DRS 1 filename1.htm Confidential Draft Submission
Table of Contents
Index to Financial Statements

Confidential Draft Submitted to the Securities and Exchange Commission on March 25, 2016

As filed with the Securities and Exchange Commission on                     , 2016

Registration No.             

 

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

Under

the Securities Act of 1933

 

 

BLOOM ENERGY CORPORATION

(Exact name of Registrant as specified in its charter)

 

 

 

Delaware   3620   77-0565408

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

1299 Orleans Drive

Sunnyvale, California 94089

(408) 543-1500

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

 

 

KR Sridhar

Chief Executive Officer

Bloom Energy Corporation

1299 Orleans Drive

Sunnyvale, California 94089

(408) 543-1500

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Gordon K. Davidson, Esq.

Sayre E. Stevick, Esq.

Jeffrey R. Vetter, Esq.

Fenwick & West LLP

Silicon Valley Center

801 California Street

Mountain View, California 94041

(650) 988-8500

 

Shawn M. Soderberg, Esq.

Bloom Energy Corporation

1299 Orleans Drive

Sunnyvale, California 94089

(408) 543-1500

 

Alan F. Denenberg, Esq.

Davis Polk & Wardwell LLP

1600 El Camino Real

Menlo Park, CA 94025

(650) 752-2000

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   þ  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of
Securities to be Registered
 

Proposed
Maximum
Aggregate

Offering Price(1)(2)

  Amount of
Registration Fee

Common Stock, par value $0.0001 per share

       

 

 

(1) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.
(2) Includes the aggregate offering price of additional shares the underwriters have the right to purchase from the Registrant, if any.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a) may determine.

 

 

 


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Index to Financial Statements

The information in this preliminary prospectus is not complete and may be changed. We and the selling stockholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion, dated                     , 2016

Preliminary Prospectus

                SHARES

 

LOGO

COMMON STOCK

 

 

This is an initial public offering of Bloom Energy Corporation’s shares of common stock. We are offering to sell                  shares in this offering. The selling stockholders identified in this prospectus are offering an additional              shares. We will not receive any of the proceeds from the sale of the shares being sold by the selling stockholders.

Prior to this offering, there has been no public market for the common stock. It is currently estimated that the initial public offering price per share will be between $              and $            .

We intend to list the common stock on the                  under the symbol “BE.”

 

 

We are an “emerging growth company” as defined under federal securities laws and, as such, will be subject to reduced public company reporting requirements. Investing in our common stock involves risks. See “Risk Factors” on page 15 to read about factors you should consider before buying shares of common stock.

 

     Per Share      Total  

Initial public offering price

   $                   $               

Underwriting discount (1)

   $        $    

Proceeds, before expenses, to us

   $        $    

Proceeds, before expenses, to the selling stockholders

   $        $    

 

(1)  See “Underwriting” for a description of the compensation payable to the underwriters.

To the extent that the underwriters sell more than              shares of common stock, the underwriters have the option to purchase up to an additional              shares of common stock from us and the selling stockholders at the initial public offering price less the underwriting discount within 30 days from the date of this prospectus.

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares against payment in New York, New York on             , 2016.

 

 

 

J.P. Morgan        Morgan Stanley   

 

Credit Suisse

 

  

BofA Merrill Lynch       

 

Pacific Crest Securities

a division of KeyBanc Capital Markets

  

  

Baird   Cowen and Company                HSBC   Raymond James                 RBC Capital Markets

Prospectus dated             , 2016


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Index to Financial Statements

TABLE OF CONTENTS

 

     Page  

Prospectus summary

     1   

Risk factors

     15   

Special note regarding forward-looking statements

     37   

Industry and market data

     38   

Use of proceeds

     39   

Dividend policy

     39   

Capitalization

     40   

Dilution

     42   

Letter from our Chief Financial Officer

     45   

Selected consolidated financial data

     48   

Management’s discussion and analysis of financial condition and results of operations

