unable to sustainrecover some or increaseall of our profitabilitycosts in connection with design, permitting, installation and site preparations incurred prior to cancellation. Cancellation rates can be between 10% and 20% in any given period due to factors outside of our control including an inability to install an Energy Server at the customer’s chosen location because of permitting or other regulatory issues, delays or unanticipated costs in securing interconnection approvals or necessary utility infrastructure, unanticipated changes in the future.cost, or other reasons unique to each customer. Our operating expenses are based on anticipated sales levels, and many of our expenses are fixed. If we are unsuccessful in closing sales after expending significant resources or if we experience delays or cancellations, our business could be materially and adversely affected. Since we do not recognize revenue on the sales of our products until installation and acceptance, a small fluctuation in the timing of the completion of our sales transactions could cause operating results to vary materially from period to period.
Our Energy Servers have significant upfront costs, and we will need to attract investors to help customers finance purchases.
Our Energy Servers have significant upfront costs. In order to assistexpand our offerings to customers in obtaining financingwho lack the financial capability to purchase our Energy Servers directly (including customers who are unable to monetize the tax credits available to purchasers of our Energy Servers) and/or who prefer to lease the product or contract for our products,services on a pay-as-you-go model, we have leasing programs with two leasing partners who have prequalified our productsubsequently developed the Traditional Lease, Managed Services and provide financing for customers through various leasing arrangements.PPA Programs. In addition to the leasingTraditional Lease model, we also offer power purchase agreements (PPAs)PPA Programs, including Third-Party PPAs, in which financing the cost of the Energy Server is provided by a subsidiary operating company ("an Operating Company")Company and funded by a subsidiary investment entity ("an Investment Company", together the "PPA Entities")Company which is financed by us and/or
in combination with third-party investors ("Equity Investors").Investors. We refer to the Operating Company and its subsidiary Investment Company collectively as a PPA Entity. In recent periods, the substantial majority of our end customers have elected to finance their purchases, typically through PPA Entities.Third Party PPAs.
We will need to grow committed financing capacity with existing partners or attract additional partners to support our growth. Generally, at any point in time, the deployment of a portion of our backlog is contingent on securing available financing. Our ability to attract third-party financing depends on many factors that are outside of our control, including the investors’ ability to utilize tax credits and other government incentives, interest rate and/or currency exchange fluctuations, our perceived creditworthiness and the condition of credit markets generally. Our financing of customer purchases of our Energy Servers is subject to conditions such as the customer’s credit quality and the expected minimum internal rate of return on the customer engagement, and if these conditions are not satisfied, we may be unable to finance purchases of our Energy Servers, which would have an adverse effect on our revenue in a particular period. If we are unable to help our customers arrange financing for our Energy Servers generally, our business will be harmed. For example, we have been workingAdditionally, the Managed Services and Traditional Lease options, as with all leases, are also limited by the customer’s willingness to commit to making fixed payments regardless of the performance of the Energy Servers or our performance of our obligations under the customer agreement.
Further, our sales process for transactions that require financing sources to arrange for additional third-party Power Purchase Agreement Program entities, one of which will need to be finalized in order for our customers to arrange financing sorequire that we can completemake certain assumptions regarding the cost of financing capital. Actual financing costs may vary from our planned installationsestimates due to factors outside of our control, including changes in customer creditworthiness, macroeconomic factors, the first quarterreturns offered by other investment opportunities available to our financing partners, and other factors. If the cost of 2019.financing ultimately exceeds our estimates, we may be unable to proceed with some or all of the impacted projects or our revenue from such projects may be less than our estimates.
We do not currently have a committed financing partner willing to finance deployments with poor credit-quality customers. If we are unable to procure financing partners willing to finance such deployments or if the cost of such financing exceeds our ability to growestimates, our business maywould be negatively impacted.
If our Energy Servers contain manufacturing defects, our business and financial results could be harmed.
Our Energy Servers are complex products and they may contain undetected or latent errors or defects. In the past, we have experienced latent defects only discovered once the Energy Server is deployed in the field. Changes in our supply chain or the failure of our suppliers to otherwise provide us with components or materials that meet our specifications could also introduce defects into our products. In addition, as we grow our manufacturing volume, the chance of manufacturing defects could increase. Any manufacturing defects or other failuresThe economic benefits of our Energy Servers to perform as expected could cause usour customers depend on the cost of electricity available from alternative sources including local electric utility companies, which cost structure is subject to incur significant re-engineering costs, divertchange.
We believe that a customer’s decision to purchase our Energy Servers is significantly influenced by the attentionprice, the price predictability of our engineering personnel from product development efforts and significantly and adversely affect customer satisfaction, market acceptance and our business reputation.
Furthermore, we may be unable to correct manufacturing defects or other failures ofelectricity generated by our Energy Servers in a manner satisfactory to our customers, which could adversely affect customer satisfaction, market acceptance and our business reputation.
The performance of our Energy Servers may be affected by factors outside of our control, which could result in harm to our business and financial results.
Field conditions, such as the quality of the natural gas supply and utility processes which vary by region and may be subject to seasonal fluctuations, have affected the performance of our Energy Servers and are not always possible to predict until the Energy Server is in operation. Although we believe we have designed new generations of Energy Servers to better withstand the variety of field conditions we have encountered, as we move into new geographies and deploy new service configurations, we may encounter new and unanticipated field conditions. Adverse impacts on performance may require us to incur significant re-engineering costs, divert the attention of our engineering personnel from product development efforts and significantly and adversely affect customer satisfaction, market acceptance and our business reputation. Furthermore, we may be unable to adequately address the impacts of factors outside of our control in a manner satisfactory to our customers, which could adversely affect customer satisfaction, market acceptance and our business reputation.
If our estimates of useful life for our Energy Servers are inaccurate or we do not meet service and performance warranties and guarantees, our business and financial results could be harmed.
We offer certain customers the opportunity to renew their operations and maintenance service agreements on an annual basis, for up to 20 years, at prices predetermined at the time of purchase of the Energy Server. Our pricing of these contracts and our reserves for warranty and replacement are based upon our estimates of the life of our Energy Servers and their components, including assumptions regarding improvements in useful life that may fail to materialize. We also provide performance warranties and guarantees covering the efficiency and output performance of our Energy Servers. We do not have a long history with a large number of field deployments, and our estimates may prove to be incorrect. Failure to meet these performance warranties and guarantee levels may require us to replace the Energy Servers at our expense or refund their costcomparison to the customer, or require us to make cash payments to the customer based on actual performance, as compared to expected performance, capped at a percentage of the relevant equipment purchase prices. Early generations of our Energy Server did not have the useful liferetail price and did not perform at an output and efficiency level that we expected. We implemented a fleet decommissioning program for our early generation Energy Servers in our PPA I program, which resulted in a significant adjustment to revenue in the quarter ended December 31, 2015, as we would otherwise have failed to meet efficiency and
output warranties. As of June 30, 2018, we had a total of 58 megawatts in total deployed early generation servers, including our first and second generation servers, out of our total installed base of 328 megawatts. We accrue for product warranty costs and recognize losses on service or performance warranties based on our estimates of costs that may be incurred and based on historical experience; however, actual warranty expenses have in the past been and may in the future be greater than we have assumed in our estimates,price outlook of electricity from the accuracy of which may be hindered due to our limited operating history operating at our current scale. We accrue for extended warranty costs that we expect to incur under the maintenance service agreements that our customers renew for a term of typically one year. In addition, we expect that our deployed early generation Energy Servers may continue to perform at a lower output and efficiency level and, as a result, the maintenance costs may exceed the contracted prices that we expect to generate in respect of those servers if our customers continue to renew their maintenance service agreements in respect of those servers.
Our business currently depends on the availability of rebates, tax creditslocal utility grid and other financial incentives. energy sources. The reduction, modification or elimination of government economic incentives could cause our revenue to decline and harm our financial results.
The U.S. federal government and some state and local governments provide incentives to end users and purchasers of our Energy Servers in the form of rebates, tax credits and other financial incentives, such as system performance payments and payments for renewable energy credits associated with renewable energy generation. We rely on these governmental rebates, tax credits and other financial incentives to significantly lower the effective price of the Energy Servers to our customers in the United States, including by lowering the cost of capital to our customers, as our financing partners and PPA Equity Investors may take advantage of these financial incentives. However, these incentives may expire on a particular date, end when the allocated funding is exhausted or be reduced or terminated as a matter of regulatory or legislative policy. For example, the federal ITC benefit expired on December 31, 2016 and without the availability of the ITC benefit incentive, we lowered the price of our Energy Servers to ensureour customers
includes, among other things, the economicsbenefit of reducing such customer’s payments to the local utility company. The rates at which electricity is available from a customer’s local electric utility company is subject to change and any changes in such rates may affect the relative benefits of our Energy Servers. Even in markets where we are competitive today, rates for electricity could decrease and render our Energy Servers uncompetitive. Several factors could lead to a reduction in the price or future price outlook for grid electricity, including the impact of energy conservation initiatives that reduce electricity consumption, construction of additional power generation plants (including nuclear, coal or natural gas) and technological developments by others in the electric power industry which could result in electricity being available at costs lower than those that can be achieved from our Energy Servers. If the retail price of grid electricity does not increase over time at the rate that we or our customers remain the same asexpect, it was prior to losing the ITC benefit, adversely affecting our gross profit. While the ITC was reinstated by the U.S Congress on February 9, 2018 and made retroactive to January 1, 2017, it is possible in the future that this incentive could be repealed.
Our Energy Servers have qualified for tax exemptions, incentives, or other customer incentives in many states including the states of California, Connecticut, Massachusetts, New Jersey and New York. Some states have utility procurement programs and/or renewable portfolio standards for which our technology is eligible. Our Energy Servers are currently installed in eleven U.S. states, each of which may have its own enabling policy framework. There is no guarantee that these policies will continue to exist in their current form, or at all. Such state programs may face increased opposition on the U.S. federal, state and local levels in the future. Changes in federal or state programs could reduce demand for our Energy Servers impair sales financing and adversely impactharm our business results.business.
For example,Further, the California Self Generation Incentive Program (SGIP) is a program administered by the California Public Utilities Commission (CPUC) which provides incentives to investor-ownedlocal electric utility or regulatory authorities may impose “departing load,” “standby,” power factor charges, greenhouse gas emissions charges, or other charges on our customers that install eligible distributed energy resources. In July 2016, the CPUC modified the SGIP to provide a smaller allocationin connection with their acquisition or use of the incentives available to generating technologies such as our Energy Servers, and a larger allocation to storage technologies. As modified, the SGIP will require all eligible power generation sources consuming natural gas to use a minimumamounts of 10% biogas to receive SGIP funds beginning in 2017, with this minimum biogas requirement increasing to 25% in 2018, 50% in 2019 and 100% in 2020. In addition, the CPUC provided a further limitation on the available allocation of funds that any one participant may claim under the SGIP. The SGIP will expire on January 21, 2021 absent extension. Our billings for product accepted derived from customers benefiting from the SGIP represented approximately 5% and 12% of total billings for product accepted for the six months ended June 30, 2018 and the year ended December 2017, respectively.
We rely on tax equity financing arrangements to realize the benefits provided by investment tax credits and accelerated tax depreciation and, in the event these programswhich are terminated, our financial results could be harmed.
We expect that any Energy Server deployments through financed transactions (including our Bloom Electrons programs, our leasing programs, and any third-party Power Purchase Agreement Programs) will receive capital from financing parties who derive a significant portion of their economic returns through tax benefits (Equity Investor). Equity Investors are generally entitled to substantially all of the project’s tax benefits, such as those provided by the ITC and MACRS depreciation, until the Equity Investors achieve their respective agreed rates of return. The number of and available capital from potential Equity Investors is limited, we compete with other energy companies eligible for these tax benefits to access such investors, and the availability of capital from Equity Investors is subject to fluctuations based on factors outside of our control such as macroeconomic trends and changes in applicable taxation regimes. Concerns regardingwhich may have a material impact on the economic benefit of our limited operating history and lack of profitability have made it difficultEnergy Servers to attract investorsour customers. Changes in the past. Our ability to obtain additional financingrates offered by local electric utilities and/or in the future depends on the continued confidenceapplicability or amounts of bankscharges and other financing sources infees imposed or incentives granted by such utilities on customers acquiring our business model,Energy Servers could adversely affect the marketdemand for our Energy ServersServers.
In some states and countries, the continued availabilitycurrent low cost of tax benefits applicable togrid electricity, even together with available subsidies, does not render our Energy Servers. In addition, conditions in financial and credit
markets generally may result in the contraction of available tax equity financing.product economically attractive. If we are unable to enter into tax equity financing agreements with attractive pricing terms orreduce our costs to a level at all, we may not be able to attract the capital needed to fund our financing programs or use the tax benefits provided by the ITC and MACRS depreciation, which could make it more difficult for customers to finance the purchase of our Energy Servers would be competitive in such markets, or require us to reduce the price at whichif we are ableunable to sellgenerate demand for our Energy Servers and therefore harmbased on benefits other than electricity cost savings, such as reliability, resilience, or environmental benefits, our business, our financial condition and our resultspotential for growth may be limited.
Furthermore, an increase in the price of operations.
We derivenatural gas or curtailment of availability (e.g., as a substantial portionconsequence of our revenue and backlog from a limited number of customers, and the loss ofphysical limitations or a significant reduction in orders from a large customer could have a material adverse effect on our operating results and other key metrics.
In any particular period, a substantial amount of our total revenue could come from a relatively small number of customers. As an example,regulatory conditions for the year ended December 31, 2016, two customers accounted for approximately 29%delivery of our total revenue. In 2017, two customers accounted for approximately 53%production of our total revenue. Since we recognizenatural gas) or the product revenue for customer-financed purchases at the time that the Energy Server is accepted, the loss of any large customer order or any delays in installations of new Energy Servers with any large customerinability to obtain natural gas service could materially and adversely affect our business results.
Our products involve a lengthy sales and installation cycle and, if we fail to close sales on a regular and timely basis, our business could be harmed.
Our sales cycle is typically 12 to 18 months but can vary considerably. In order to make a sale, we must typically provide a significant level of education to prospective customers regarding the use and benefits of our product and its technology. The period between initial discussions with a potential customer and the eventual sale of even a single product typically depends on a number of factors, including the potential customer’s budget and decision as to the type of financing it chooses to use as well as the arrangement of such financing. Prospective customers often undertake a significant evaluation process which may further extend the sales cycle. Once a customer makes a formal decision to purchase our product, the fulfillment of the sales order by us requires a substantial amount of time. Currently, we believe the time between the entry into a sales contract with a customer and the installation of our Energy Servers can range from nineless economically attractive to twelve months or more. This lengthy salespotential customers and installation cycle is subject to a number of significant risks over which we have little or no control. Because of both the long sales and installation cycles, we may expend significant resources without having certainty of generating a sale.
These lengthy sales and installation cycles increase the risk that our customers will fail to satisfy their payment obligations or will cancel orders before the completion of the transaction or delay the planned date for installation. Generally, a customer can cancel an order prior to installation and we may be unable to recover some or all of our costs in connection with design, permitting, installation and site preparations incurred prior to cancellation. Cancellation rates can be between 10% and 20% in any given period due to factors outside of our control including an inability to install an Energy Server at the customer’s chosen location because of permitting or other regulatory issues, unanticipated changes in the cost, the availability of alternative sources of electricity available to the customer or other reasons unique to each customer. Our operating expenses are based on anticipated sales levels, and many of our expenses are fixed. If we are unsuccessful in closing sales after expending significant resources or if we experience delays or cancellations, our business could be materially and adversely affected. Since we do not recognize revenue on the sales of our products until installation and acceptance, a small fluctuation in the timing of the completion of our sales transactions could cause operating results to vary materially from period to period.reduce demand.
We rely on interconnection requirements and net metering arrangements that are subject to change.
Because our Energy Servers are designed to operate at a constant output twenty-four hours a day, seven days a week, and our customers’ demand for electricity typically fluctuates over the course of the day or week, there are often periods when our Energy Servers are producing more electricity than a customer may require, and such excess electricity must be exported to the local electric utility. Many, but not all, local electric utilities provide compensation to our customers for such electricity under “net metering” programs. NetUtility tariffs and fees, interconnection agreements and net metering programsrequirements are subject to changes in availability and terms.terms and some jurisdictions do not allow interconnections or export at all. At times in the past, such changes have had the effect of significantly reducing or eliminating the benefits of such programs. Changes in the availability of, or benefits offered by, utility tariffs, the net metering programsrequirements or interconnection agreements in place in the jurisdictions in which we operate on in which we anticipate expanding into in the future could adversely affect the demand for our Energy Servers. For example, in California, changes are expected in the eligibility requirements for the net metering tariffs
applicable to fuel cells that are currently in effect from investor-owned utilities. Although we are and will continue to remain
an active participant in regulatory proceedings addressing such requirements, we cannot predict the outcome of the
proceedings.
We currently face and will continue to face significant competition.
We compete for customers, financing partners, and incentive dollars with other electric power providers. Many providers of electricity, such as traditional utilities and other companies offering distributed generation products, have: longer operating histories; customer incumbency advantages; access to and influence with local and state governments; and access to more capital resources than do we. Significant developments in alternative technologies, such as energy storage, wind, solar, or hydro power generation, or improvements in the efficiency or cost of traditional energy sources, including coal, oil, natural gas used in combustion, or nuclear power, may materially and adversely affect our business and prospects in ways we cannot anticipate. We may also face new competitors who are not currently in the market. If we fail to adapt to changing market conditions and to compete successfully with grid electricity or new competitors, our growth will be limited which would adversely affect our business results.
We derive a substantial portion of our revenue and backlog from a limited number of customers, and the loss of or a significant reduction in orders from a large customer could have a material adverse effect on our operating results and other key metrics.
In any particular period, a substantial amount of our total revenue could come from a relatively small number of customers. As an example, in the year ended December 31, 2019, two customers, The economic benefitsSouthern Company and SK E&C accounted for approximately 34% and 23% of our total revenue, respectively. A unit of The Southern Company wholly owns a Third-Party PPA, and that entity purchases Energy Servers which are then provided to various end customers under PPAs. The loss of any large customer order or any delays in installations of new Energy Servers with any large customer would materially and adversely affect our business results.