     54   

Business

     98   

Management

     114   

Executive compensation

     122   

Related party transactions

     130   

Principal and selling stockholders

     132   

Description of capital stock

     135   

Shares eligible for future sale

     142   

Material U.S. federal income tax considerations for non-U.S. holders

     145   

Underwriting

     150   

Experts

     160   

Legal matters

     160   

Where you can find more information

     160   

Index to consolidated financial statements

     F-1   

 

 

We are responsible for the information contained in this prospectus and in any free writing prospectus filed with the Securities and Exchange Commission. We, the underwriters and the selling stockholders have not authorized anyone to provide you with additional information or information different from that contained in this prospectus or in any free writing prospectus filed with the Securities and Exchange Commission. We, the underwriters and the selling stockholders are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of shares of our common stock.

Neither we, the selling stockholders, nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who obtain this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of common stock and the distribution of this prospectus outside of the United States.

Through and including                     , 2016 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

 

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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before buying shares in this offering. Therefore, you should read this entire prospectus carefully, including “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our consolidated financial statements and the related notes contained elsewhere in this prospectus. Unless the context requires otherwise, the words “we,” “us,” “our” and “Bloom Energy” refer to Bloom Energy Corporation and its subsidiaries.

BLOOM ENERGY CORPORATION

Overview

Our mission is to make clean, reliable energy affordable for everyone in the world. To fulfill this mission, we have developed an advanced distributed electric power solution that is redefining the $2.5 trillion electric power market and transforming how power is generated and delivered, with the commercial and industrial segments as our initial focus. Our solution, the Bloom Energy Server, is an on-site stationary power generation platform, built for the digital age and capable of delivering uninterrupted, 24x7 base load power that is fault tolerant, resilient and clean. The Bloom Energy Server converts standard low-pressure natural gas or biogas into electricity through an electrochemical process without combustion, resulting in very high conversion efficiencies and lower greenhouse gas emissions than conventional fossil fuel generation such as coal or oil combustion. A typical configuration produces 250 kilowatts of power in a footprint roughly equivalent to that of half of a standard 30 foot shipping container, or approximately 125 times more space-efficient than solar power generation. Any number of these Energy Server systems can be clustered together in various configurations to form solutions from hundreds of kilowatts to many tens of megawatts. The cost of electricity delivered by our solution is often favorable compared to grid-supplied power in the areas where our Energy Servers are deployed. Most importantly, the electricity produced by our systems offers our customers a significant advantage in predictable economics compared to rising and unpredictable grid prices. As a result, our system has been adopted by some of the largest companies in the world, including 24 of the Fortune 100 companies as of December 31, 2015.

The traditional centralized electric grid infrastructure requires significant investment for its maintenance, upgrade and operation, which has been continually driving up the cost of grid power. The electric grid has inherent vulnerabilities and is susceptible to failures due to natural disasters as well as cyber-attacks and physical sabotage. The daisy-chain topology of the centralized grid has a tendency to cascade outages rather than to contain them. Because our on-site stationary power systems are located at the point of consumption, our Energy Servers, when configured with our uninterruptible power module (UPM), largely avoid the existing electric power grid’s inherent vulnerability to outages from weather events and other threats, as well as the additional losses of efficiency associated with the transmission of power over long distances. Our Energy Servers are modular, redundant, and can be “hot swapped,” or serviced without interruption, offering very high availability to our customers.

According to the United Nations Development Programme, 1.3 billion people worldwide live without electricity—more than one in five people around the globe. In emerging countries, where there tends to be an acute shortage of electricity, it is often not economically viable to construct a new centralized grid due to the significant upfront investment required. We believe there is a leap-frogging opportunity in emerging economies to bypass the development or expansion of a centralized electric grid with a network of micro-grids powered by distributed power generation.