Our ability to develop new products and enter into new markets could be negatively impacted if we are unable to identify partners to assist in such development or expansion.
We continue to develop products for emerging markets and, as we move into those markets, we may need to identify new business partners in order to facilitate such development and expansion. Identifying new business and development partners is a lengthy process and is subject to significant risks and uncertainties. If we are unable to identify reliable partners in a new market or are unable to negotiate mutually-acceptable terms to form the basis of new partnership arrangements, our ability to expand our business could be limited and our financial conditions and results of operations could be harmed
Risks Relating to Our Products and Manufacturing
Our business has been and will continue to be adversely affected by the COVID-19 pandemic.
We have been and will continue monitoring and adjusting as appropriate our operations in response to the COVID-19 pandemic. As a technology company that supplies resilient, reliable and clean energy, we have been able to conduct the majority of operations as an “essential business” in California and Delaware, where we manufacture and perform many of our R&D activities, as well as in other states and countries where we are installing or maintaining our Energy Servers, notwithstanding government “shelter in place” orders. For the safety of our employees and others, many of our employees are still working from home unless they are directly supporting essential manufacturing production operations, installation work, service and maintenance activities and R&D. We have established protocols to minimize the risk of COVID-19 transmission within our facilities, including enhanced cleaning, and temperature screenings upon entry. In addition, all individuals entering Bloom facilities are required to wear face coverings and are directed not to enter if they have COVID-19-like symptoms. We follow all CDC guidelines when notified of possible exposures. Even with these precautions, it is possible an asymptomatic individual could enter our facilities and transmit the virus to others.
If we become aware of any cases of COVID-19 among any of our employees, we notify those with whom the person is known to have been in contact, send the exposed employees home for at least 14 days and require each employee to be tested negative before returning to work. We have had a couple of positive cases to date. Certain roles within our facilities involve greater mobility throughout our facilities and potential exposure to more employees. In the event one of such employees suffers from COVID-19, or if we otherwise believe that a significant number of employees have been exposed and sent home, particularly in our manufacturing facilities, our production could be significantly impacted. Furthermore, since our manufacturing process involves tasks performed at both our California facility and Delaware facility, significant exposure at either facility would have a substantial impact on our overall production, and in such case, our cash flow and results of operations including revenue will be adversely affected.
We have experienced COVID 19-related delays from certain vendors and suppliers, which, in turn, could cause delays in the manufacturing and installation of our Energy Servers and adversely impact our cash flows and results of operations including revenue. To date, we have been able to offset any issues with alternative suppliers, but in the future, it may not be possible to find replacement products or supplies, and ongoing delays could affect our business and growth. For example, particular suppliers on which we rely were shut down, and we were not able to obtain the needed parts. While we have identified and qualified alternative suppliers for these parts, we may experience future disruptions in the availability or price of these or other parts, and we cannot guarantee that we will succeed in finding alternate suppliers that are able to meet our needs. In addition, international air and sea logistics systems have been heavily impacted by the COVID-19 pandemic. Air carriers have significantly reduced their passenger and air freight capacity, and many ports are either temporarily closed or have reduced their hours of operation. Actions by government agencies may further restrict the operations of freight carriers, which would negatively impact our ability to receive the parts and supplies we need to manufacture our Energy Servers or to deliver them to our customers.
We also rely on third party financing for our customers’ purchases of our Energy Servers. If third party financiers experience liquidity problems or elect to suspend or cancel investments in our projects, we may be unable to secure financing for our customer purchases, which in turn would impact our ability to deploy our Energy Servers and impact our cash flows and results of operations, including revenue. We believe the current environment may also increase the time to solidify new relationships which could impact the time required to achieve funding. Our ability to obtain financing for our Energy Servers also partly depends on the creditworthiness of our customers. Some of our current and prospective customers’ credit ratings have recently fallen, which may make it difficult for us to obtain financing for their use of an Energy Server. For current customers whose Energy Servers are not yet installed, an inability to obtain financing may impact our cash flows and results of operations including revenue. For prospective customers, it may decrease demand for our Energy Servers if financing is not available in light of their credit. If our customers cannot obtain financing to purchase our Energy Servers, our cash flow and results of operations including revenue will be adversely affected. Although the impact of the COVID-19 pandemic on our ability to obtain financing for our customers’ use of our Energy Servers has not yet had a significant impact on our business, delays in obtaining financing for our Energy Servers would lead to a decrease in our cash flows and results of operations, including revenue. Furthermore, in cases where the inability to obtain financing only becomes apparent after we have installed an Energy Server, there would be no offsetting decrease in our expenses.
Our installation and maintenance operations have also been, and will continue to be, adversely impacted by the COVID-19 pandemic. For example, our installation projects have experienced delays and may continue to experience delays relating to, among other things, shortages in available labor for design, installation and other work; the inability or delay in our ability to access customer facilities due to shutdowns or other restrictions; the decreased productivity of our general contractors, their sub-contractors, medium-voltage electrical gear suppliers, and the wide range of engineering and construction related specialist suppliers on whom we rely for successful and timely installations; the stoppage of work by gas and electric utilities on which we are critically dependent for hook ups; and the unavailability of necessary civil and utility inspections as well as the review of our permit submissions and issuance of permits by multiple authorities that have jurisdiction over our activities. As to maintenance, if we are delayed in or unable to perform scheduled or unscheduled maintenance, our previously-installed Energy Servers will likely experience adverse performance impacts including reduced output and/or efficiency, which could result in warranty and/or guaranty claims by our customers. Further, due to the nature of our Energy Servers, if we are unable to replace worn parts in accordance with our standard maintenance schedule, we may be subject to increased costs in the future. These adverse impacts may increase in severity or continue indefinitely, including following the lifting of “shelter in place” orders.
We are not the only business impacted by these shortages and delays, which means that we may in the future face increased competition for scarce resources, which may result in continuing delays or increases in the cost of obtaining such services, including increased labor costs and/or fees to expedite permitting. In addition, while construction activities have to date been deemed “essential business” and allowed to proceed in many jurisdictions, we have experienced interruptions and delays caused by confusion related to exemptions for “essential business” among our suppliers and their sub-contractors and the relevant permitting utilities. Future changes in applicable government orders or regulations, or changes in the interpretation of existing orders or regulations, could result in reductions in the scope of permitted construction activities or prohibitions on such activities. An inability to install our Energy Servers would negatively impact our acceptances, and thereby impact our cash flows and results of operations, including revenue.
We cannot predict with certainty at this time the full extent to which COVID-19 will impact our business, cash flows and results of operations including revenue. It will depend on many factors. These include, among others, the extent of harm to public health, the willingness of our employees to travel and work in our manufacturing facilities and at our service and installation sites even if permitted to do so, the disruption to the global economy and to our supply base and potential customer base, and impacts on liquidity and the availability of capital. We are staying in close communication with our manufacturing facilities, employees, customers, suppliers and partners, and acting to mitigate the impact of this dynamic and evolving situation, but there is no guarantee that we will be able to do so.
Our future success depends in part on our ability to increase our production capacity, and we may not be able to do so in a cost-effective manner.
To the extent we are successful in growing our business, we may need to increase our production capacity. Our ability to plan, construct, and equip additional manufacturing facilities is subject to significant risks and uncertainties, including the following:
•The expansion or construction of any manufacturing facilities will be subject to the risks inherent in the development and construction of new facilities, including risks of delays and cost overruns as a result of factors outside our control such as delays in government approvals, burdensome permitting conditions, and delays in the delivery of manufacturing equipment and subsystems that we manufacture or obtain from suppliers.
•In order for us to expand internationally, we have entered into joint venture agreements that have allowed us to add manufacturing capability outside of the United States. Adding manufacturing capacity in any international location will subject us to new laws and regulations including those pertaining to labor and employment, environmental and export import. In addition, it brings with it the risk of managing larger scale foreign operations.
•We may be unable to achieve the production throughput necessary to achieve our target annualized production run rate at our current and future manufacturing facilities.
•Manufacturing equipment may take longer and cost more to engineer and build than expected, and may not operate as required to meet our production plans.
•We may depend on third-party relationships in the development and operation of additional production capacity, which may subject us to the risk that such third parties do not fulfill their obligations to us under our arrangements with them.
•We may be unable to attract or retain qualified personnel.
If we are unable to expand our manufacturing facilities, we may be unable to further scale our business. If the demand for our Energy Servers or our production output decreases or does not rise as expected, we may not be able to spread a significant amount of our fixed costs over the production volume, resulting in a greater than expected per unit fixed cost, which would have a negative impact on our financial condition and our results of operations.
If we are not able to continue to reduce our cost structure in the future, our ability to become profitable may be impaired.
We must continue to reduce the manufacturing costs for our Energy Servers to expand our market. Additionally, certain of our existing service contracts were entered into based on projections regarding service costs reductions that assume continued advances in our manufacturing and services processes which we may be unable to realize. While we have been successful in reducing our manufacturing and services costs to date, the cost of components and raw materials, for example, could increase in the future. Any such increases could slow our growth and cause our financial results and operational metrics to suffer. In addition, we may face increases in our other expenses including increases in wages or other labor costs as well as installation, marketing, sales or related costs. We may continue to make significant investments to drive growth in the future. In order to expand into new electricity markets (in which the price of electricity from the grid is lower) while still maintaining our current margins, we will need to continue to reduce our costs. Increases in any of these costs or our failure to achieve projected cost reductions could adversely affect our results of operations and financial condition and harm our business and prospects. If we are unable to reduce our cost structure in the future, we may not be able to achieve profitability, which could have a material adverse effect on our business and our prospects.
If our Energy Servers contain manufacturing defects, our business and financial results could be harmed.
Our Energy Servers are complex products and they may contain undetected or latent errors or defects. In the past, we have experienced latent defects only discovered once the Energy Server is deployed in the field. Changes in our supply chain or the failure of our suppliers to otherwise provide us with components or materials that meet our specifications could introduce defects into our products. Also, as we grow our manufacturing volume, the chance of manufacturing defects could increase. In addition, design changes made for the purpose of cost reduction, performance improvement, fulfilling new customer requirements or improved reliability could introduce new design defects that may impact Energy Server performance and life. Any design or manufacturing defects or other failures of our Energy Servers to our customers depends onperform as expected could cause us to incur significant service and re-engineering costs, divert the cost of electricity available from alternative sources including local electric utility companies, which cost structure is subject to change.
The economic benefitattention of our Energy Servers to our customers includes, among other things, the benefit of reducing such customer’s payments to the local utility company. The rates at which electricity is availableengineering personnel from a customer’s local electric utility company is subject to changeproduct development efforts, and any changes in such rates may affect the relative benefits of our Energy Servers. Further, the local electric utility may impose “departing load,” “standby” or other charges on our customers in connection with
their acquisition of our Energy Servers, the amounts of which are outside of our controlsignificantly and which may have a material impact on the economic benefit of our Energy Servers to our customers. Changes in the rates offered by local electric utilities and/or in the applicability or amounts of charges and other fees imposed by such utilities on customers acquiring our Energy Servers could adversely affect the demand forcustomer satisfaction, market acceptance, and our Energy Servers.business reputation.
Additionally, the electricity produced by our Energy Servers is currently not cost competitive in many geographic markets, and
Furthermore, we may be unable to reduce our costs to a level at whichcorrect manufacturing defects or other failures of our Energy Servers wouldin a manner satisfactory to our customers, which could adversely affect customer satisfaction, market acceptance, and our business reputation.
The performance of our Energy Servers may be competitiveaffected by factors outside of our control, which could result in harm to our business and financial results.
Field conditions, such markets. Asas the quality of the natural gas supply and utility processes which vary by region and may be subject to seasonal fluctuations or environmental factors such unlessas smoke from wild fires, have affected the costperformance of electricityour Energy Servers and are not always possible to predict until the Energy Server is in operation. Although we believe we have designed new generations of Energy Servers to better withstand the variety of field conditions we have encountered, as we move into new geographies and deploy new service configurations, we may encounter new and unanticipated field conditions. Adverse impacts on performance may require us to incur significant service and re-engineering costs or divert the attention of our engineering personnel from product development efforts. Furthermore, we may be unable to adequately address the impacts of factors outside of our control in a manner satisfactory to our customers. Any of these markets rises or we are able to generate demandcircumstances could significantly and adversely affect customer satisfaction, market acceptance, and our business reputation.
If our estimates of the useful life for our Energy Servers are inaccurate or we do not meet service and performance warranties and guaranties, or is we fail to accrue adequate warranty and guaranty reserves, our business and financial results could be harmed.
We offer certain customers the opportunity to renew their operations and maintenance service agreements on an annual basis, for up to 30 years, at prices predetermined at the time of purchase of the Energy Server. We also provide performance warranties and guaranties covering the efficiency and output performance of our Energy Servers. Our pricing of these contracts and our reserves for warranty and replacement are based upon our estimates of the useful life of our Energy Servers and their components, including assumptions regarding improvements in power module life that may fail to materialize. We do not have a long history with a large number of field deployments, and our estimates may prove to be incorrect. Failure to meet these performance warranties and guaranty levels may require us to replace the Energy Servers at our expense or refund their cost to the customer, or require us to make cash payments to the customer based on benefits other than electricity cost savings,actual performance, as compared to expected performance, capped at a percentage of the relevant equipment purchase prices. We accrue for product warranty costs and recognize losses on service or performance warranties when required by U.S. GAAP based on our potential for growthestimates of costs that may be limited.incurred and based on historical experience. However, as we expect our customers to renew their maintenance service agreements each year, the total liability over time may be more than the accrual. Actual warranty expenses have in the past been and may in the future be greater than we have assumed in our estimates, the accuracy of which may be hindered due to our limited history operating at our current scale.
As of June 30, 2020, we had a total of 34 megawatts in total deployed early generation servers, including our first and second generation servers, out of our total acceptances, net, of 506 megawatts. None of these early generation servers are recognized as our property, plant and equipment. We expect that our deployed early generation Energy Servers, if not upgraded with our more current generation power modules, may continue to perform at a lower output and efficiency level and, as a result, the maintenance costs may exceed the contracted prices that we expect to generate if our customers continue to renew their maintenance service agreements with respect to those servers. Further, the Energy Servers held on our consolidated financial statements, including those acquired through our Managed Services and PPA programs, could be impaired or have their useful life shortened in the future if adequate maintenance services are not performed or if a determination is made to upgrade the Energy Servers.
Our business is subject to risks associated with construction, utility interconnection, cost overruns and delays, including those related to obtaining government permits and other contingencies that may arise in the course of completing installations.
Because we generally do not recognize revenue on the sales of our Energy Servers until installation and acceptance except where a third party is responsible for installation (such as in our sales in South Korea), our financial results are dependent,depend to a large extent on the timeliness of the installation of our Energy Servers. Furthermore, in some cases, the installation of our Energy Servers may be on a fixed price basis, which subjects us to the risk of cost overruns or other unforeseen expenses in the installation process.
Although we generally are not regulated as a utility, federal, state and local government statutes and regulations concerning electricity heavily influence the market for our product and services. These statutes and regulations often relate to electricity pricing, net metering, incentives, taxation and the rules surrounding the interconnection of customer-owned electricity generation for specific technologies. In the United States, governments frequently modify these statutes and regulations. Governments, often acting through state utility or public service commissions, change and adopt different requirements for utilities and rates for commercial customers on a regular basis. Changes, or in some cases a lack of change, in any of the laws, regulations, ordinances or other rules that apply to our installations and new technology could make it more costly for us or our customers to install and operate our Energy Servers on particular sites and, in turn, could negatively affect our ability to deliver cost savings to customers for the purchase of electricity.
The construction, installation, and operation of our Energy Servers at a particular site is also generally subject to oversight and regulation in accordance with national, state, and local laws and ordinances relating to building codes, safety, environmental protection, and related matters, and typically requiresrequire various local and other governmental approvals and
permits, including environmental approvals and permits, that vary by jurisdiction. In some cases, these approvals and permits require periodic renewal. It is difficult and costly to track the requirements of every individual authority having jurisdiction over our installations, to design our Energy Servers to comply with these varying standards, and to obtain all applicable approvals and permits. We cannot predict whether or when all permits required for a given project will be granted or whether the conditions associated with the permits will be achievable. The denial of a permit or utility connection essential to a project or the imposition of impractical conditions would impair our ability to develop the project. In addition, we cannot predict whether the permitting process will be lengthened due to complexities and appeals. Delay in the review and permitting process for a project can impair or delay our and our customers’ abilities to develop that project or may increase the cost so substantially that the project is no longer attractive to us or our customers. Furthermore, unforeseen delays in the review and permitting process could delay the timing of the installation of our Energy Servers and could therefore adversely affect the timing of the recognition of revenue related to the installation, which could harm our operating results in a particular period.
In addition, the completion of many of our installations is dependent upondepends on the availability of and timely connection to the natural gas grid and the local electric grid. In some jurisdictions, the local utility company(ies)companies or the municipality hashave denied our request for connection or have required us to reduce the size of certain projects. In addition, some municipalities have recently adopted restrictions that prohibit any new construction that allows for the use of natural gas. For more information regarding these restrictions, please see the risk factor entitled "As a fossil fuel-based technology, we may be subject to a heightened risk of regulation, to a potential for the loss of certain incentives, and to changes in our customers’ energy procurement policies." Any delays in our ability to connect with utilities, delays in the performance of installation-related services, or poor performance of installation-related services by our general contractors or sub-contractors will have a material adverse effect on our results and could cause operating results to vary materially from period to period.
Furthermore, we rely on third partythe ability of our third-party general contractors to install Energy Servers at our customers’ sites.sites and to meet our installation requirements. We currently work with a limited number of general contractors, which has impacted and may continue to impact our ability to make installations as planned. Our work with contractors or their sub-contractors may have the effect of usour being required to comply with additional rules (including rules unique to our customers), working conditions, site remediation, and other union requirements, which can add costs and complexity to an installation project. The timeliness, thoroughness, and quality of the installation-related services performed by some of our general contractors and their sub-contractors in the past have not always met our expectations or standards and in the future may not meet our expectations and standards.standards in the future.
Any significant disruption in the operations at our manufacturing facilities could delay the production of our Energy Servers, which would harm our business and results of operations.
We manufacture our Energy Servers in a limited number of manufacturing facilities, any of which could become unavailable either temporarily or permanently for any number of reasons, including equipment failure, material supply, public health emergencies or catastrophic weather or geologic events. For example, several of our manufacturing facilities are located in an area prone to earthquakes. In the event of a significant disruption to our manufacturing process, we may not be able to easily shift production to other facilities or to make up for lost production, which could result in harm to our reputation, increased costs, and lower revenues.
The failure of our suppliers to continue to deliver necessary raw materials or other components of our Energy Servers in a timely manner could prevent us from delivering our products within required time frames, and could cause installation delays, cancellations, penalty payments, and damage to our reputation.
We rely on a limited number of third-party suppliers for some of the raw materials and components for our Energy Servers, including certain rare earth materials and other materials that may be of limited supply. If our suppliers provide insufficient inventory at the level of quality required to meet customer demand or if our suppliers are unable or unwilling to provide us with the contracted quantities (as we have limited or in some case no alternatives for supply), our results of operations could be materially and negatively impacted. If we fail to develop or maintain our relationships with our suppliers, or if there is otherwise a shortage or lack of availability of any required raw materials or components, we may be unable to manufacture our Energy Servers or our Energy Servers may be available only at a higher cost or after a long delay. Such delays could prevent us from delivering our Energy Servers to our customers within required timeframestime frames and cause order cancellations. We have had to create our own supply chain for some of the components and materials utilized in our fuel cells. We have made significant expenditures in the past to develop our supply chain. In many cases, we entered into contractual relationships with suppliers to jointly develop the components we needed. These activities wereare time and capital intensive. Accordingly, the number of suppliers we have for some of our components and materials is limited and, in some cases, sole sourced. Some of our suppliers use proprietary processes to manufacture components. We may be unable to obtain comparable
components from alternative suppliers without considerable delay, expense, or at all, as replacing these suppliers could require us either to make significant investments to bring the capability in housein-house or to invest in a new suppliersupply chain partner. Some of our suppliers are smaller, private companies, heavily dependent on us as a customer. If our suppliers face difficulties obtaining the credit or capital necessary to expand their operations when needed, they could be unable to supply necessary raw materials and components needed to support our planned sales and services operations, which would negatively impact our sales volumes and cash flows.
Moreover, we have in the past and may in the future experience unanticipated disruptions to operations or other difficulties with our supply chain or internalized supply processes due to exchange rate fluctuations, volatility in regional markets from where materials are obtained particularly(particularly China and Taiwan,Taiwan), changes in the general macroeconomic outlook, global trade disputes, political instability, expropriation or nationalization of property, public health emergencies such as the recent COVID-19 pandemic, civil strife, strikes, insurrections, acts of terrorism, acts of war, or natural disasters. The failure by us to obtain raw materials or components in a timely manner or to obtain raw materials or components that meet our quantity and cost requirements could impair our ability to manufacture our Energy Servers or increase their costs or service costs of our existing portfolio of Energy Servers under maintenance services agreements. If we cannot obtain substitute materials or components on a timely basis or on acceptable terms, we could be prevented from delivering our Energy Servers to our customers within required timeframes,time frames, which could result in sales and installation delays, cancellations, penalty payments, or damage to our reputation, any of which could have a material adverse effect on our business and results of operations. In addition, we rely on our suppliers to meet quality standards, and the failure of our suppliers to meet or exceed those quality standards could cause delays in the delivery of our products, cause unanticipated servicing costs, and cause damage to our reputation.
Our financial conditionability to develop new products and results of operationsenter into new markets could be negatively impacted if we are unable to identify suppliers to deliver new materials and other key metrics are likely to fluctuatecomponents on a quarterly basis in future periods, which could cause our results for a particular period to fall below expectations, resulting in a severe decline in the price of our Class A common stock.timely basis.
Our financial condition and results of operations and other key metrics have fluctuated significantly in the past and mayWe continue to fluctuate in the future due to a variety of factors, many of which are beyond our control. For example, the amount of product revenue we recognize in a given period is materially dependent on the volume of installations of our Energy Servers in that perioddevelop products for emerging markets and, the type of financing used by the customer.
In addition to the other risks described herein, the following factors could also cause our financial condition and results of operations to fluctuate on a quarterly basis:
the timing of installations, which may depend on many factors such as availability of inventory, product quality or performance issues, or local permitting requirements, utility requirements, environmental, health and safety requirements, weather and customer facility construction schedules;
size of particular installations and number of sites involved in any particular quarter;
the mix in the type of purchase or financing options used by customers in a period, and the rates of return required by financing parties in such period;
whether we are able to structure our sales agreements in a manner that would allow for the product and installation revenue to be recognized up front at acceptance;
delays or cancellations of Energy Server installations;
fluctuations in our service costs, particularly due to unaccrued costs of servicing and maintaining Energy Servers;
weaker than anticipated demand for our Energy Servers due to changes in government incentives and policies;
fluctuations in our research and development expense, including periodic increases associated with the pre-production qualification of additional tools as we expand our production capacity;
interruptions in our supply chain;
move into those markets, must qualify new suppliers to manufacture and deliver the length of the salesnecessary components required to build and installation cycle forinstall those new products. Identifying new manufacturing partners is a particular customer;
the timinglengthy process and level of additional purchases by existing customers;
unanticipated expenses or installation delays associated with changes in governmental regulations, permitting requirements by local authorities at particular sites, utility requirements and environmental, health and safety requirements; and
disruptions in our sales, production, service or other business activities resulting from disagreements with our labor force or our inability to attract and retain qualified personnel.
Fluctuations in our operating results and cash flow could, among other things, give rise to short-term liquidity issues. In addition, our revenue, key operating metrics and other operating results in future quarters may fall short of the expectations of investors and financial analysts, which could have an adverse effect on the price of our Class A common stock.
We must maintain customer confidence in our liquidity and long-term business prospects in order to grow our business.
Currently, we are the only provider able to fully support and maintain our Energy Servers. If potential customers believe we do not have sufficient capital or liquidity to operate our business over the long-term or that we will be unable to maintain their Energy Servers and provide satisfactory support, customers may be less likely to purchase or lease our products, particularly in light of the significant financial commitment required. In addition, financing sources may be unwilling to provide financing on reasonable terms. Similarly, suppliers, financing partners and other third parties may be less likely to invest time and resources in developing business relationships with us if they have concerns about the success of our business.
Accordingly, in order to grow our business, we must maintain confidence in our liquidity and long-term business prospects among customers, suppliers, financing partners and other parties. This may be particularly complicated by factors such as:
our limited operating history at a large scale;
our lack of profitability;
unfamiliarity with or uncertainty about our Energy Servers and the overall perception of the distributed generation market;
prices for electricity or natural gas in particular markets;
competition from alternate sources of energy;
warranty or unanticipated service issues we may experience;
the environmental consciousness and perceived value of environmental programs to our customers;
the size of our expansion plans in comparison to our existing capital base and the scope and history of operations;
the availability and amount of tax incentives, credits, subsidies or other programs; and
the other factors set forth in this section.
Several of these factors are largely outside our control, and any negative perceptions about our liquidity or long-term business prospects, even if unfounded, would likely harm our business.
A material decrease in the retail price of utility-generated electricity or an increase in the price of natural gas would affect demand for our Energy Servers.
We believe that a customer’s decision to purchase our Energy Servers is significantly influenced by the price, the price predictability of electricity generated by our Energy Servers in comparison to the retail price and the future price outlook of electricity from the local utility grid and other renewable energy sources. In some states and countries, the current cost of grid electricity, even together with available subsidies, does not render our product economically attractive. Furthermore, if the retail price of grid electricity does not increase over time at the rate that we or our customers expect, it could reduce demand for our Energy Servers and harm our business. Several factors could lead to a reduction in the price or future price outlook for grid electricity, including the impact of energy conservation initiatives that reduce electricity consumption, construction of additional power generation plants (including nuclear, coal or natural gas) and technological developments by others in the electric power industry which could result in electricity being available at costs lower than those that can be achieved from our Energy Servers.
Furthermore, an increase in the price of natural gas or curtailment of availability could make our Energy Servers less economically attractive to potential customers and reduce demand.
We currently face and will continue to face significant competition.
We compete for customers, financing partners and incentive dollars with other electric power providers. Many providers of electricity, such as traditional utilities and other companies offering distributed generation products, have longer operating
histories, have customer incumbency advantages, have access to and influence with local and state governments and well as having access to more capital resources than do we. Significant developments in alternative technologies, such as energy storage, wind, solar or hydro power generation, or improvements in the efficiency or cost of traditional energy sources including coal, oil, natural gas used in combustion or nuclear power, may materially and adversely affect our business and prospects in ways we cannot anticipate. We may also face new competitors who are not currently in the market. If we fail to adapt to changing market conditions and to compete successfully with grid electricity or new competitors, our growth will be limited which would adversely affect our business results.
Our future success depends in part on our ability to increase our production capacity and we may not be able to do so in a cost-effective manner.
To the extent we are successful in growing our business, we may need to increase our production capacity. Our ability to plan, construct and equip additional manufacturing facilities is subject to significant risks and uncertainties, including the following:
The expansion or construction of any manufacturing facilities will be subject to the risks inherent in the development and construction of new facilities, including risks of delays and cost overruns as a result of factors outside our control such as delays in government approvals, burdensome permitting conditions and delays in the delivery of manufacturing equipment and subsystems that we manufacture or obtain from suppliers.
It may be difficult to expand our business internationally without additional manufacturing facilities located outside the United States. Adding manufacturing capacity in any international location will subject us to new laws and regulations including those pertaining to labor and employment, environmental and export import. In addition, it brings with it the risk of managing larger scale foreign operations.
We may be unable to achieve the production throughput necessary to achieve our target annualized production run rate at our current and future manufacturing facilities.
Manufacturing equipment may take longer and cost more to engineer and build than expected, and may not operate as required to meet our production plans.
We may depend on third-party relationships in the development and operation of additional production capacity, which may subject us to the risk that such third parties do not fulfill their obligations to us under our arrangements with them.
We may be unable to attract or retain qualified personnel.
uncertainties. If we are unable to identify reliable manufacturing partners in a new market, our ability to expand our manufacturing facilities, we maybusiness could be unable to further scale our business. If the demand for our Energy Servers or our production output decreases or does not rise as expected, we may not be able to spread a significant amount of our fixed costs over the production volume, thereby increasing our per unit fixed cost, which would have a negative impact onlimited and our financial conditionconditions and our results of operations.operations could be harmed.
We have, in some instances, entered into long-term supply agreements that could result in insufficient inventory and negatively affect our results of operations.
We have entered into long-term supply agreements with certain suppliers. Some of these supply agreements provide for fixed or inflation-adjusted pricing, and substantial prepayment obligations. If our suppliers provide insufficientobligations and in a few cases, supplier purchase commitments. These arrangements could mean that we end up paying for inventory that we did not need or that was at a higher price than the level of quality required to meet customer demand or if our suppliers are unable or unwilling to provide us with the contracted quantities, as we have limited or in some case no alternatives for supply, our results of operations could be materially and negatively impacted.market. Further, we face significant specific counterparty risk under long-term supply agreements when dealing with suppliers without a long, stable production and financial history. Given the uniqueness of our product, many of our suppliers do not have a long operating history and are private companies that may not have substantial capital resources. In the event any such supplier experiences financial difficulties, it may be difficult or impossible, or may require substantial time and expense, for us to recover any or all of our prepayments. We do not know whether we will be able to maintain long-term supply relationships with our critical suppliers or whether we may secure new long-term supply agreements. Additionally, many of our parts and materials are procured from foreign suppliers, which exposes us to risks including unforeseen increases in costs or interruptions in supply arising from changes in applicable international trade regulations such as taxes, tariffs or quotas. Any of the foregoing could materially harm our financial condition and our results of operations.
We face supply chain competition, including competition from businesses in other industries, which could result in insufficient inventory and negatively affect our results of operations.
Certain of our suppliers also supply parts and materials to other businesses including businesses engaged in the production of consumer electronics and other industries unrelated to fuel cells. As a relatively low-volume purchaser of certain of these parts and materials, we may be unable to procure a sufficient supply of the items in the event that our suppliers fail to
produce sufficient quantities to satisfy the demands of all of their customers, which could materially harm our financial condition and our results of operations.
We, and some of our suppliers, obtain capital equipment used in our manufacturing process from sole suppliers and, if this equipment is damaged or otherwise unavailable, our ability to deliver our Energy Servers on time will suffer.
Some of the capital equipment used to manufacture our products and some of the capital equipment used by our suppliers have been developed and made specifically for us, are not readily available from multiple vendors, and would be difficult to repair or replace if they did not function properly. If any of these suppliers were to experience financial difficulties or go out of business or if there were any damage to or a breakdown of our manufacturing equipment and we could not obtain replacement equipment in a timely manner, our business would suffer. In addition, a supplier’s failure to supply this equipment in a timely manner with adequate quality and on terms acceptable to us could disrupt our production schedule or increase our costs of production and service.
If we are not able to continue to reducePossible new tariffs could have a material adverse effect on our cost structure inbusiness.
Our business is dependent on the future, our ability to become profitable may be impaired.
We must continue to reduce the manufacturing costsavailability of raw materials and components for our Energy Servers, to expand our market. Additionally, certain of our existing service contracts were entered into basedparticularly electrical components common in the semiconductor industry, specialty steel products / processing and raw materials. Tariffs imposed on projections regarding service costs reductions that assume continued advances in our manufacturingsteel and services processes which we may be unable to realize. While wealuminum imports have been successful in reducing our manufacturing and services costs to date,increased the cost of components and raw materials for example, could increase inour Energy Servers and decreased the future. Any such increases could slow our growth and cause our financial results and operational metrics to suffer. In addition, we may face increases in our other expenses including increases in wagesavailable supply. Additional new tariffs or other labor costs as well as installation, marketing, salestrade protection measures which are proposed or related costs. We may continue to make significant investments to drive growth inthreatened and the future. In order to expand into electricity markets in which the pricepotential escalation of electricity from the grid is lower while still maintaininga trade war and retaliation measures could have a material adverse effect on our current margins, we will need to continue to reduce our costs. Increases in any of these costs or our failure to achieve projected cost reductions could adversely affect ourbusiness, results of operations and financial conditioncondition.
To the extent practicable, given the limitations in supply chain previously discussed, although we currently maintain alternative sources for raw materials, our business is subject to the risk of price fluctuations and harmperiodic delays in the delivery of certain raw materials, which tariffs may exacerbate. Disruptions in the supply of raw materials and components could temporarily impair our ability to manufacture our Energy Servers for our customers or require us to pay higher prices in order to obtain these raw materials or components from other sources, which could affect our business and prospects. If we are unableour results of operations. While it is too early to reducepredict how the recently enacted tariffs on imported steel will impact our cost structure inbusiness, the future, we may not be able to achieve profitability, whichimposition of tariffs on items imported by us from China or other countries could increase our costs and could have a material adverse effect on our business and our prospects.results of operations.
A failure to properly comply (or to comply properly) with foreign trade zone laws and regulations could increase the cost of our duties and tariffs.
We have established two foreign trade zones, one in California and one in Delaware, through qualification with U.S. Customs, and are approved for "zone to zone" transfers between our California and Delaware facilities. Materials received in a foreign trade zone are not subject to certain U.S. duties or tariffs until the material enters U.S. commerce. We benefit from the adoption of foreign trade zones by reduced duties, deferral of certain duties and tariffs, and reduced processing fees, which help us realize a reduction in duty and tariff costs. However, the operation of our foreign trade zones requires compliance with applicable regulations and continued support of U.S. Customs with respect to the foreign trade zone program. If we failare unable to managemaintain the qualification of our growth effectively,foreign trade zones, or if foreign trade zones are limited or unavailable to us in the future, our duty and tariff costs would increase, which could have an adverse effect on our business and operating results may suffer.of operations.
Risks Relating to Government Incentive Programs
Our current growthbusiness currently depends on the availability of rebates, tax credits and future growth plans may make it difficult for usother financial incentives, and the reduction, modification, or elimination of such benefits could cause our revenue to efficiently operatedecline and harm our business, challenging us to effectively manage our capital expenditures and control our costs while we expand our operations to increase our revenue. If we experience significant growth in orders without improvements in automation and efficiency, we may need additional manufacturing capacity and wefinancial results.
The U.S. federal government and some of our suppliers may need additionalstate and capital intensive equipment. Any growth in manufacturing must include a scaling of quality control as the increase in production increases the possible impact of manufacturing defects. In addition, any growth in the volume of saleslocal governments provide incentives to end users and purchasers of our Energy Servers in the form of rebates, tax credits, and other financial incentives, such as system performance payments and payments for renewable energy credits associated with renewable energy generation. In addition, some countries outside the U.S. also provide incentives to end users and purchasers of our Energy Servers. We currently have operations and sell our Energy Servers in Japan, India, and the Republic of Korea (collectively, our "Asia Pacific region"), where in some locations such as the Republic of Korea, Renewable Portfolio Standards ("RPS") are in place to promote the adoption of renewable power generation, including fuel cells. Our Energy Servers have qualified for tax exemptions, incentives, or other customer incentives in many states including the states of California, Connecticut, Massachusetts, New Jersey and New York. Some states have utility procurement programs and/or renewable portfolio standards for which our technology is eligible. Our Energy Servers are currently installed in eleven U.S. states, each of which may outpacehave its own enabling policy framework. We rely on these governmental rebates, tax credits, and other financial incentives to significantly lower the effective price of the Energy Servers to our customers in the U. S. and the Asia Pacific region. Our financing partners and Equity Investors in Bloom Electrons programs may also take advantage of these financial incentives, lowering the cost of capital and energy to our
customers. However, these incentives or RPS may expire on a particular date, end when the allocated funding is exhausted, or be reduced or terminated as a matter of regulatory or legislative policy.
For example, the previous federal ITC, a federal tax incentive for fuel cell production, expired on December 31, 2016. Without the availability of the ITC benefit incentive, we lowered the price of our Energy Servers to ensure the economics to our customers would remain the same as it was prior to losing the ITC benefit, adversely affecting our gross profit. While the ITC was reinstated by the U.S Congress on February 9, 2018 and made retroactive to January 1, 2017, under current law it will phase out on December 31, 2022, as noted below:
•the 30% ITC credit was reinstated retroactive to January 1, 2017;
•installations that commenced construction before January 1, 2020 were eligible for a 30% credit;
•installations that commence construction in 2020 are eligible for a 26% credit;
•installations that commence construction in 2021 are eligible for a 22% credit; and
•installations have to be placed in service by January 1, 2024 or the installations become ineligible for the credit.