The electric grid typically delivers power generated by sources with a high carbon footprint, and there is increasing pressure to reduce resulting carbon dioxide and other greenhouse gas emissions. There is a rising

 



 

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demand for uninterruptible, distributed, clean electricity solutions that overcome the challenges of the traditional grid, and can address the requirements of the digital economy by delivering 24x7 electric power, with very high availability, reliability and quality. Our Energy Servers operate on-site at very high efficiencies using natural gas or biogas, offering significant greenhouse gas reductions, and, unlike prevalent renewable technologies such as wind and solar, provide a viable alternative to base load electricity generated by a central power plant.

We designed our solution as an alternative to the electric grid, with our value proposition centered on reliability, resiliency and sustainability, combined with attractive and predictable economics. Our systems deliver 24x7, clean base load power customized for today’s digital world, with high predictability and certainty of value for our customers over the long term. We have invested over $1.5 billion into building our company and developing our solution, and have continuously innovated and evolved our technology over time. Our latest solution is significantly less expensive to produce than our first commercially deployed solution in 2008, allowing us to expand our target markets. Our team has decades of experience in the various specialized disciplines and systems engineering concepts unique to this technology. We had 147 issued patents in the United States and 60 issued patents internationally as of December 31, 2015.

Our solution is capable of addressing customer needs across a wide range of industry verticals, including big box retail and grocery stores, corporate campuses, telecommunications and advanced data centers. However, we believe that we are capturing only a small percentage of our largest customers’ total energy spend, which gives us a significant opportunity for growth, particularly as the price of grid power increases in areas where our customers have additional sites. As of the end of 2015, we had 187 megawatts in total deployed systems and an additional product sales backlog of 87.9 megawatts.

Industry Background

People around the world depend upon access to reliable and affordable electric power for a healthy, functioning economy and for delivery of essential services. According to Marketline, the market for electric power is one of the largest sectors of the global economy with an annual spend of $2.5 trillion in 2014, and is projected to grow at a compound annual growth rate of 7.6% to $3.6 trillion in 2019.

There are numerous challenges driving a transformation in how electricity is produced, delivered and consumed. We believe that this transformation will be similar to the seismic shifts seen in the computer and telecommunications industries, from centralized mainframe computing and landline telephone systems to ubiquitous and highly personalized distributed technologies.

Some of the key challenges facing the electric power market are:

Increasing costs to maintain and operate the existing electric grid

The U.S. Department of Energy has recently described the U.S. electricity grid as “aging, inefficient, congested, and incapable of meeting the future energy needs of the information economy,” while the American Society of Civil Engineers gave the U.S. energy infrastructure a grade of D+ in 2013. The electric power grid has suffered from insufficient investment in critical infrastructure. The Edison Electric Institute estimated that between 2015 and 2017, U.S. investor-owned electric utilities will need to make total capital expenditure investments of approximately $300 billion.

Inherent vulnerability of existing grid design

The existing electric grid architecture features centralized, monolithic power plants and mostly above-ground transmission and distribution wires. This design has numerous points of failure and limited redundancy,

 



 

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and the daisy-chain topology can cascade outages rather than contain them. For example, in 2003, an initial failure blamed on a tree branch in Ohio set off outages that cascaded across eight states and parts of Canada, cutting power for 50 million people.

Furthermore, the limits of this design, coupled with aging and underinvested infrastructure, leaves the grid vulnerable to natural disasters. The U.S. Council of Economic Advisers and the U.S. Department of Energy estimate that weather-related electricity outages cost the U.S. economy up to $335 billion between 2003 and 2012. Some of these natural disasters are increasing in frequency and severity, a trend expected to continue due to climate change and other factors, which will likely increase the cost of grid-supplied power to customers.

There is also increasing concern over the threat of cyber-attack and physical sabotage to the centralized grid infrastructure.

Lack of access to affordable and reliable electricity in developing countries

According to the United Nations Development Programme, 1.3 billion people worldwide live without electricity—more than one in five people around the globe. For developing countries to grow their economies, they must expand access to reliable and affordable electric power. Building a centralized grid system, in addition to its inherent limitations, can also be infeasible due to the lack of adequate capital for upfront investment. Moreover, in dense urban areas, the costs of building this infrastructure are compounded by a lack of urban planning. In rural areas, using the centralized model to transmit and distribute electricity to low-density populations is economically unviable. As a result, we believe these countries are likely to develop a hybrid solution consisting of both centralized and distributed electrical power infrastructure to accelerate availability of power.