The ITC program has operational criteria that extend for five years. If the energy property is disposed or otherwise ceases to be qualified investment credit property before the close of the five-year recapture period is fulfilled, it could result in a partial reduction of the incentives. In the case of Energy Servers purchased by PPA Entities, the PPA Entities bear the risk of repayment if the assets placed in service do not meet the ITC operational criteria in the future.
As another example, many of our installations in California interconnect with investor-owned utilities on Fuel Cell Net Energy Metering (“FC NEM”) tariffs. The FC NEM tariffs will not be available for new installations after December 31, 2021 and installations that are currently on FC NEM tariffs will have to meet more stringent standards regarding the emissions of
greenhouse gases that are under development in order to remain eligible for the FC NEM tariffs. Although we are working to
ensure that that an acceptable substitute to FC NEM is put in place prior to December 31, 2021, it is not certain that our efforts
will be successful. If our customers are unable to interconnect under the FC NEM tariffs the costs of interconnection may
increase and such increase may negatively impact demand for our products. Additionally, the uncertainty regarding the
requirements for continued service under the FC NEM tariffs may negatively impact the perceived value or risks of our
products, which may negatively impact demand for our products.”
Changes in federal, state, or local programs or the RPS in the Republic of Korea could reduce demand for our Energy Servers, impair sales financing, and adversely impact our business results. The continuation of these programs depends upon political support which to date has been bipartisan and durable. Nevertheless, one set of political activists aggressively seeks to eliminate these programs while another set seeks to deny access to these programs for any technology that relies on natural gas, regardless of the technology’s positive contribution to reducing air pollution, reducing carbon emissions or enabling electric service to be more reliable and resilient.
We rely on tax equity financing arrangements to realize the benefits provided by investment tax credits and accelerated tax depreciation and in the event these programs are terminated, our financial results could be harmed.
We expect that any Energy Server deployments through financed transactions (including our Bloom Electrons programs, our leasing programs and any Third-Party PPA Programs) will receive capital from Equity Investors who derive a significant portion of their economic returns through tax benefits. Equity Investors are generally entitled to substantially all of the project’s tax benefits, such as those provided by the ITC and Modified Accelerated Cost Recovery System ("MACRS") or bonus depreciation, until the Equity Investors achieve their respective agreed rates of return. The number of and available capital from potential Equity Investors is limited, we compete with other energy companies eligible for these tax benefits to access such investors, and the availability of capital from Equity Investors is subject to fluctuations based on factors outside of our control such as macroeconomic trends and changes in applicable taxation regimes. Concerns regarding our limited operating history, lack of profitability and that we are only the party who can perform operations and maintenance on our Energy Servers have made it difficult to attract investors in the past. Our ability to obtain additional financing in the future depends on the continued confidence of banks and other financing sources in our business model, the market for our Energy Servers, and the continued availability of tax benefits applicable to our Energy Servers. In addition, conditions in the general economy and financial and credit markets may result in the contraction of available tax equity financing. If we are unable to enter into tax equity financing agreements with attractive pricing terms, or at all, we may not be able to obtain the capital needed to fund our financing programs or use the tax benefits provided by the ITC and MACRS depreciation, which could make it more difficult for customers to finance the purchase of our Energy Servers. Such circumstances could also require us to reduce the price at which we are able to sell our Energy Servers and therefore harm our business, our financial condition, and our results of operations.
Risks Related to Legal Matters and Regulations
We are subject to various environmental laws and regulations that could impose substantial costs upon us and cause delays in the delivery and installation of our Energy Servers.
We are subject to national, state, and local environmental laws and regulations as well as environmental laws in those foreign jurisdictions in which we operate. Environmental laws and regulations can be complex and may often change. These laws can give rise to liability for administrative oversight costs, cleanup costs, property damage, bodily injury, fines, and penalties. Capital and operating expenses needed to comply with environmental laws and regulations can be significant, and violations may result in substantial fines and penalties or third-party damages. In addition, ensuring we are in compliance with applicable environmental laws requires significant time and management resources and could cause delays in our ability to engage sufficientbuild out, equip and experienced personneloperate our facilities as well as service our fleet, which would adversely impact our business, our prospects, our financial condition, and our operating results. In addition, environmental laws and regulations such as the Comprehensive Environmental Response, Compensation and Liability Act in the United States impose liability on several grounds including for the investigation and cleanup of contaminated soil and ground water, for building contamination, for impacts to managehuman health and for damages to natural resources. If contamination is discovered in the higher numberfuture at properties formerly owned or operated by us or currently owned or operated by us, or properties to which hazardous substances were sent by us, it could result in our liability under environmental laws and regulations. Many of installationsour customers who purchase our Energy Servers have high sustainability standards, and any environmental noncompliance by us could harm our reputation and impact a current or potential customer’s buying decision. Additionally, in many cases we contractually commit to engage contractors to complete installationsperforming all necessary installation work on a timelyfixed-price basis, and unanticipated costs associated with environmental remediation and/or compliance expenses may cause the cost of performing such work to exceed our revenue. The costs of complying with environmental laws, regulations, and customer requirements, and any claims concerning noncompliance or liability with respect to contamination in the future, could have a material adverse effect on our financial condition or our operating results.
The installation and operation of our Energy Servers are subject to environmental laws and regulations in various jurisdictions, and there is uncertainty with respect to the interpretation of certain environmental laws and regulations to our Energy Servers, especially as these regulations evolve over time.
Bloom is committed to compliance with applicable environmental laws and regulations including health and safety standards, and we continually review the operation of our Energy Servers for health, safety, and environmental compliance. Our Energy Servers, like other fuel cell technology-based products of which we are aware, produce small amounts of hazardous wastes and air pollutants, and we seek to ensure that these are handled in accordance with applicable regulatory standards.
Maintaining compliance with laws and regulations can be challenging given the changing patchwork of environmental laws and regulations that prevail at the federal, state, regional, and local level. Most existing environmental laws and regulations preceded the introduction of our expectationsinnovative fuel cell technology and standards. Any failurewere adopted to manageapply to technologies existing at the time (i.e., large coal, oil, or gas-fired power plants). Currently, there is generally little guidance from these agencies on how certain environmental laws and regulations may or may not be applied to our growth effectivelytechnology.
For example, natural gas, which is the primary fuel used in our Energy Servers, contains benzene, which is classified as a hazardous waste if it exceeds 0.5 milligrams per liter. A small amount of benzene found in the public natural gas supply (equivalent to what is present in one gallon of gasoline in an automobile fuel tank which are exempt from federal regulation) is collected by the gas cleaning units contained in our Energy Servers which are typically replaced once every 18 to 24 months by us from customers’ sites. From 2010 to late 2016 and in the regular course of maintenance of the Energy Servers, we periodically replaced the units in our servers relying upon a federal environmental exemption that permitted the handling of such units without manifesting the contents as containing a hazardous waste. Although over the years and with the approval of two states, we believed that we operated under the exemption, the U.S. Environmental Protection Agency ("EPA") issued guidance for the first time in late 2016 that differed from our belief and conflicted with the state approvals we had obtained. We have complied with the new guidance and, given the comparatively small quantities of benzene produced, we do not anticipate significant additional costs or risks from our compliance with the revised 2016 guidance. However, EPA has asked us to show cause why it should not collect approximately $1.0 million in fines from us for the prior period. In order to put this matter behind us and with no admission of law or fact, we agreed to a consent agreement that was ratified and incorporated by reference into a final order that was entered by an Environmental Appeals Judge for EPA’s Environmental Appeals Board in May of 2020. Additionally, a nominal penalty was paid to a state agency under that state’s environmental laws relating to the operation of our Energy Server under the exemption prior to the issuance of the revised EPA guidance.
Another example relates to the very small amounts of chromium in hexavalent form ("CR+6") which our Energy Servers emit at nanometer scale. This occurs any time a steel super alloy is exposed to high temperatures. CR+6 is found in small concentrations in the air generally. However, exposure to high or significant concentrations over prolonged periods of time can be carcinogenic. While the small amount of chromium emitted by our Energy Servers is initially in the hexavalent form, it converts to a non-toxic trivalent form, or CR+3, rapidly after it leaves the Energy Server. In tests we have conducted, air measurements taken 10 meters from an Energy Server show that the CR+6 is largely converted.
Our Energy Servers do not present any significant health hazard based on our modeling, testing methodology, and measurements. There are several supporting elements to this position including that the emissions from our Energy Servers are in very low concentrations, are emitted as nano-particles that convert to the non-hazardous form CR+3 rapidly, are quickly dispersed into the air, and are not emitted in close proximity to locations where people would be expected to have a prolonged exposure. Nevertheless, we have engineered a technology solution that we are deploying.
Several states in which we currently operate, including California, require permits for emissions of hazardous air pollutants based on the quantity of emissions, most of which require permits only for quantities of emissions that are higher than those observed from our Energy Servers. Other states in which we operate, including New York, New Jersey, and North Carolina, have specific exemptions for fuel cells. Some states in which we operate have CR+6 limits which are an order of magnitude over our operating range. Within California, the Bay Area Air Quality Management District ("BAAQMD") requires a permit for emissions that are more than 0.00051 lbs/year. Other California regulations require that levels of CR+6 be below 0.00005 µg/m³, which is the level required by Proposition 65 and which requires notification of the presence of CR+6 unless it can be shown to be at levels that do not pose a significant health risk. We have determined that the standards applicable in California in this regard are more stringent than those in any other state or foreign location in which we have installed Energy Servers to date, therefore, deployment of our solution has been focused on California's standards.
There are generally no relevant environmental testing methodology guidelines for a technology such as ours. The standard test method for analyzing emissions cannot be readily applied to our Energy Servers because it would require inserting a probe into an emission stack. Our servers do not have emission stacks; therefore, we have to construct an artificial stack on top of our server in order to conduct a test. If we used the testing methodology similar to what the air districts have used in other large scale industrial products, it would show that we would need to reduce the emissions of CR+6 from our Energy Servers to meet the most stringent requirements. However, we employed a modified test method that is designed to capture the actual operating conditions of our Energy Servers and its distinctly different design from legacy power plants and industrial equipment. Based on our modeling, measured results and analysis, we believe we are in compliance with State of California air regulations. However, it is possible that the California Air Districts will require us to abate or shut down the operations of certain of our existing Energy Servers on a temporary basis or will seek the imposition of monetary penalties.
While we seek to comply with air quality and emission standards in every region in which we operate, it is possible that certain customers in other regions may request that we provide the new technology solution for their Energy Servers to comply with the stricter standards imposed by California even though they are not applicable and even though we are under no contractual obligation to do so. We plan to satisfy these requests from customers. Failure or delay in attaining regulatory approval could materiallyresult in our not being able to operate in a particular local jurisdiction.
These examples illustrate that our technology is moving faster than the regulatory process in many instances. It is possible that regulators could delay or prevent us from conducting our business in some way pending agreement on, and compliance with, shifting regulatory requirements. Such actions could delay the installation of Energy Servers, could result in penalties, could require modification or replacement or could trigger claims of performance warranties and defaults under customer contracts that could require us to repurchase their Energy Servers, any of which could adversely affect our business, our financial performance, and our reputation. In addition, new laws or regulations or new interpretations of existing laws or regulations could present marketing, political or regulatory challenges and could require us to upgrade or retrofit existing equipment, which could result in materially increased capital and operating expenses.
Furthermore, we have not yet determined whether our Energy Servers will satisfy regulatory requirements in the other states in the U.S. and in international locations in which we do not currently sell Energy Servers but may pursue in the future.
As a fossil fuel-based technology, we may be subject to a heightened risk of regulation, to a potential for the loss of certain incentives, and to changes in our customers’ energy procurement policies.
Although the current generation of Energy Servers running on natural gas produce nearly 50% less carbon emissions compared to the average of U.S. combustion power generation, the operation of our Energy Servers does produce carbon dioxide ("CO2"), which has been shown to be a contributing factor to global climate change. As such, we may be negatively
impacted by CO2-related changes in applicable laws, regulations, ordinances, rules, or the requirements of the incentive programs on which we and our customers currently rely. Changes (or a lack of change to comprehensively recognize the risks of climate change and recognize the benefit of our technology as one means to maintain reliable and resilient electric service with a lower greenhouse gas emission profile) in any of the laws, regulations, ordinances, or rules that apply to our installations and new technology could make it illegal or more costly for us or our customers to install and operate our Energy Servers on particular sites, thereby negatively affecting our ability to deliver cost savings to customers, or we could be prohibited from completing new installations or continuing to operate existing projects. Certain municipalities in California have already banned the use of distributed generation products that utilize fossil fuel. Additionally, our customers’ and potential customers’ energy procurement policies may prohibit or limit their willingness to procure our Energy Servers. Our business prospects may be negatively impacted if we are prevented from completing new installations or our installations become more costly as a result of laws, regulations, ordinances, or rules applicable to our Energy Servers, or by our customers’ and potential customers’ energy procurement policies.
Existing regulations and changes to such regulations impacting the electric power industry may create technical, regulatory, and economic barriers which could significantly reduce demand for our Energy Servers or affect the financial performance of current sites.
The market for electricity generation products is heavily influenced by U.S. federal, state, local, and foreign government regulations and policies as well as by internal policies and regulations of electric utility providers. These regulations and policies often relate to electricity pricing and technical interconnection of customer-owned electricity generation. These regulations and policies are often modified and could continue to change, which could result in a significant reduction in demand for our Energy Servers. For example, utility companies commonly charge fees to larger industrial customers for disconnecting from the electric grid or for having the capacity to use power from the electric grid for back-up purposes. These fees could change, thereby increasing the cost to our customers of using our Energy Servers and making them less economically attractive.
In addition, our project with Delmarva Power & Light Company (the "Delaware Project") is subject to laws and regulations relating to electricity generation, transmission, and sale in Delaware and at the federal level.
A law governing the sale of electricity from the Delaware Project was necessary to implement part of several incentives that Delaware offered to Bloom to build our major manufacturing facility ("Manufacturing Center") in Delaware. Those incentives have proven controversial in Delaware, in part because our Manufacturing Center, while a significant source of continuing manufacturing employment, has not expanded as quickly as projected. The opposition to the Delaware Project is an example of potentially material risks associated with electric power regulation.
At the federal level, the Federal Energy Regulatory Commission ("FERC") has authority to regulate under various federal energy regulatory laws, wholesale sales of electric energy, capacity, and ancillary services, and the delivery of natural gas in interstate commerce. Also, several of our PPA Entities are subject to regulation under FERC with respect to market-based sales of electricity, which requires us to file notices and make other periodic filings with FERC, which increases our costs and subjects us to additional regulatory oversight.
Although we generally are not regulated as a utility, federal, state, and local government statutes and regulations concerning electricity heavily influence the market for our product and services. These statutes and regulations often relate to electricity pricing, net metering, incentives, taxation, and the rules surrounding the interconnection of customer-owned electricity generation for specific technologies. In the United States, governments frequently modify these statutes and regulations. Governments, often acting through state utility or public service commissions, change and adopt different requirements for utilities and rates for commercial customers on a regular basis. Changes, or in some cases a lack of change, in any of the laws, regulations, ordinances, or other rules that apply to our installations and new technology could make it more costly for us or our customers to install and operate our Energy Servers on particular sites and, in turn, could negatively affect our ability to deliver cost savings to customers for the purchase of electricity.
We may become subject to product liability claims which could harm our financial condition and liquidity if we are not able to successfully defend or insure against such claims.
We may in the future become subject to product liability claims. Our Energy Servers are considered high energy systems because they use flammable fuels and may operate at 480 volts. Although our Energy Servers are certified to meet ANSI, IEEE, ASME, and NFPA design and safety standards, if an Energy Server is not properly handled in accordance with our servicing and handling standards and protocols, there could be a system failure and resulting liability. These claims could require us to incur significant costs to defend. Furthermore, any successful product liability claim could require us to pay a substantial
monetary award. Moreover, a product liability claim could generate substantial negative publicity about our Company and our Energy Servers, which could harm our brand, our business prospects, and our operating resultsresults. While we maintain product liability insurance, our insurance may not be sufficient to cover all potential product liability claims. Any lawsuit seeking significant monetary damages either in excess of our coverage or outside of our coverage may have a material adverse effect on our business and our financial condition. Our
Current or future operating results depend tolitigation or administrative proceedings could have a large extentmaterial adverse effect on our abilitybusiness, our financial condition and our results of operations.
We have been and continue to manage this expansionbe involved in legal proceedings, administrative proceedings, claims, and growth successfully.other litigation that arise in the ordinary course of business. Purchases of our products have also been the subject of litigation. For information regarding pending legal proceedings, please see Part II Item 1, Legal Proceedings and Note 14, Commitments and Contingencies, in Part I, Item 1, Financial Statements. In addition, since our Energy Server is a new type of product in a nascent market, we have in the past needed and may in the future need to seek the amendment of existing regulations, or in some cases the development of new regulations, in order to operate our business in some jurisdictions. Such regulatory processes may require public hearings concerning our business, which could expose us to subsequent litigation.
Unfavorable outcomes or developments relating to proceedings to which we are a party or transactions involving our products such as judgments for monetary damages, injunctions, or denial or revocation of permits, could have a material adverse effect on our business, our financial condition, and our results of operations. In addition, settlement of claims could adversely affect our financial condition and our results of operations.
Risks Relating to Our Intellectual Property
Our failure to protect our intellectual property rights may undermine our competitive position, and litigation to protect our intellectual property rights may be costly.
Although we have taken many protective measures to protect our trade secrets including agreements, limited access, segregation of knowledge, password protections, and other measures, policing unauthorized use of proprietary technology can be difficult and expensive. For example, many of our engineers reside in California where it is not legally permissible to prevent them from working for a competitor if and when one should exist. Also, litigation may be necessary to enforce our intellectual property rights, to protect our trade secrets, or to determine the validity and scope of the proprietary rights of others. Such litigation may result in our intellectual property rights being challenged, limited in scope, or declared invalid or unenforceable. We cannot be certain that the outcome of any litigation will be in our favor, and an adverse determination in any such litigation could impair our intellectual property rights, and may harm our business, our prospects, and our reputation.
We rely primarily on patent, trade secret, and trademark laws and non-disclosure, confidentiality, and other types of contractual restrictions to establish, maintain, and enforce our intellectual property and proprietary rights. However, our rights under these laws and agreements afford us only limited protection and the actions we take to establish, maintain, and enforce our intellectual property rights may not be adequate. For example, our trade secrets and other confidential information could be disclosed in an unauthorized manner to third parties, our owned or licensed intellectual property rights could be challenged, invalidated, circumvented, infringed, or misappropriated or our intellectual property rights may not be sufficient to provide us
with a competitive advantage, any of which could have a material adverse effect on our business, financial condition, or operating results. In addition, the laws of some countries do not protect proprietary rights as fully as do the laws of the United States. As a result, we may not be able to protect our proprietary rights adequately abroad.
In connection with our planned expansion into new markets we may need to develop relationships with new partners,
including project developers and/or financiers who may require access to certain of our intellectual property in order to
mitigate perceived risks regarding our ability to service their projects over the contracted project duration. If we are unable to
come to agreement regarding the terms of such access or find alternative means to address this perceived risk, such failure may
negatively impact our ability to expand into new markets. Alternatively, we may be required to develop new strategies for the
protection of our intellectual property, which may be less protective than our current strategies and could therefore erode our
competitive position.
Our patent applications may not result in issued patents, and our issued patents may not provide adequate protection, either of which may have a material adverse effect on our ability to prevent others from commercially exploiting products similar to ours.
We cannot be certain that our pending patent applications will result in issued patents or that any of our issued patents will afford protection against a competitor. The status of patents involves complex legal and factual questions, and the breadth of claims allowed is uncertain. As a result, we cannot be certain that the patent applications that we file will result in patents being issued or that our patents and any patents that may be issued to us in the future will afford protection against competitors with similar technology. In addition, patent applications filed in foreign countries are subject to laws, rules, and procedures that differ from those of the United States, and thus we cannot be certain that foreign patent applications related to issued U.S. patents will be issued in other regions. Furthermore, even if these patent applications are accepted and the associated patents issued, some foreign countries provide significantly less effective patent enforcement than in the United States.
In addition, patents issued to us may be infringed upon or designed around by others and others may obtain patents that we need to license or design around, either of which would increase costs and may adversely affect our business, our prospects, and our operating results.
We may need to defend ourselves against claims that we infringe, haveinfringed, misappropriated, or otherwise violateviolated the intellectual property rights of others, which may be time-consuming and would cause us to incur substantial costs.
Companies, organizations, or individuals, including our competitors, may hold or obtain patents, trademarks, or other proprietary rights that they may in the future believe are infringed by our products or services. Although we are not currently subject to any claims related to intellectual property, these companies holding patents or other intellectual property rights allegedly relating to our technologies could, in the future, make claims or bring suits alleging infringement, misappropriation, or other violations of such rights, or otherwise assert their rights and by seeking licenses or injunctions. Several of the proprietary components used in our Energy Servers have been subjected to infringement challenges in the past. We also generally indemnify our customers against claims that the products we supply infringe, misappropriate, or otherwise violate third party intellectual property rights, and we therefore may therefore be required to defend our customers against such claims. If a claim is successfully brought in the future and we or our products are determined to have infringed, misappropriated, or otherwise violated a third party’s intellectual property rights, we may be required to do one or more of the following:
•cease selling or using our products that incorporate the challenged intellectual property;
•pay substantial damages (including treble damages and attorneys’ fees if our infringement is determined to be willful);
•obtain a license from the holder of the intellectual property right, which may not be available on reasonable terms or at all; or
•redesign our products or means of production, which may not be possible or cost-effective.
Any of the foregoing could adversely affect our business, prospects, operating results, and financial condition. In addition, any litigation or claims, whether or not valid, could harm our reputation, result in substantial costs and divert resources and management attention.
We also license technology from third parties and incorporate components supplied by third parties into our products. We may face claims that our use of such technology or components infringes or otherwise violates the rights of others, which would subject us to the risks described above. We may seek indemnification from our licensors or suppliers under our contracts with them, but our rights to indemnification or our suppliers’ resources may be unavailable or insufficient to cover our costs and losses.
Risks Relating to Our Financial Condition and Operating Results
We have incurred significant losses in the past and we may not be profitable for the foreseeable future.
Since our inception in 2001, we have incurred significant net losses and have used significant cash in our business. As of June 30, 2020, we had an accumulated deficit of $3.1 billion. We expect to continue to expand our operations, including by investing in manufacturing, sales and marketing, research and development, staffing systems, and infrastructure to support our growth. We anticipate that we will incur net losses for the foreseeable future. Our ability to achieve profitability in the future will depend on a number of factors, including:
•growing our sales volume;
•increasing sales to existing customers and attracting new customers;
•expanding into new geographical markets and industry market sectors;
•attracting and retaining financing partners who are willing to provide financing for sales on a timely basis and with attractive terms;
•continuing to improve the useful life of our fuel cell technology and reducing our warranty servicing costs;
•reducing the cost of producing our Energy Servers;
•improving the efficiency and predictability of our installation process;
•improving the effectiveness of our sales and marketing activities;
•attracting and retaining key talent in a competitive marketplace; and
•the amount of stock-based compensation recognized in the period.
Even if we do achieve profitability, we may be unable to sustain or increase our profitability in the future.
Our financial condition and results of operations and other key metrics are likely to fluctuate on a quarterly basis in future periods, which could cause our results for a particular period to fall below expectations, resulting in a severe decline in the price of our Class A common stock.
Our financial condition and results of operations and other key metrics have fluctuated significantly in the past and may continue to fluctuate in the future due to a variety of factors, many of which are beyond our control. For example, the amount of product revenue we recognize in a given period is materially dependent on the volume of installations of our Energy Servers in that period and the type of financing used by the customer.
In addition to the other risks described herein, the following factors could also cause our financial condition and results of operations to fluctuate on a quarterly basis:
•the timing of installations, which may depend on many factors such as availability of inventory, product quality or performance issues, or local permitting requirements, utility requirements, environmental, health, and safety requirements, weather, COVID-19 or such other health emergency, and customer facility construction schedules;
•size of particular installations and number of sites involved in any particular quarter;
•the mix in the type of purchase or financing options used by customers in a period, the geographical mix of customer sales, and the rates of return required by financing parties in such period;
•whether we are able to structure our sales agreements in a manner that would allow for the product and installation revenue to be recognized upfront at acceptance;
•delays or cancellations of Energy Server installations;
•fluctuations in our service costs, particularly due to unexpected costs of servicing and maintaining Energy Servers;
•weaker than anticipated demand for our Energy Servers due to changes in government incentives and policies or due to
other conditions;
•fluctuations in our research and development expense, including periodic increases associated with the pre-production qualification of additional tools as we expand our production capacity;
•interruptions in our supply chain;
•the length of the sales and installation cycle for a particular customer;
•the timing and level of additional purchases by existing customers;
•unanticipated expenses or installation delays associated with changes in governmental regulations, permitting requirements by local authorities at particular sites, utility requirements and environmental, health, and safety requirements;
•disruptions in our sales, production, service or other business activities resulting from disagreements with our labor force or our inability to attract and retain qualified personnel; and
•unanticipated changes in federal, state, local, or foreign government incentive programs available for us, our customers, and tax equity financing parties.
Fluctuations in our operating results and cash flow could, among other things, give rise to short-term liquidity issues. In addition, our revenue, key operating metrics, and other operating results in future quarters may fall short of the expectations of investors and financial analysts, which could have an adverse effect on the price of our Class A common stock.
If we fail to manage our growth effectively, our business and operating results may suffer.
Our current growth and future growth plans may make it difficult for us to efficiently operate our business, challenging us to effectively manage our capital expenditures and control our costs while we expand our operations to increase our revenue. If we experience a significant growth in orders without improvements in automation and efficiency, we may need additional manufacturing capacity and we and some of our suppliers may need additional and capital intensive equipment. Any growth in manufacturing must include a scaling of quality control as the increase in production increases the possible impact of manufacturing defects. In addition, any growth in the volume of sales of our Energy Servers may outpace our ability to engage sufficient and experienced personnel to manage the higher number of installations and to engage contractors to complete installations on a timely basis and in accordance with our expectations and standards. Any failure to manage our growth effectively could materially and adversely affect our business, our prospects, our operating results, and our financial condition. Our future operating results depend to a large extent on our ability to manage this expansion and growth successfully.
The accounting treatment related to our revenue-generating transactions is complex, and if we are unable to attract and retain key employees and hirehighly qualified management, technical, engineering and salesaccounting personnel to evaluate the accounting implications of our complex or non-routine transactions, our ability to compete and successfully growaccurately report our business couldfinancial results may be harmed.
We believe thatOur revenue-generating transactions include traditional leases, Managed Services Agreements, sales to international channel partners and PPA transactions, all of which are accounted for differently in our success and our ability to reach our strategic objectives are highly dependent on the contributions of our key management, technical, engineering and sales personnel. The lossfinancial statements. Many of the services of any ofaccounting rules related to our key employees could disrupt our operations, delayfinancing transactions are complex and require experienced and highly skilled personnel to review and interpret the developmentproper accounting treatment with respect thereto. Competition for senior finance and introduction of our products and services and negatively impact our business, prospects and operating results. In particular, we are highly dependent on the services of Dr. Sridhar, our President and Chief Executive Officer, and other key employees. None of our key employees is bound by an employment agreement for any specific term. We cannot assure you that we will be able to successfully attract and retain senior leadership necessary to grow our business. Furthermore, there is increasing competition for talented individuals in our field, and competition for qualified
accounting personnel is especially intense in the San Francisco Bay Area where our principal officeswho have public company reporting experience is intense, and if we are located. Our failureunable to attractrecruit and retain personnel with the required level of expertise to evaluate and accurately classify our executive officers and other key technology, sales, marketing and support personnel could adversely impact our business, our prospects, our financial condition and our operating results. In addition, we do not have “key person” life insurance policies covering any of our officers or other key employees.
We are subject to various environmental laws and regulations that could impose substantial costs upon us and cause delays in building our manufacturing facilities.
We are subject to national, state and local environmental laws and regulations as well as environmental laws in those foreign jurisdictions in which we operate. Environmental laws and regulations can be complex and may often change. These laws can give rise to liability for administrative oversight costs, cleanup costs, property damage, bodily injury, fines and penalties. Capital and operating expenses needed to comply with environmental laws and regulations can be significant, and violations may result in substantial fines and penalties or third-party damages. In addition, ensuring we are in compliance with applicable environmental laws could require significant time and management resources and could cause delays inrevenue-producing transactions, our ability to build out, equip and operate our facilities as well as service our fleet, which would adversely impact our business, our prospects,accurately report our financial condition and our operating results. In addition, environmental laws and regulations such as the Comprehensive Environmental Response, Compensation and Liability Act in the United States impose liability on several grounds including for the investigation and cleanup of contaminated soil and ground water, for building contamination, for impacts to human health and for damages to natural resources. If contamination is discovered in the future at properties formerly owned or operated by us or currently owned or operated by us, or properties to which hazardous substances were sent by us, it could result in our liability under environmental laws and regulations. Many of our customers who purchase our Energy Servers have high sustainability standards, and any environmental noncompliance by us could harm our reputation and impact a current or potential customer’s buying decision. The costs of complying with environmental laws, regulations and customer requirements, and any claims concerning noncompliance or liability with respect to contamination in the future, could have a material adverse effect on our financial condition or our operating results.
The installation and operation of our Energy Servers are subject to environmental laws and regulations in various jurisdictions, and there is uncertainty with respect to the interpretation of certain environmental laws and regulations to our Energy Servers, especially as these regulations evolve over time.
Bloom is committed to compliance with applicable environmental laws and regulations including health and safety standards, and we continually review the operation of our Energy Servers for health, safety and compliance. Our Energy Servers, like other fuel cell technology-based products of which we are aware, produce small amounts of hazardous wastes and air pollutants, and we seek to ensure that they are handled in accordance with applicable regulatory standards.
Maintaining compliance with laws and regulations canresults may be challenging given the changing patchwork of environmental laws and regulations that prevail at the federal, state, regional and local level. Most existing environmental laws and regulations preceded the introduction of our innovative fuel cell technology and were adopted to apply to technologies existing at the time, namely large, coal, oil or gas-fired power plants. Currently, there is generally little guidance from these agencies on how certain environmental laws and regulations may or may not be applied to our technology.
For example, natural gas, which is the primary fuel used in our Energy Servers, contains benzene which is classified as a hazardous waste if it exceeds 0.5 milligrams (mg) per liter. A small amount of benzene found in the public natural gas pipeline (equivalent to what is present in one gallon of gasoline in an automobile fuel tank which is exempt from federal regulation) is collected by the gas cleaning units contained in our Energy Servers which is typically replaced once every 18 to 24 months by us from customers’ sites. From 2010 to late 2016 and in the regular course of maintenance of the Energy Servers, we periodically replaced the units in our servers under a federal environmental exemption that permitted the handling of such units without manifesting the contents as containing a hazardous waste. Although at the time we believed that we operated under the exemption with the approval of two states that had adopted the federal exemption, the federal Environmental Protection Agency issued guidance for the first time in late 2016 that differed from our belief and conflicted with the state approvals we had obtained even though we had operated under the exemption since 2010. We have complied with the new guidance and, given the comparatively small quantities of benzene produced, we do not anticipate significant additional costs or risks from our compliance with the revised guidance. However, the EPA is seeking to collect approximately $1.0 million in fines from us for the prior period, which we are contesting. Additionally, we paid a nominal fine to an agency in a different state under the state’s environmental laws relating to the operation of our Energy Server in that state under the exemption prior to the issuance of the revised EPA guidance.
Another example relates to the very small amounts of chromium in hexavalent form, or CR+6, which our Energy Servers emit. This occurs any time a steel super alloy is exposed to high temperatures. CR+6 is found in small samples in the air generally. However, exposure to high or significant concentrations over prolonged periods of time can be carcinogenic. While
the small amount of chromium emitted by our Energy Servers is initially in the hexavalent form, it converts to a non-toxic trivalent form, or CR+3 rapidly after it leaves the Energy Server. In tests we have conducted, air measurements taken 10 meters from an Energy Server show that the CR+6 is largely converted.
Our Energy Servers do not present any significant health hazard based on our modeling, testing methodology and measurements. There are several supporting elements to this position including that the emissions from our Energy Servers are in very low concentrations, are emitted as nano-particles that convert to the non-hazardous form CR+3 rapidly, are quickly dispersed into the air and are not emitted in close proximity to locations where people would be expected to have a prolonged exposure.
Several states in which we currently operate, including California, require permits for emissions of hazardous air pollutants based on the quantity of emissions, most of which require permits only for quantities of emissions that are higher than those observed from our Energy Servers. Other states in which we operate, including New York, New Jersey and North Carolina, have specific exemptions for fuel cells. Some states in which we operate have CR+6 limits which are an order of magnitude over our operating range. Within California, the Bay Area Air Quality Management District ("BAAQMD"), requires a permit for emissions that are more than .00051 lbs/year. Other California regulations require that levels of CR+6 be below .00005 µg/m³ (the level required by Proposition 65) and which requires notification of the presence of CR+6 unless it can be shown to be at levels that do not pose a significant health risk. We have determined that the standards applicable in California in this regard are more stringent than those in any other state or foreign location in which we have installed Energy Servers to date.
There are generally no relevant environmental testing methodology guidelines for a technology such as ours. The standard test method for analyzing emissions cannot be readily applied to our Energy Servers because it would require inserting a probe into an emission stack. Our servers do not have emission stacks; therefore, we have to construct an artificial stack on top of our server in order to conduct a test. If we used the testing methodology similar to what the air districts have used in other large scale industrial products, it would show that we would need to reduce the emissions of CR+6 from our Energy Servers to meet the most stringent requirements. However, we employed a modified test method that is designed to capture the actual operating conditions of our Energy Servers and its distinctly different design from legacy power plants and industrial equipment. Based on our modeling, measured results and analysis, we believe we are in compliance with State of California air regulations.harmed.
We will work with the California Air Districts and seekreached a determination to obtain their agreement that we are in compliance. Should the regulators disagree, we have engineered a technology solution that provides an alternate route to compliance. We are already deploying this technology solution in new Energy Servers in California and we are ready to deploy it in existing Energy Servers. It will cost less than 0.1% of our product cost. However, it is possible that the California Air Districts will require us to abate or shut down the operations ofrestate certain of our existing Energy Servers on a temporary basis or will seek the imposition of monetary fines.
While we seek to comply with air quality and emission standards in every region in which we operate, it is possible that certain customers in other regions may request that we provide the new technology solution for their Energy Servers to comply with the stricter standards imposed by California even though they are not applicable and even though we are under no contractual obligation to do so. We will comply with these requests. Failure or delay in attaining regulatory approval could result in our not being able to operate in a particular local jurisdiction.
These examples illustrate that our technology is moving faster than the regulatory process in many instances. It is possible that regulators could delay or prevent us from conducting our business in some way pending agreement on, and compliance with, shifting regulatory requirements. Such actions could delay the installation of Energy Servers, could result in fines, could require modification or replacement or could trigger claims of performance warranties and defaults under customer contracts that could require us to repurchase their Energy Servers, any of which could adversely affect our business, ourpreviously issued consolidated financial performance and our reputation. In addition, new laws or regulations or new interpretations of existing laws or regulations could require us to upgrade or retrofit existing equipment, which could result in materially increased capital and operating expenses.
Furthermore, we have not yet determined whether our Energy Servers will satisfy regulatory requirements in the other states in the U.S. and in international locations in which we do not currently sell Energy Servers but may pursue in the future.
As a fossil fuel-based technology, we may be subject to a heightened risk of regulation, to a potential for the loss of certain incentives and to changes in our customers’ energy procurement policies.