Increasing concern over climate change

In response to rising concern over climate change, the 2015 Paris COP21 climate talks resulted in a global consensus that the rate of release of carbon dioxide and other greenhouse gases must be reduced with an increased sense of urgency. The electric power sector, which today produces more greenhouse gases than any other sector of the global economy, is under increasing pressure to do its part. Policy initiatives to reduce greenhouse gases from power generation are widespread, including renewable portfolio standards, or mandated targets for low- or zero-carbon power generation, and EPA directives limiting carbon emissions from power generation.

Intermittent generation sources negatively impacting grid stability

According to the Department of Energy’s Quadrennial Energy Review in 2015, electricity generation from wind grew over three-fold while solar grew over 20-fold between 2008 and 2014. While these renewable sources help to reduce greenhouse gas emissions, they provide only intermittent power to the grid, which compromises the grid’s ability to deliver 24x7 reliable electric power. As the penetration of these resources increases, balancing real-time supply and demand becomes more challenging and costly.

Due to these challenges, we need 24x7 electric power solutions that are reliable, clean and without the shortcomings of the existing grid infrastructure. This need is especially acute in the commercial and industrial (C&I) segments, representing 68% of global electricity consumption, according to Marketline, where cost and reliability have a direct impact on profitability and business sustainability.

Our Solution

Our Bloom Energy Server is an advanced distributed power generation system that delivers clean, always-on, primary base load power on-site.

 



 

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The Bloom Energy Server is based on our proprietary solid oxide fuel cell technology, which converts fuel into electricity through an electrochemical process without combustion. The only input to the system is standard low-pressure natural gas or biogas from municipal gas lines. The high-quality electrical output of the Energy Server is connected to the customer’s main electrical feed, capable of avoiding the transmission and distribution losses associated with the centralized grid system. Each Bloom Energy Server is modular and composed of independent 50 kilowatt power modules. A typical configuration includes multiple power modules in a single Energy Server, which produces 250 kilowatts of power in a footprint roughly equivalent to that of half a standard 30 foot shipping container, or approximately 125 times more space-efficient than solar power generation. Any number of these Energy Server systems can be clustered together in various configurations to form solutions from hundreds of kilowatts to many tens of megawatts. The Bloom Energy Server provides a single core technology platform that is easily customizable and upgradeable to add new features and capabilities. The Bloom Energy Server is easily integrated into corporate environments due to its aesthetically attractive design, compact space requirement, minimal noise profile and lack of harmful emissions.

Our Value Proposition

Our value proposition is supported by four key pillars: reliability, resiliency, sustainability and predictable economics. While the relative importance of these attributes can vary by customer, the combination of these four factors is a significant differentiator for us in the marketplace. We provide a complete, integrated “behind-the-meter” solution including installation, equipment, service, maintenance and, in some cases, bundled fuel. The four elements of our value proposition emphasize those areas where there is a strong customer need and where we believe we can deliver superior performance.

Reliability. Our Energy Servers deliver always-on, 24x7 base load power that can be used with or without complementary intermittent power sources. The output of our Energy Servers is designed to meet the requirements of the digital economy, with very high availability of power, mission-critical reliability and grid-independent capabilities. Bloom provides highly customizable power. The Bloom Energy Server can be configured to eliminate the need for traditional backup power equipment such as diesel generators, batteries or UPS systems.

Resiliency. Our Energy Servers avoid the vulnerabilities of conventional transmission and distribution lines by generating power on-site. The system operates at very high availability due to its modular and fault-tolerant design, which includes multiple independent power generation modules that are hot swappable. Importantly, our systems utilize the reliable and resilient natural gas infrastructure, which is a mesh network buried underground, unlike the daisy chain, above-ground electric grid architecture. A failure at one point in the natural gas system does not necessarily cause the same kind of cascading failure that can occur on the electrical grid.