Although the current generation of Bloom Energy Servers running on natural gas produce nearly 60% less carbon emissions compared to the average of U.S. combustion power generation, the operation of our Energy Servers does produce
carbon dioxide ("CO2"), which has been shown to be a contributing factor to global climate change. As such, we may be negatively impacted by CO2-related changes in applicable laws, regulations, ordinances or other rules, or the requirements of the incentive programs on which we currently rely. Changes, or in some cases a lack of change, in any of the laws, regulations, ordinances or other rules that apply to our installations and new technology could make it illegal or more costly for us or our customers to install and operate our Energy Servers on particular sites thereby negatively affecting our ability to deliver cost savings to customers, or we could be prohibited from completing new installations or continuing to operate existing projects. Certain municipalities have already banned the use of distributed generation products that utilize fossil fuel. Additionally, our customers’ and potential customers’ energy procurement policies may prohibit or limit their willingness to procure our Energy Servers. Our business prospects may be negatively impacted if we are prevented from completing new installations or our installations become more costlystatements as a result of laws, regulations, ordinances or other rules applicablethe identification of material misstatements in previously issued financial statements, which resulted in unanticipated costs and may affect investor confidence and raise reputational issues.
As discussed in Note 2, Restatement of Previously Issued Financial Statements, in Part I, Item 1, Financial Statements, we reached a determination to restate our Energy Servers, or byconsolidated financial statements for the periods disclosed in that note after misstatements in our customers’ and potential customers’ energy procurement policies.
Existing regulations and changes to such regulations impacting the electric power industry may create technical, regulatory and economic barriers which could significantly reduce demand for our Energy Servers.
The market for electricity generation products is heavily influenced by U.S. federal, state, local and foreign government regulations and policies as well as by internal policies and regulationsaccounting treatment of electric utility providers. These regulations and policies often relate to electricity pricing and technical interconnection of customer-owned electricity generation. These regulations and policies are often modified and could continue to change, which could result in a significant reduction in demand for our Energy Servers. For example, utility companies commonly charge fees to larger industrial customers for disconnecting from the electric grid or for having the capacity to use power from the electric grid for back-up purposes. These fees could change, thereby increasing the cost to our customers of using our Energy Servers and making them less economically attractive. In addition, our project with Delmarva Power & Light Company (Delmarva) is subject to laws and regulations relating to electricity generation, transmission and sale such as Federal Energy Regulatory Commission (FERC) regulation under various federal energy regulatory laws, which requires FERC authorization to make wholesale sales of electric energy, capacity and ancillary services. Also, severalsome of our PPA Entities are subject to regulation under FERC with respect to market-based sales of electricity, which requires us to file notices and make other periodic filings with FERC, which increases our costs and subjects us to additional regulatory oversight.
Possible new tariffs could have a material adverse effect on our business.
Our business is dependent on the availability of raw materials and componentscomplex or non-routine transactions were identified. The restatement also included corrections for our Energy Servers particularly electrical components commonpreviously identified immaterial uncorrected misstatements in the semiconductor industry, specialty steel products / processingimpacted periods. As a result, we have incurred unanticipated costs for accounting and raw materials. The United States has recently imposed tariffs on steel and aluminum imports which may increase the cost of raw materials for our Energy Servers and decrease the available supply. The United States is also considering tariffs on additional items which could include items imported by us from Chinalegal fees in connection with or other countries.
Although we currently maintain alternative sources for raw materials, our business is subjectrelated to the risk of price fluctuationsrestatement, and periodic delays in the delivery of certain raw materials, which tariffs may exacerbate. Disruptions in the supply of raw materials and components could temporarily impair our ability to manufacture our Energy Servers for our customers or require us to pay higher prices in order to obtain these raw materials or components from other sources, which could thereby affect our business and our results of operations. While it is too early to predict how the recently enacted tariffs on imported steel will impact our business, the imposition of tariffs on items imported by us from China or other countries could increase our costs and could have a material adverse effect on our business and our results of operations.
We may become subject to product liability claims,a number of additional risks and uncertainties, which could harm our financial condition and liquidity if we are not able to successfully defend or insure against such claims.
We may affect investor confidence in the future become subject to product liability claims. Our Energy Servers are considered high energy systems because they use flammable fuelsaccuracy of our
financial disclosures and may operate at 480 volts. Although our Energy Servers are certified to meet ANSI, IEEE, ASME and NFPA design and safety standards, if not properly handled in accordance with our servicing and handling standards and protocols, there could be a system failure and resulting liability. These claims could require us to incur significant costs to defend. Furthermore, any successful product liability claim could require us to pay a substantial monetary award. Moreover, a product liability claim could generate substantial negative publicity about our company and our Energy Servers, which could harm our brand,raise reputational risks for our business, prospects, and our operating results. While we maintain product liability insurance, our insurance may not be sufficient to cover all potential product liability claims. Any lawsuit seeking significant monetary damages either in excess of our coverage or outside of our coverage may have a material adverse effect on our business and our financial condition.
Current or future litigation or administrative proceedings could have a material adverse effect on our business, our financial condition and our results of operations.
We have been and continue to be involved in legal proceedings, administrative proceedings, claims and other litigation that arise in the ordinary course of business. Purchases of our products have also been the subject of litigation. For example, in 2011, an amendment to the Delaware Renewable Energy Portfolio Statute was enacted to permit the Delaware public service utility, Delmarva, to meet its renewable energy standards using energy generated by fuel cells manufactured and operated in Delaware. This statute required Delmarva to charge a tariff to its ratepayors to pay for certain costs of providers of such energy generated by fuel cells. In 2012, plaintiffs FuelCell Energy Inc. and John A. Nichols filed suit against Delaware Governor Jack Markell and the Delaware Public Service Commission in the U.S. District Court for Delaware claiming that the 2011 amendment to the statute discriminated against interstate fuel cell providers and subsidized us for building a manufacturing facility in Delaware to manufacture fuel cells. We were not named as a party to this lawsuit and the litigation was ultimately settled. As another example, in July 2018, we received a Statement of Claim from two former executives of Advanced Equities, Inc. seeking to compel arbitration and alleging a breach of a confidential agreement from June 2014. This Statement of Claim sought, among other things, to void the indemnification and confidentiality provisions under the confidential agreement and to recover attorneys’ fees and costs. The Statement of Claim was dismissed without prejudice on July 22, 2018. In addition, since our Energy Server is a new type of product in a nascent market, we have in the past needed and may in the future need to seek the amendment of existing regulations, or in some cases the creation of new regulations, in order to operate our business in some jurisdictions. Such regulatory processes may require public hearings concerning our business, which could expose us to subsequent litigation.
Unfavorable outcomes or developments relating to proceedings to which we are a party or transactions involving our products such as judgments for monetary damages, injunctions, or denial or revocation of permits, could have a material adverse effect on our business, our financial condition, and our results of operations. In addition, settlement of claims could adversely affect our financial condition and our results of operations.
A breach or failure of our networks or computer or data management systems could damage our operations and our reputation.
Our business is dependent on the security and efficacy of our networks and computer and data management systems. For example, all of our Energy Servers are connected to and controlled and monitored by our centralized remote monitoring service, and we rely on our internal computer networks for many of the systems we use to operate our business generally. Although we take protective measures and endeavor to modify them as circumstances warrant, the security of our infrastructure, including the network that connects our Energy Servers to our remote monitoring service, may be vulnerable to breaches, unauthorized access, misuse, computer viruses or other malicious code and cyber-attacks that could have a material adverse impact on our business and our Energy Servers in the field. A breach or failure of our networks or computer or data management systems due to intentional actions such as cyber-attacks, negligence or other reasons could seriously disrupt our operations or could affect our ability to control or to assess the performance in the field of our Energy Servers and could result in disruption to our business and potentially legal liability. These events could result in significant costs or reputational consequences.
Our headquarters and other facilities are located in an active earthquake zone, and an earthquake or other types of natural disasters or resource shortages could disrupt and harm our results of operations.
We conduct a majority of our operations in the San Francisco Bay area in an active earthquake zone, and certain of our facilities are located within known flood plains. The occurrence of a natural disaster such as an earthquake, drought, flood, localized extended outages of critical utilities or transportation systems or any critical resource shortages could cause a significant interruption in our business, damage or destroy our facilities, our manufacturing equipment, or our inventory, and cause us to incur significant costs, anyboth of which could harm our business ourand financial condition, and our results of operations. The insurance we maintain against fires, earthquakes and other natural disasters may not be adequate to cover our losses in any particular case.results.
Expanding operations internationally could expose us to risks.
Although we currently primarily operate in the United States, we will seek to expand our business internationally. We currently have operations in Japan, China India and South Korea. Managing any international expansion will require additional resources and controls including additional manufacturing and assembly facilities. Any expansion internationally could subject our business to risks associated with international operations, including:
conformity with applicable business customs, including translation into foreign languages and associated expenses;
lack of availability of government incentives and subsidies;
challenges in arranging, and availability of, financing for our customers;
potential changes to our established business model;
cost of alternative power sources, which could be meaningfully lower outside the United States;
availability and cost of natural gas;
difficulties in staffing and managing foreign operations in an environment of diverse culture, laws and customers, and the increased travel, infrastructure and legal and compliance costs associated with international operations;
installation challenges which we have not encountered before which may require the development of a unique model for each country;
compliance with multiple, potentially conflicting and changing governmental laws, regulations and permitting processes including environmental, banking, employment, tax, privacy and data protection laws and regulations such as the EU Data Privacy Directive;
compliance with U.S. and foreign anti-bribery laws including the Foreign Corrupt Practices Act and the U.K. Anti-Bribery Act;
difficulties in collecting payments in foreign currencies and associated foreign currency exposure;
restrictions on repatriation of earnings;
compliance with potentially conflicting and changing laws of taxing jurisdictions where we conduct business and applicable U.S. tax laws as they relate to international operations, the complexity and adverse consequences of such tax laws and potentially adverse tax consequences due to changes in such tax laws; and
regional economic and political conditions.
As a result of these risks, any potential future international expansion efforts that we may undertake may not be successful.
If we discoverrecently identified a material weakness in our internal control over financial reporting related to the accounting for and disclosure of complex or non-routine transactions. If we do not effectively remediate the material weakness or if we otherwise fail to maintain effective internal control over financial reporting, our ability to report our financial results on a timely and an accurate basis may adversely affect the market price of our Class A common stock.
The Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley Act)("Sarbanes-Oxley Act") requires, among other things, that wepublic companies evaluate the effectiveness of ourtheir internal control over financial reporting and disclosure controls and procedures. AlthoughAs a recently public company and as an emerging growth company, we elected to delay adopting the requirements of the Sarbanes-Oxley Act as is our option under the Sarbanes-Oxley Act. While we have not yet adopted the requirements under Section 404B of the Sarbanes-Oxley Act, we did not discover anyidentify a material weaknessesweakness in internal control over financial reporting at December 31, 2017, subsequent2019, as we did not design and maintain an effective control environment with a sufficient complement of resources with an appropriate level of accounting knowledge, expertise and training to evaluate the accounting for and disclosure of complex or non-routine transactions commensurate with our financial reporting requirements. Please see Part I, Item 4, Controls and Procedures, in this Quarterly Report on Form 10-Q for additional information regarding the identified material weakness and our actions to date to remediate the material weakness. Subsequent testing by us or our independent registered public accounting firm, which has not yet performed an audit of our internal control over financial reporting, may reveal additional deficiencies in our internal control over financial reporting that are deemed to be material weaknesses.
To comply with Section 404A,404B, we may incur substantial cost,costs, expend significant management time on compliance-related issues, and hire additional accounting, financial, and internal audit staff with appropriate public company experience and technical accounting knowledge. Moreover, if we are not able to comply with the requirements of Section 404A404B in a timely manner or if we or our independent registered public accounting firm identify deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, we could be subject to sanctions or investigations by the Securities and Exchange Commission (SEC)SEC or other regulatory authorities, which would require additional financial and management resources. Any failure to maintain effective disclosure controls and procedures or internal control over financial reporting could have a material adverse effect on our business and operating results and cause a decline in the price of our Class A common stock. For further discussion on Section 404 compliance, see our Risk Factor: "We will no longer be an emerging growth company beginning on December 31, 2020, after which we will not be able to take advantage of the reduced disclosure requirements applicable to emerging growth companies."
Our ability to use our deferred tax assets to offset future taxable income may be subject to limitations that could subject our business to higher tax liability.
We may be limited in the portion of net operating loss carryforwards that we can use in the future to offset taxable income for U.S. federal and state income tax purposes. If not utilized, ourOur net operating loss carryforwards (NOLs)("NOLs") will expire, if unused, beginning in 2022 and 2018,2028, respectively. A lack of future taxable income would adversely affect our ability to utilize these NOLs. In addition, under Section 382 of the Internal Revenue Code of 1986, as amended (the Code)"Code"), a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its NOLs to offset future taxable income. Changes in our stock ownership as well as other changes that may be outside of our control could result in ownership changes under Section 382 of the Code, which could cause our NOLs to be subject to certain limitations. Our NOLs may also be impaired under similar provisions of state law. Our deferred tax assets, which are currently fully reserved with a valuation allowance, may expire unutilized or underutilized, which could prevent us from offsetting future taxable income.
Risks Relating to Our Liquidity
We must maintain customer confidence in our liquidity, including in our ability to timely service our debt obligations, and long-term business prospects in order to grow our business.
Currently, we are the only provider able to fully support and maintain our Energy Servers. If potential customers believe we do not have sufficient capital or liquidity to operate our business over the long-term or that we will be unable to maintain their Energy Servers and provide satisfactory support, customers may be less likely to purchase or lease our products, particularly in light of the significant financial commitment required. In addition, financing sources may be unwilling to provide financing on reasonable terms. Similarly, suppliers, financing partners, and other third parties may be less likely to invest time and resources in developing business relationships with us if they have concerns about the success of our business.
Accordingly, in order to grow our business, we must maintain confidence in our liquidity and long-term business prospects among customers, suppliers, financing partners, and other parties. This may be particularly complicated by factors such as:
•our limited operating history at a large scale;
•the size of our debt obligations;
•our lack of profitability;
•unfamiliarity with or uncertainty about our Energy Servers and the overall perception of the distributed generation market;
•prices for electricity or natural gas in particular markets;
•competition from alternate sources of energy;
•warranty or unanticipated service issues we may experience;
•the environmental consciousness and perceived value of environmental programs to our customers;
•the size of our expansion plans in comparison to our existing capital base and the scope and history of operations;
•the availability and amount of tax incentives, credits, subsidies or other incentive programs; and
•the other factors set forth in this “Risk Factors” section.
Several of these factors are largely outside our control, and any negative perceptions about our liquidity or long-term business prospects, even if unfounded, would likely harm our business.
Our substantial indebtedness, and restrictions imposed by the agreements governing our and our PPA Entities’ outstanding indebtedness, may limit our financial and operating activities and may adversely affect our ability to incur additional debt to fund future needs.
As of June 30, 2018,2020, we and our subsidiaries had approximately $960.1$645.7 million of total consolidated indebtedness, of which an aggregate of $607.4$416.0 million represented indebtedness that is recourse to us.us, of which $14.7 million is classified as current and $401.3 million is classified as non-current. Of this amount, $254.1$401.3 million represented debt, under our 8% Notes, $4.1 million represented operating debt, $352.8 million represented debt of our PPA Entities, $254.1 million represented debt under our 6% Notes and $95.1$69.5 million represented debt under our 10% Notes, and $263.4 million represented debt under our 10% Convertible Notes. Our substantialIn addition, our PPA Entities’ outstanding indebtedness of $229.7 million represented indebtedness that is non-recourse to us. The agreements governing our and any newour PPA Entities’ outstanding indebtedness could:contain, and other future debt agreements may contain, covenants imposing operating and financial restrictions on our business that limit our flexibility including, among other things:
•borrow money;
•pay dividends or make other distributions;
•incur liens;
•make asset dispositions;
•make loans or investments;
•issue or sell share capital of our subsidiaries;
•issue guaranties;
•enter into transactions with affiliates;
•merge, consolidate or sell, lease or transfer all or substantially all of our assets;
•require us to dedicate a substantial portion of cash flow from operations to the payment of principal and interest on indebtedness, thereby reducing the funds available for other purposes such as working capital and capital expenditures;
•make it more difficult for us to satisfy and comply with our obligations with respect to our indebtedness;
•subject us to increased sensitivity to interest rate increases;
•make us more vulnerable to economic downturns, adverse industry conditions, or catastrophic external events;
•limit our ability to withstand competitive pressures;
•limit our ability to invest in new business subsidiaries that are not PPA Entity-relatedEntity-related;
•reduce our flexibility in planning for or responding to changing business, industry, and economic conditions; and/or
•place us at a competitive disadvantage to competitors that have relatively less debt than we have.
Our debt agreements and our PPA Entities’ debt agreements require the maintenance of financial ratios or the satisfaction of financial tests such as debt service coverage ratios and consolidated leverage ratios. Our and our PPA Entities’ ability to meet these financial ratios and tests may be affected by events beyond our control and, as a result, we cannot assure you that we will be able to meet these ratios and tests. Upon the occurrence of events such as a change in control of our Company, significant asset sales or mergers or similar transactions, the liquidation or dissolution of our Company or the cessation of our stock exchange listing, holders of our 10% Convertible Notes have we.the right to cause us to repurchase for cash any or all of such outstanding notes at a repurchase price in cash equal to 100% of the principal amount thereof, plus accrued and unpaid interest thereon. We cannot provide assurance that we would have sufficient liquidity to repurchase such notes. Furthermore, our financing and debt agreements, such as our 10% Convertible Notes, contain events of default. If an event of default were to occur, the trustee or the lenders could, among other things, terminate their commitments and declare outstanding amounts due and payable and our cash may become restricted. We cannot provide assurance that we would have sufficient liquidity to repay or refinance our indebtedness if such amounts were accelerated upon an event of default. Borrowings under other debt instruments that contain cross-acceleration or cross-default provisions may, as a result, be accelerated and become due and payable as a consequence. We may be unable to pay these debts in such circumstances. If we were unable to repay those amounts, lenders could proceed against the collateral granted to them to secure repayment of those amounts. We cannot assure you that the collateral will be sufficient to repay in full those amounts. We cannot provide assurance that the operating and financial restrictions and covenants in these agreements will not adversely affect our ability to finance our future operations or capital needs, or our ability to engage in other business activities that may be in our interest or our ability to react to adverse market developments.
As of June 30, 2020, we and our subsidiaries have approximately $645.7 million of total consolidated indebtedness, including $26.1 million in short-term debt and $619.7 million in long-term debt. In addition, our 10% Convertible Notes contain restrictions on our ability to issue additional debt and both the 10% Convertible Notes limit our ability to provide collateral for any additional debt. Given our current level of indebtedness, the restrictions on additional indebtedness contained in the 10% Convertible Notes and the fact that most of our assets serve as collateral to secure existing debt, it may be difficult for us to secure additional debt financing at an attractive cost, which may in turn impact our ability to expand our operations and our product development activities and to remain competitive in the market.
In addition, our substantial level of indebtedness could limit our ability to obtain required additional financing on acceptable terms or at all for working capital, capital expenditures, and general corporate purposes. Any of these risks could impact our ability to fund our operations or limit our ability to expand our business, which could have a material adverse effect on our business, our financial condition, our liquidity, and our results of operations. Our liquidity needs could vary significantly and may be affected by general economic conditions, industry trends, performance, and many other factors not within our control.
We may not be able to generate sufficient cash to meet our debt service obligations.
Our ability to generate sufficient cash to make scheduled payments on our debt obligations will depend on our future financial performance, which will be affected by a range of economic, competitive, and business factors, many of which are outside of our control.
In addition, we conductWe finance a significant volume of our operations through,Energy Servers and receive equity allocationsdistributions from ourcertain of the PPA Entities whichthat purchase the Energy Servers and other project intangibles through a series of milestone payments. The milestone payments and equity distributions contribute to our cash flow. These PPA Entities are separate and distinct legal entities, do not guarantee our debt obligations, and will have no obligation, contingent or otherwise, to pay amounts due under our debt obligations or to make any
funds available to pay those amounts, whether by dividend, distribution, loan, or other payments. Distributions by the PPA Entities to us are precluded under these arrangements if there is an event of default or if financial covenants such as maintenance of applicable debt service coverage ratios are not met even if there is not otherwise an event of default. Furthermore, under the terms of our equity financing arrangements for PPA Company II, PPA Company IIIa and PPA Company IIIb, substantially all of the cash flows generated from these PPA Entities in excess of debt service obligations are distributed to Equity Investors until the investors achieve a targeted internal rate of return or until a fixed date in the future, which is expected to be after a period of five or more years (the flip date) after which time we will receive substantially all of the remaining income (loss), tax and tax allocation attributable to the long-term customer payments and other incentives. In the case of PPA Company IV and PPA Company V, Equity Investors receive 90% of all cash flows generated in excess of its debt service obligations and other expenses for the duration of the applicable PPA Entity without any flip date or other time- or return-based adjustment. Moreover, even after the occurrence of the flip date for the PPA Entities, we do not anticipate distributions to be material enough independently to support our ongoing cash needs and therefore, we will still need to generate significant cash from our product sales. Therefore, itIt is possible that the PPA Entities may not contribute significant cash to us even if we are in compliance with the financial covenants under the project debt incurred by the PPA Entities.
Future borrowings by our PPA Entities may contain restrictions or prohibitions on the payment of dividends to us. The ability of our PPA Entities to make such payments to us may be subject to applicable laws including surplus, solvency and other limits imposed on the ability of companies to pay dividends.
If we do not generate sufficient cash to satisfy our debt obligations, including interest payments, or if we are unable to satisfy the requirement for the payment of principal at maturity or other payments that may be required from time to time under the terms of our debt instruments, we may have to undertake alternative financing plans such as refinancing or restructuring our debt, selling assets, reducing or delaying capital investments, or seeking to raise additional capital. We cannot provide assurance that any refinancing or restructuring would be possible, that any assets could be sold, or, if sold, of the timing of the sales and the amount of proceeds realized from those sales, that additional financing could be obtained on acceptable terms, if at all, or that additional financing would be available or permitted under the terms of our various debt instruments then in effect. Furthermore, the ability to refinance indebtedness would depend upon the condition of the finance and credit markets at the time which have in the past been, and may in the future be, volatile. Our inability to generate sufficient cash to satisfy our debt obligations or to refinance our obligations on commercially reasonable terms or on a timely basis would have an adverse effect on our business, our results of operations and our financial condition.
Certain of our outstanding convertible debt securities may be required to be settled in cash, which could have a material effect on our financial position.
Certain listing standards of The New York Stock Exchange limit the number of shares we may deliver upon conversion of our outstanding convertible notes that we amended in March of 2020 unless we first obtain the approval of our stockholders to issue shares in excess of that amount. We may never obtain such stockholder approval To comply with these listing standards, the number of shares that we may issue upon conversion of our outstanding convertible notes will be limited to an amount that does not exceed these limitations, until we have obtained stockholder approval to issue additional shares Any shares that would otherwise have been deliverable upon conversion in the absence of this limitation will instead be settled in cash based on the applicable daily conversion values during the relevant period. We may not have the funds available to settle such conversions in cash. Our inability to settle such conversions in cash by the required conversion date would be able to secure additional debt financing.
As of June 30, 2018, we anda default under the agreements that govern our subsidiaries had approximately $960.1 million of total consolidated indebtedness, including $30.0 million in short-term debt and $930.1 million in long-term debt. In addition, our 10% Notes contain restrictions on our ability to issue additional debt and both the 6% Notes and 10% Notes limit our ability to provide collateral for any additional debt. Given our current level of indebtedness, the restrictions on additional indebtedness contained in the 10% Notes and the fact that most of our assets serve as collateral to secure existing debt, it may be difficult for us to secure additional debt financing at an attractive cost, which may in turn impact our ability to expand our operations and our product development activities and to remain competitive in the market.convertible notes.
Under some circumstances, we may be required to or elect to make additional payments to our PPA Entities or the Power Purchase Agreement Program Equity Investors.
OurThree of our PPA Entities are structured in a manner such that, other than the amount of any equity investment we have made, we do not have any further primary liability for the debts or other obligations of the PPA Entities. However, we are required to guarantee the obligations of our wholly-owned subsidiary which invests alongside other investors in the PPA Entities. These obligations typically include the capital contribution obligations of such subsidiary to the PPA Entity as well as the representations and warranties made by and indemnification obligations of such subsidiary to Equity Investors in the applicable PPA Entity. As a result, we may be obligated to make payments on behalf of our wholly-owned subsidiary to Equity Investors in the PPA Entities in the event of a breach of these representations, warranties or covenants.
All of our PPA Entities that operate Energy Servers for end customers have significant restrictions on their ability to incur increased operating costs, or could face events of default under debt or other investment agreements if end customers are not able to meet their payment obligations under PPAs or if Energy Servers are not deployed in accordance with the project’s schedule. For example, under PPA Company IIIa’s credit agreement, on or before February 19, 2019 PPA Company IIIa is obligated to offer its lenders an insurance policy or performance bond, the cost of which is not expected to be material, to mitigate the risk should we will fail to perform our obligations under our operation and maintenance obligations to PPA Company IIIa. Upon receipt of such an offer, the lenders may elect to require PPA Company IIIa to obtain such insurance policy or performance bond, at PPA Company IIIa’s expense, or elect to require PPA Company IIIa to prepay all remaining amounts owed under PPA Company IIIa’s project debt. IfIn three cases, if our PPA Entities experience unexpected, increased costs such as insurance costs, interest expense or taxes or as a result of the acceleration of repayment of outstanding indebtedness, or if end customers are unable or unwilling to continue to purchase power under their PPAs, there could be insufficient cash generated from the project to meet the debt service obligations of the PPA Entity or to meet any targeted rates of return of Equity Investors. If this werea PPA Entity fails to occur,make required debt service payments, this could constitute an event of default and entitle the lender to foreclose on the collateral securing the debt or could trigger other payment obligations of the PPA Entity. To avoid this, we could choose to contribute additional capital to the applicable PPA Entity to enable such PPA Entity to make additional payments to avoid an event of default, which could adversely affect our business or our financial condition. Additionally, under PPA Company II’s credit agreement, PPA Company II is obligated to offer to repay all outstanding debt in the event that we obtain an investment grade credit rating unless we provide a guarantee of the debt obligations of the PPA Company II. Upon receipt of such offer, the lenders may elect to require PPA Company II to prepay all remaining amounts owed under PPA Company II’s project debt. Under PPA Company IV’s note purchase agreement, PPA Company IV is obligated to offer to repay all outstanding debt in the event that at any time we fail to own (directly or indirectly) at least 50.1% of the equity interest of PPA Company IV not owned by the Equity Investor(s). Upon receipt of such offer, the lenders may waive that obligation or elect to require PPA Company IV to prepay all remaining amounts owed under PPA Company IV’s project debt.
Restrictions imposed by the agreements governing of our and our PPA Entities’ outstanding indebtedness contain covenants that significantly limit our actions.
The agreements governing our outstanding indebtedness contain, and our other future debt agreements may contain, covenants imposing operating and financial restrictions on our business that limit our flexibility including, among other things, to:
borrow money;
pay dividends or make other distributions;
incur liens;
make asset dispositions;
make loans or investments;
issue or sell share capital of our subsidiaries;
issue guarantees;
enter into transactions with affiliates; and
merge, consolidate or sell, lease or transfer all or substantially all of our assets.
Our debt agreements and our PPA Entities’ debt agreements require the maintenance of financial ratios or the satisfaction of financial tests such as debt service coverage ratios and consolidated leverage ratios. Our and our PPA Entities’ ability to meet these financial ratios and tests may be affected by events beyond our control and, as a result, we cannot assure you that we will be able to meet these ratios and tests. Upon the occurrence of events such as a change in control of our company, significant asset sales or mergers or similar transactions, the liquidation or dissolution of our company or the cessation of our stock exchange listing, holders of our 6% Notes have the right to cause us to repurchase for cash any or all of such outstanding notes at a repurchase price in cash equal to 100% of the principal amount thereof, plus accrued and unpaid interest thereon. We cannot provide assurance that we would have sufficient liquidity to repurchase the notes. Furthermore, our financing and debt agreements, such as our 6% Notes and our 10% Notes, contain events of default. If an event of default were to occur, the trustee or the lenders could, among other things, terminate their commitments and declare outstanding amounts due and payable and our cash may become restricted. We cannot provide assurance that we would have sufficient liquidity to repay or refinance our indebtedness if such amounts were accelerated upon an event of default. Borrowings under other debt instruments that contain cross-acceleration or cross-default provisions may, as a result, be accelerated and become due and payable as a consequence. We may be unable to pay these debts in such circumstances. If we were unable to repay those amounts, lenders could proceed against the collateral granted to them to secure repayment of those amounts. We cannot assure you that the collateral will be sufficient to repay in full those amounts. We cannot assure you that the operating and financial restrictions and covenants in these agreements will not adversely affect our ability to finance our future operations or capital needs, or our ability to engage in other business activities that may be in our interest or our ability react to adverse market developments.
If our PPA Entities default on their obligations under non-recourse financing agreements, we may decidePPA Company IV have not been triggered as of June 30, 2020.
Risks Relating to make payments to prevent such PPA Entities’ creditors from foreclosing on the relevant collateral, as such a foreclosure would result in our losing our ownership interest in the PPA Entity or in some or all of its assets, or a material part of our assets, as the case may be. To satisfy these obligations, we may be required to use amounts distributed by our other PPA Entities as well as other sources of available cash, reducing the cash available to develop our projects and to our operations. The loss of a material part of our assets or our ownership interest in one or more of our PPA Entities or some or all of their assets, or any use of our resources to support our obligations or the obligations of our PPA Entities, could have a material adverse effect on our business, our financial condition and our results of operations.Our Operations
We may have conflicts of interest with our PPA Entities.
In eachmost of our PPA Entity,Entities, we act as the managing member and are responsible for the day-to-day administration of the project. However, we are also a major service provider for each PPA Entity in itsour capacity as the operator of the Energy Servers under an operations and maintenance agreement. Because we are both the administrator and the manager of theour PPA Entities, as well as a major service provider, we face a potential conflict of interest in that we may be obligated to enforce contractual rights that a PPA Entity has against us in our capacity as a service provider. By way of example, the PPA Entity may have a right to payment from us under a warranty provided under the applicable operations and maintenance agreement, and we may be financially motivated to avoid or delay this liability by failing to promptly enforce this right on behalf of the PPA Entity. While we do not believe that we had any conflicts of interest with our PPA Entities as of June 30, 2018,2020, conflicts of interest may arise in the future which cannot be foreseen at this time. In the event that prospective future Equity Investors and debt financing partners perceive there to exist any such conflicts, it could harm our ability to procure financing for our PPA Entities in the future, which could have a material adverse effect on our business.
If we are unable to attract and retain key employees and hire qualified management, technical, engineering, and sales personnel, our ability to compete and successfully grow our business could be harmed.
We believe that our success and our ability to reach our strategic objectives are highly dependent on the contributions of our key management, technical, engineering, and sales personnel. The loss of the services of any of our key employees could disrupt our operations, delay the development and introduction of our products and services and negatively impact our business, prospects, and operating results. In particular, we are highly dependent on the services of Dr. Sridhar, our Chairman and President and Chief Executive Officer, and other key employees. None of our key employees is bound by an “emergingemployment agreement for any specific term. We cannot assure you that we will be able to successfully attract and retain senior leadership necessary to grow our business. Furthermore, there is increasing competition for talented individuals in our field, and competition for qualified personnel is especially intense in the San Francisco Bay Area where our principal offices are located. Our failure to attract and retain our executive officers and other key management, technical, engineering, and sales personnel could adversely impact our business, our prospects, our financial condition, and our operating results. In addition, we do not have “key person” life insurance policies covering any of our officers or other key employees.
We will no longer be an emerging growth company” andcompany beginning on December 31, 2020 after which we cannotwill not be certain ifable to take advantage of the reduced disclosure requirements applicable to emerging growth companies will make our Class A common stock less attractive to investors and may make it more difficult to compare our performance with other public companies.
We arehave been an “emerging growth company,” as defined in the JOBS Act, and we intend to takehave taken advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emergingemerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as amended, or the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbindingnon-binding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We may take advantageexpect to cease to be an emerging growth company as of these exemptionsDecember 31, 2020.
As a result, we will need to comply with the independent auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act beginning with our annual report on Form 10-K for so long as we are anthe year ending December 31, 2020, will be required to hold a say-on-pay vote and a say-on-frequency vote at our 2021 annual meeting of stockholders, and will no longer be entitled to provide the reduced executive compensation disclosures permitted by emerging growth companies in our annual report on the Form 10-K and proxy statement for the year ending December 31, 2020. We expect that our transition from “emerging growth company,”company” will require additional attention from management and will result in increased costs to us, which could include higher legal fees, accounting fees and fees associated with investor relations activities, among others.
A breach or failure of our networks or computer or data management systems could damage our operations and our reputation.
Our business is dependent on the security and efficacy of our networks and computer and data management systems. For example, all of our Energy Servers are connected to and controlled and monitored by our centralized remote monitoring service, and we rely on our internal computer networks for many of the systems we use to operate our business generally. Although we take protective measures and endeavor to modify them as circumstances warrant, the security of our infrastructure, including the network that connects our Energy Servers to our remote monitoring service, may be vulnerable to breaches, unauthorized access, misuse, computer viruses, or other malicious code and cyber-attacks that could have a material adverse impact on our
business and our Energy Servers in the field. A breach or failure of our networks or computer or data management systems due to intentional actions such as cyber-attacks, negligence, or other reasons could seriously disrupt our operations or could affect our ability to control or to assess the performance in the field of our Energy Servers and could result in disruption to our business and potentially legal liability.In addition, if certain of our IT systems failed, our production line might be affected, which could impact our business and operating results. These events, in addition to impacting our financial results, could result in significant costs or reputational consequences.
Our headquarters and other facilities are located in an active earthquake zone, and an earthquake or other types of natural disasters or resource shortages, including public safety power shut-offs that have occurred and will continue to occur in California, could disrupt and harm our results of operations.
We conduct a majority of our operations in the San Francisco Bay area in an active earthquake zone, and certain of our facilities are located within known flood plains. The occurrence of a natural disaster such as an earthquake, drought, flood, fire, localized extended outages of critical utilities (such as California's public safety power shut-offs) or transportation systems, or any critical resource shortages could cause a significant interruption in our business, damage or destroy our facilities, our manufacturing equipment, or our inventory, and cause us to incur significant costs, any of which could harm our business, our financial condition, and our results of operations. The insurance we maintain against fires, earthquakes and other natural disasters may not be adequate to cover our losses in any particular case.
Expanding operations internationally could expose us to additional risks.
Although we currently primarily operate in the United States, we will seek to expand our business internationally. We currently have operations in Japan, China, India, and the Republic of Korea (collectively, our "Asia Pacific region"). Managing any international expansion will require additional resources and controls including additional manufacturing and assembly facilities. Any expansion internationally could subject our business to risks associated with international operations, including:
•conformity with applicable business customs, including translation into foreign languages and associated expenses;
•lack of availability of government incentives and subsidies;
•challenges in arranging, and availability of, financing for our customers;
•potential changes to our established business model;
•cost of alternative power sources, which could be until December 31, 2023,meaningfully lower outside the last dayUnited States;
•availability and cost of natural gas;
•difficulties in staffing and managing foreign operations in an environment of diverse culture, laws, and customers, and the fiscal year following the fifth anniversary of our initial public offering. We cannot predict if investors will find our Class A common stock less attractive because we will rely on these exemptions. If some investors find our Class A common stock less attractive as a result, there may be a less active trading market for our Class A common stockincreased travel, infrastructure, and our stock price may be more volatile.legal and compliance costs associated with international operations;
As an “emerging growth company”,•installation challenges which we have electednot encountered before which may require the development of a unique model for each country;
•compliance with multiple, potentially conflicting and changing governmental laws, regulations, and permitting processes including environmental, banking, employment, tax, privacy, and data protection laws and regulations such as the EU Data Privacy Directive;
•compliance with U.S. and foreign anti-bribery laws including the Foreign Corrupt Practices Act and the U.K. Anti-Bribery Act;
•difficulties in collecting payments in foreign currencies and associated foreign currency exposure;
•restrictions on repatriation of earnings;
•compliance with potentially conflicting and changing laws of taxing jurisdictions where we conduct business and compliance with applicable U.S. tax laws as they relate to useinternational operations, the extended transition period for complying with new or revised accounting standards under Section 102(b)(2)complexity and adverse consequences of the JOBS Act, that allows ussuch tax laws, and potentially adverse tax consequences due to delay the adoption of new or revised accounting standards that have different effective dates for publicchanges in such tax laws; and private companies until those standards apply to private
•regional economic and political conditions.