Sustainability. Our Energy Servers are fuel-flexible, enabling our customers to choose the fuel source that best fits their needs based on availability, cost and carbon footprint. When running on natural gas, compared to average emissions across the U.S. grid, Bloom Energy Servers reduce carbon emissions by over 50%. Bloom Energy Servers can also utilize renewable biogas to generate carbon-neutral electricity. In both cases, our Energy Servers emit virtually no criteria air pollutants, including NOx or SOx.

Bloom Energy Servers use virtually no water in normal operation. On average, to produce one megawatt per hour for a year, thermoelectric power generation for the U.S. grid consumes approximately 156 million gallons of water more than Bloom Energy Servers.

Predictable economics. In contrast to the rising and unpredictable cost outlook for grid electricity, we offer our customers the ability to lock in cost for electric power over the long term. We provide customers with a solution that includes all of the fixed equipment and maintenance costs for the life of the contract. We also enable our customers to scale from a few hundred kilowatts to many megawatts on a “pay-as-you-grow” basis.

 



 

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Factors Driving Customer Adoption

Key factors that are driving the rapid adoption of our solution include:

Customers are driving a growing requirement for high-quality and reliable power in the increasingly pervasive digital economy. The proliferation of cloud services and big data, and the associated explosion in demand for computing power, is reshaping the type and quality of power demanded by the digital economy. For providers and users of cloud services, uninterruptible, high-quality power is essential—requirements that the legacy grid is struggling to meet. Our highly available and scalable solution can replace the current patchwork of solutions, which include surge protectors, UPS and back-up generators.

Customers are seeking an alternative to the unpredictable and rising price of grid power. Grid costs in the United States have been rising for decades and are expected to continue to rise over the long term. In the shorter term, grid prices can be volatile, driven by regulatory judgments, commodity prices and the impact of external events such as weather. In contrast, we offer a complete turn-key solution that can provide customers with a competitive and predictable cost for their electricity for periods of up to 20 years.

Our technology is proven with industry-leading customers. Our approach to innovation is evolutionary—every generation of our technology builds on a proven core and factors in lessons learned from our broadly deployed fleet. Our systems have been deployed with Fortune 500 customers since 2008 and have reached 187 megawatts in total. Our systems have operated without disruption through natural disasters such as Hurricane Sandy and the 6.0 Richter scale earthquake near Napa, California in 2014.

The natural gas revolution has provided an economically attractive means for achieving carbon reduction. Natural gas, an important bridge fuel to the lower-carbon future, is now in abundant supply at economically attractive prices. This abundance, coupled with new technologies such as our Energy Servers that convert this fuel into electricity at high efficiency, will play a major role in replacing high-carbon fuels such as coal and oil.

Our Growth Strategy

Our growth strategies include:

Maintain technology leadership and leverage first-mover advantage

Our technology leadership is considerable and we have a well-established track record of continuous improvement. Our priority is to continue to advance our technology and build on this leadership position.

Significant and sustained improvements in “power density.” We have continually added more generation capacity into the same footprint and expect to continue to do so with successive generations of our technology. Today’s Bloom Energy Servers are capable of delivering five times the power of our first-generation system only five years ago, while staying within approximately the same service footprint. It is also an increasingly powerful differentiator versus other solutions such as solar, which requires at least 125 times more space—which is often unavailable—to deliver the same amount of power as one Bloom Energy Server does today.

Continual increases in electrical efficiency. Efficiency is defined as the percentage of the energy in the fuel that is converted to electricity. The higher the efficiency, the less fuel used to generate a given unit of electric power output, resulting in lower fuel costs. Today our Energy Servers are significantly more efficient than the average of the U.S. grid. The latest generation of our Energy Servers, which began shipping in 2015, is capable of beginning-of-life efficiencies of 65%, and we expect to further improve the efficiency in succeeding generations.