As a result of this election, our financial statementsthese risks, any potential future international expansion efforts that we may undertake may not be comparable to companies that comply with public company effective dates.successful.
Risks RelatedRelating to Ownership of our Class AOur Common Stock
The stock price of our Class A common stock has been and may continue to be volatile, and you could lose all or part of your investment.volatile.
The market price of our Class A common stock has been and may continue to be volatile. In addition to factors discussed in this Quarterly Report on Form 10-Q,Risk Factors section, the market price of our Class A common stock may fluctuate significantly in response to numerous factors, many of which are beyond our control, including:
•overall performance of the equity markets;
•actual or anticipated fluctuations in our revenue and other operating results;
•changes in the financial projections we may provide to the public or our failure to meet these projections;
•failure of securities analysts to initiate or maintain coverage of us, changes in financial estimates by any securities analysts who follow our companyCompany or our failure to meet these estimates or the expectations of investors;
•the issuance of reports from short sellers that may negatively impact the trading price of our Class A common stock;
•recruitment or departure of key personnel;
•the economy as a whole and market conditions in our industry;
•new laws, regulations, or subsidies, or credits or new interpretations of them applicable to our business;
•negative publicity related to problems in our manufacturing or the real or perceived quality of our products;
•rumors and market speculation involving us or other companies in our industry;
•announcements by us or our competitors of significant technical innovations, acquisitions, strategic partnerships, or capital commitments;
•lawsuits threatened or filed against us;
•other events or factors including those resulting from war, incidents of terrorism or responses to these events;
•the expiration of contractual lock-up or market standoff agreements; and
•sales or anticipated sales of shares of our Class A common stock by us or our stockholders.
In addition, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. Stock prices of many companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies. In the past, stockholders have instituted securities class action litigation following periods of market volatility. If we were to becomeWe are currently involved in securities litigation it couldwhich may subject us to substantial costs, divert resources and the attention of management from our business, and adversely affect our business.
Sales of substantial amounts of our Class A common stock in the public markets, or the perception that they might occur, could cause the market price of our Class A common stock to decline.
The market price of our Class A common stock could decline as a result of sales of a large number of shares of our Class A common stock in the public market.market as and when our Class B common stock converts to Class A common stock. The perception that these sales might occur may also cause the market price of our common stock to decline. We had a total of 10,570,84199,233,074 shares of our Class A common stock and 31,005,215 shares of our Class B common stock outstanding as of June 30, 2018. In addition, 20,700,0002020. The lock up for our Class B shares ofexpired on January 21, 2019 and these shares are now freely tradeable once converted into Class A common stock sold in our in July 2018 IPO are freely tradable,shares, except for any shares purchased by our “affiliates” as defined in Rule 144 under the Securities Act of 1933, as amended (the “Securities Act”("Securities Act").
Further, as of June 30, 2020, we had an aggregate of $249.3 million in convertible debt, our 10% Convertible Notes, under which the outstanding shares of common stock not sold inprincipal may be converted, at the initial public offering, subject to certain exceptions, we, all of our directors and executive officers and alloption of the holders, into an aggregate of our common stock and securities exercisable for or convertible into our common stock outstanding immediately prior to our IPO, are subject to market stand-off agreements with us or have entered into lock-up agreements with the underwriters of our IPO under which they have agreed, subject to specific exceptions, not to sell, directly or indirectly, any31,162,415 shares of Class B common stock without the permission of our IPO underwriters, for a period of 180 days from July 24, 2018, the date of the Prospectus used in connection with our IPO; provided that if such restricted period ends during a trading blackout period, the restricted period will end one business day following the date that we announce our earnings results for the previous quarter. When the lock-up period expires, we and our security holders subject to a lock-up agreement or market standoff agreement will be able to sell shares in the public market. In addition, the underwriters from our IPO may, in their sole discretion, release all or some portion of the shares subject to lock-up agreements prior to the expiration of the lock-up period. Sales of a substantial number of such shares upon expiration of the lock-up and market stand-off agreements, or the perception that such sales may occur or early release of these agreements, could cause our market price to fall or make it more difficult for you to sell yourstock. Upon conversion into Class A common stock, at a time and price that you deem appropriate.
these shares are freely tradeable, except to the extent these shares are held by our “affiliates” as defined in Rule 144 under the Securities Act.
In addition, as of June 30, 2018,2020, we had options and RSUs outstanding that, if fully exercised or settled, would result in the issuance of 3,107,1019,664,887 shares of Class BA common stock. Subsequent to June 30, 2018, we also issued restricted stock units that may be settled for 13,747,182and 15,214,822 shares of our Class B common stock. We have filed a registration statement on Form S-8 to register shares reserved for future issuance under our equity compensation plans. Subject to the satisfaction of applicable vesting requirements, and expiration of the market standoff agreements and lock-up agreements referred to above, the shares issued upon exercise of outstanding stock options or settlement of outstanding RSUs will be available for immediate resale in the United States in the open market.
Moreover, certain holders of our common stock have rights, subject to some conditions, to require us to file registration statements for the public resale of such shares or to include such shares in registration statements that we may file for us or other stockholders.
The dual class structure of our common stock and the voting agreements among certain stockholders have the effect of concentrating voting control of our Company with KR Sridhar, our Chairman and Chief Executive Officer, and Chairman, and also with those stockholders who held our capital stock prior to the completion of our initial public offeringIPO including our directors, executive officers and significant stockholders, which limits or precludes your ability to influence corporate matters including the election of directors and the approval of any change of control transaction, and may adversely affect the trading price of our Class A common stock.
Our Class B common stock has ten votes per share, and our Class A common stock has one vote per share. As of June 30, 20182020, and after giving effect to the voting agreements between KR Sridhar, our Chairman and Chief Executive Officer, and Chairman, and certain holders of Class B common stock, our directors, executive officers, significant stockholders of our common stock, and their respective affiliates collectively held a substantial majority of the voting power of our capital stock. Because of the ten-to-one voting ratio between our Class B and Class A common stock, the holders of our Class B common stock collectively will continue to control a majority of the combined voting power of our common stock and therefore are able to control all matters submitted to our stockholders for approval until the earliest to occur of (i) immediately prior to the close of business on July 27, 2023, (ii) immediately prior to the close of business on the date on which the outstanding shares of Class B common stock represent less than five percent (5%) of the aggregate number of shares of Class A common stock and Class B common stock then outstanding, (iii) the date and time or the occurrence of an event specified in a written conversion election delivered by KR Sridhar to our Secretary or Chairman of the Board to so convert all shares of Class B common stock, or (iv) immediately following the date of the death of KR Sridhar. This concentrated control limits or precludes Class A stockholders’ ability to influence corporate matters while the dual class structure remains in effect, including the election of directors, amendments of our organizational documents, and any merger, consolidation, sale of all or substantially all of our assets, or other major corporate transaction requiring stockholder approval. In addition, this may prevent or discourage unsolicited acquisition proposals or offers for our capital stock that Class A stockholders may feel are in their best interest as one of our stockholders.
Future transfers by holders of Class B common stock will generally result in those shares converting to Class A common stock, subject to limited exceptions such as certain transfers effected for estate planning purposes. The conversion of Class B common stock to Class A common stock will have the effect, over time, of increasing the relative voting power of those remaining holders of Class B common stock who retain their shares in the long-term.
The conversion of the 10% Convertible Promissory Note could result in a significant stockholder with substantial voting control.
The holders of the 10% Convertible Promissory Notes have the option to convert the outstanding principal under the 10% Convertible Promissory Notes to Class B common stock at a conversion price of $8.00 per share at any time and prior to maturity of the 10% Convertible Promissory Notes in December 2021. As of June 30, 2020, an aggregate of 21,232,797 shares of Class B common stock is issuable to the Canada Pension Plan Investment Board (“CPPIB”) upon the conversion of the outstanding principal under the 10% Convertible Promissory Notes. This, along with 312,575 shares of Class B common stock which CPPIB acquired from the exercise of a warrant at IPO, would result, as of June 30, 2020, in CPPIB having approximately 35% of the total voting power with respect to all shares of our Class A common stock (which has one vote per share) and Class B common stock (which has ten votes per share), voting as a single class, and would provide CPPIB significant influence over matters presented to the stockholders for approval and may result in voting decisions by CPPIB that are not in the best interests of our stockholders generally.
The dual class structure of our common stock may adversely affect the trading market for our Class A common stock.
S&P Dow Jones and FTSE Russell have recently announcedimplemented changes to their eligibility criteria for inclusion of shares of public companies on certain indices, including the S&P 500, namely, to exclude companies with multiple classes of shares of common stock from being added to such indices. In addition, several shareholder advisory firms have announced their opposition to the use of multiple class structures. As a result, the dual class structure of our common stock may prevent the inclusion of our Class A common stock in such indices and may cause shareholder advisory firms to publish negative commentary about our corporate governance practices or otherwise seek to cause us to change our capital structure. Any such exclusion from indices could result in a less active trading market for our Class A common stock. Any actions or publications by shareholder advisory firms critical of our corporate governance practices or capital structure could also adversely affect the value of our Class A common stock.
If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, the market price of our Class A common stock and trading volume could decline.
The market price for our Class A common stock depends in part on the research and reports that securities or industry analysts publish about us or our business. If few securities analysts commence coverage of us or if industry analysts cease coverage of us, the trading price for our Class A common stock would be negatively affected. IfIn addition, if one or more of the analysts who cover us downgrade our Class A common stock or publish inaccurate or unfavorable research about our business, our Class A common stock price would likely decline. If one or more of these analysts cease coverage of us or fail to publish reports on
us regularly, demand for our Class A common stock could decrease, which might cause our Class A common stock price and trading volume to decline. In addition, certain short sellers of our Class A common stock have published reports that we believe have negatively impacted the trading price of our Class A common stock.
We do not intend to pay dividends for the foreseeable future.
We have never declared or paid any cash dividends on our capital stock and do not intend to pay any cash dividends in the foreseeable future. We anticipate that we will retain all of our future earnings for use in the development of our business and for general corporate purposes. Any determination to pay dividends in the future will be at the discretion of our board of directors. Accordingly, investors must rely on sales of their Class A common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investments.
Provisions in our charter documents and under Delaware law could make an acquisition of our companyCompany more difficult, may limit attempts by our stockholders to replace or remove our current management, may limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, or employees, and may limit the market price of our Class A common stock.
Provisions in our restated certificate of incorporation and amended and restated bylaws may have the effect of delaying or preventing a change of control or changes in our management. Our restated certificate of incorporation and amended and restated bylaws include provisions that:
provide•require that our board of directors will beis classified into three classes of directors with staggered three year terms;
•permit the board of directors to establish the number of directors and fill any vacancies and newly created directorships;
•require super-majority voting to amend some provisions in our restated certificate of incorporation and amended and restated bylaws;
•authorize the issuance of “blank check” preferred stock that our board of directors could use to implement a stockholder rights plan;
provide that •only the chairman of our board of directors, our chief executive officer, or a majority of our board of directors will beare authorized to call a special meeting of stockholders;
•prohibit stockholder action by written consent, which thereby requires all stockholder actions be taken at a meeting of our stockholders;
provide for•establish a dual class common stock structure in which holders of our Class B common stock may have the ability to control the outcome of matters requiring stockholder approval even if they own significantly less than a majority of the
outstanding shares of our common stock, including the election of directors and significant corporate transactions such as a merger or other sale of our companyCompany or substantially all of itsour assets;
provide that•expressly authorize the board of directors is expressly authorized to make, alter, or repeal our bylaws; and
•establish advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted upon by stockholders at annual stockholder meetings.
In addition, our restated certificate of incorporation and our amended and restated bylaws provide that the Court of Chancery of the State of Delaware will be the exclusive forum for: any derivative action or proceeding brought on our behalf; any action asserting a breach of fiduciary duty; any action asserting a claim against us arising pursuant to the Delaware General Corporation Law, our restated certificate of incorporation or our amended and restated bylaws; or any action asserting a claim against us that is governed by the internal affairs doctrine. Our restated certificate of incorporation and our amended and restated bylaws will also provide that unless we consent in writing to the selection of an alternative forum, the federal district courts of the United States of America shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act of 1933, as amended.Act. These choice of forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or any of our directors, officers, or other employees, which thereby may discourage lawsuits with respect to such claims. Alternatively, if a court were to find the choice of forum provision contained in our restated certificate of incorporation and our amended and restated bylaws to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could harm our business, our operating results, and our financial condition.
Moreover, Section 203 of the Delaware General Corporation Law may discourage, delay, or prevent a change in control of our company.Company. Section 203 imposes certain restrictions on mergers, business combinations, and other transactions between us and holders of 15% or more of our common stock.
ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
Unregistered Sales of Equity Securities
From April 1, 2018 through June 30, 2018, we granted options to purchase an aggregate of 313,909 shares of Class B common stock under our 2012 Plan, with a per share exercise price of $30.96 and we issued 145,856 shares of Class B common stock upon exercise of stock options under our 2012 Plan. These shares were issued pursuant to benefit plans and contracts related to compensation in reliance upon the exemption from registration requirements of Rule 701 of the Securities Act. The recipients of the securities in each of these transactions represented their intentions to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof, and appropriate legends were placed upon the stock certificates issued in these transactions.
Use of Proceeds
In July 2018, we closed our initial public offering in which we sold 20,700,000 shares of Class A common stock at a price to the public of $15.00 per share including shares sold in connection with the exercise of the underwriters’ option to purchase additional shares. The offer and sale of all of the shares in the IPO were registered under the Securities Act pursuant to a registration statement on Form S-1 (File No. 333-225571), which was declared effective by the SEC on July 24, 2018. We raised aggregate net proceeds of $284.3 million from the IPO after underwriting discounts and commissions and payments of offering costs. There has been no material change in the planned use of proceeds from our IPO as described in the Prospectus. The managing underwriters of our IPO were J.P. Morgan Securities LLC and Morgan Stanley & Co. LLC. No payments were made by us to directors, officers or persons owning ten percent or more of our common stock or to their associates, or to our affiliates, other than payments in the ordinary course of business to officers for salaries and to non-employee directors pursuant to our director compensation policy.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 - MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5 - OTHER INFORMATION
None.
ITEM 6 - EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES
Index to Exhibits
The exhibits listed below are filed or incorporated by reference as part of this Quarterly Report on Form 10-Q.
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| | | Incorporated by Reference | | | |
| Exhibit Number | | Description | Form | File No. | Exhibit | Filing Date |
| | Restated Certificate of Incorporation. | 10-Q | 001-38598 | 3.1 | 9/7/2018 |
| | Amended and Restated Bylaws, effective August 8, 2019 | 10-Q | 001-38598 | 3.2 | 8/14/2019 |
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| | Amended and Restated Indenture by and among the Registrant, certain guarantors party thereto and U.S. Bank National Association, as trustee, dated as of April 20, 2020 | 10-Q | 001-38598 | 4.1 | 5/11/2020 |
| | Form of 10% Convertible Senior Secured Note due 2021 | 10-Q | 001-38598 | 4.2 | 5/11/2020 |
| | Third Amendment to Security Agreement by and among the Registrant, certain guarantors party thereto and U.S. Bank National Association, as collateral agent, dated as of April 20, 2020 | 10-Q | 001-38598 | 4.3 | 5/11/2020 |
| | Form of Indenture for Senior Secured Notes due 2027 | 10-Q | 001-38598 | 4.4. | 5/11/2020 |
| | Form of 10.25% Senior Secured Notes due 2027 | 10-Q | 001-38598 | 4.5 | 5/11/2020 |
| | Form of Security Agreement for Senior Secured Notes due 2027 | 10-Q | 001-38598 | 4.6 | 5/11/2020 |
| | Amended and Restated Subordinated Secured Convertible Note Modification Agreement by and between the Registrant and Constellation NewEnergy, Inc., dated as of March 31, 2020 | 10-Q | 001-38598 | 4.7 | 5/11/2020 |
| | Lease Agreement, dated as of June 10, 2020, by and between the Registrant and DPIF2 CA 20 Christy Street, LLC | | | | Filed herewith |
| x | Amended and Restated Purchase, Use and Maintenance Agreement between the Company and 2018 ESA Project Company, LLC dated June 30, 2020 | | | | Filed herewith |
| | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities and Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | Filed herewith |
| | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities and Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | Filed herewith |
| ** | Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | | | Filed herewith |
| 101.INS | | XBRL Instance Document | | | | Filed herewith |
| 101.SCH | | XBRL Taxonomy Extension Schema Document | | | | Filed herewith |
| 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document | | | | Filed herewith |
| 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document | | | | Filed herewith |
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Exhibit101.LAB | | Document |
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3.1¹ | | |
3.2¹ | | |
10.1¹ | | |
31.1¹ | | |
31.2¹ | | |
32.1¹ ² | | |
101.INS¹ | | XBRL Instance Document |
101.SCH¹ | | XBRL Taxonomy Extension Schema Document |
101.CAL¹ | | XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF¹ | | XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB¹ | | XBRL Taxonomy Extension Label Linkbase Document | | | | Filed herewith |
101.PRE¹101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document | | | | Filed herewith |
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| ^ | | Management contracts or compensation plans or arrangements in which directors or executive officers are eligible to participate.
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¹** | | Filed herewith. |
² | | The certificationcertifications furnished in ExhibitsExhibit 32.1 hereto isare deemed to accompany this Quarterly Report on Form 10-Q and iswill not be deemed “filed”"filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act.Act of 1934, as amended. |
| † | Confidential treatment requested with respect to portions of this exhibit. |
| x | Portions of this exhibit are redacted as permitted under Regulation S-K, Rule 601. |
Signatures
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| BLOOM ENERGY CORPORATION | | | | |
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BLOOM ENERGY CORPORATION | | | | |
| Date: | August 4, 2020 | By: | | |
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Date: | September 7, 2018 | By: | | /s/ KR Sridhar |
| | | | KR Sridhar |
| | | | Founder, President, Chief Executive Officer and Director |
| | | | (Principal Executive Officer) |
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| Date: | August 4, 2020 | By: | | /s/ Gregory Cameron |
| | By: | | /s/ Randy FurrGregory Cameron |
| | | | Randy FurrExecutive Vice President and |
| | | | Chief Financial Officer |
| | | | (Principal Financial and Accounting Officer) |
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