 



 

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Expanded feature sets and sizing options to address new market opportunities. The Bloom Energy Server platform provides the hardware and software building blocks that can be deployed in different configurations to provide market-specific solutions. For example, we may provide smaller or custom solutions which could allow us to address additional markets, such as powering cell sites, franchise retail, multi-tenant housing and large industrial applications.

Grow wallet share with existing customers and acquire new customers

We employ a “land and expand” model, in which our strategy is to prove the value of Bloom solutions to our customers, establish incumbency and grow share of wallet as we create more value across more of our customers’ facilities over time. Approximately three quarters of our sales volume since 2011 has been derived from repeat customers. These repeat orders provide better visibility into our sales pipeline and also lower our cost of sales. We currently target primarily Fortune 500 customers with very significant electric power spend. Given our customers’ large total electric power spend, we view the current low penetration rate as a significant opportunity for growth. The successful adoption of our solution by industry leaders has also encouraged new customers of similar scale and electricity demand to follow suit. As a result, while volume has been driven by repeat customers, the majority of new sales contracts since 2011 are with new customers.

Drive production cost reductions to expand our market

Since our initial commercial deployments eight years ago, we have continually brought the production cost of our systems down. We expect technology innovation to drive further reductions as each successive generation of Bloom Energy Servers builds on the design and field experience of all previous generations. As our production costs continue to decrease this will enable us to expand into new markets. Furthermore, we expect that increased production volumes will lead to further cost reductions, enabling improved margins. On a per unit basis, which we measure in dollars-per-kilowatt, we have reduced our material costs by over 75% from the inception of our first generation Energy Server to our current generation Energy Server. Material costs per unit came down by more than 50% over the life of our first generation system and by over 40% over the life of our second generation system. With each successive new generation, we have been able to reduce the material costs compared to the prior generation’s material costs: Our second generation had material costs at the start of production that were approximately 60% lower per kilowatt than our first generation and our third generation had material costs at the start of production that were more than 35% lower per kilowatt than our second generation.

Expand into international markets and new fast-growing segments

International. Most of our current and target customers have global footprints, which we expect will be another avenue for growth while also lowering the cost and risk of new market entry. Today, we have installations in Japan and India.

We also target fast-growing segments where we believe we can deliver significant value including data centers and critical facilities such as distribution centers, which cannot suffer even a momentary disruption to power without significant negative consequences.

Data Centers. According to Technavio, a leading market research company, the global data center power market was valued at $9.9 billion in 2014 and is expected to reach $18.7 billion by 2019, growing at a compound annual growth rate of 14%. We are well positioned in the data center power market, with the capability to provide primary power for data centers with up to Tier III availability and reliability without reliance on traditional backup or power conditioning equipment.

Micro-Grids. To mitigate the risk of grid power outages, there is significant and growing interest in micro-grids, which combine distributed power generation and storage into a network that can be isolated from the larger grid. According to Technavio, the global micro-grid market was valued at $9.2 billion in 2014 and is expected to reach $21.8 billion by 2019, growing at a compound annual growth rate of 19%. We are well positioned to

 



 

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compete in this market by providing a field-customizable, on-site, always-on base load power generation system—a key requirement for a micro-grid solution.

Provide innovative financing options to our customers

We intend to continue to assist our customers by providing innovative financing options to purchase our solution and grow our market opportunity. Our customers can purchase our systems outright, with operations and maintenance services contracts, or purchase the electricity that our Energy Servers produce without any upfront costs, through various financing vehicles, including leases and power purchase agreements (PPAs).

Risk Factors

Our business is subject to many risks and uncertainties, as more fully described under “Risk Factors” and elsewhere in this prospectus. For example, you should be aware of the following before investing in our common stock:

 

    our limited operating history and our nascent industry makes evaluating our business and future prospects difficult;

 

    the distributed generation industry is an emerging market and distributed generation may not receive widespread market acceptance;

 

    we have incurred significant losses in the past and we do not expect to be profitable for the foreseeable future;

 

    our Energy Servers have significant upfront costs, and we will need to attract investors to help customers finance purchases;

 

    if our Energy Servers contain manufacturing defects, our business and financial results could be harmed;

 

    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;

 

    our business currently depends on the availability of rebates, tax credits and other financial incentives. The reduction, modification, or elimination of government economic incentives could cause our revenue to decline and harm our financial results;

 

    we rely on tax equity financing arrangements to realize the benefits provided by investment tax credits and accelerated tax depreciation;

 

    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;

 

    our products involve a lengthy sales and installation cycle, and if we fail to close sales on a regular and timely basis it could harm our business;

 

    our business is subject to risks associated with construction, cost overruns and delays, including those related to obtaining government permits, and other contingencies that may arise in the course of completing installations;

 

    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;

 



 

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    our financial condition and results of operations and other key metrics are likely to fluctuate on a quarterly basis in future periods, which could cause our results for a particular period to fall below expectations, resulting in a severe decline in the price of our common stock;

 

    we must maintain customer confidence in our liquidity and long-term business prospects in order to grow our business; and

 

    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.

Corporate Information

We were incorporated in the State of Delaware on January 18, 2001 as Ion America Corporation. On September 20, 2006, we changed our name to Bloom Energy Corporation. Our principal executive offices are located at 1299 Orleans Drive, Sunnyvale, California 94089, and our telephone number is (408) 543-1500. Our website address is www.bloomenergy.com. The information on, or that can be accessed through, our website is not part of this prospectus and the inclusion of our website address in this prospectus is an inactive textual reference only.

“Bloom Energy” is our registered trademark in the United States and is registered in Japan, India, Australia, the European Union and under the Madrid Protocol. Our other registered trademarks and service marks in the United States include: Energy Server, Bloom Electrons, Bloomconnect, Bloomenergy, Bloom Box and BE. This prospectus also contains trademarks, service marks and trade names of other companies. We do not intend for our use or display of other companies’ trade names, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of, us by these other companies.

Implications of Being an Emerging Growth Company

As a company with less than $1.0 billion in revenue during our last completed fiscal year, we qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. An emerging growth company may take advantage of specified reduced reporting requirements that are otherwise applicable generally to public companies. These reduced reporting requirements include:

 

    an exemption from compliance with the auditor attestation requirement on the effectiveness of our internal control over financial reporting;

 

    an exemption from compliance with any requirement that the Public Company Accounting Oversight Board may adopt regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements;

 

    reduced disclosure about our executive compensation arrangements;

 

    an exemption from the requirements to obtain a non-binding advisory vote on executive compensation or a stockholder approval of any golden parachute arrangements; and

 

    extended transition periods for complying with new or revised accounting standards.

We will remain an emerging growth company until the earliest to occur of: (1) the end of the first fiscal year in which our annual gross revenue is $1.0 billion or more; (2) the end of the first fiscal year in which we are deemed to be a “large accelerated filer,” as defined in the Securities Exchange Act of 1934, as amended, or the Exchange Act; (3) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt securities; and (4) the end of the fiscal year during which the fifth anniversary of this offering occurs. We may choose to take advantage of some, but not all, of the available benefits under the

 



 

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JOBS Act. We are choosing to irrevocably “opt out” of the extended transition periods available under the JOBS Act for complying with new or revised accounting standards, but we currently intend to take advantage of the other exemptions discussed above. Accordingly, the information contained herein may be different than the information you receive from other public companies in which you hold stock.

 



 

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THE OFFERING

 

Common stock offered by us                    shares
Common stock offered by the selling stockholders                    shares
Total common stock offered                    shares
Common stock outstanding after this offering                    shares
Option to purchase additional shares of our common stock from us                    shares
Option to purchase additional shares of our common stock from the selling stockholders                    shares
Use of proceeds   We estimate that the net proceeds from the sale of shares of our common stock that we are selling in this offering will be approximately $        million, based on an assumed initial public offering price of $        per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We will not receive any proceeds from the sale of shares of common stock by the selling stockholders.
  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. See “Use of Proceeds.”
Proposed             symbol   “BE”
Risk factors   See “Risk Factors” and other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in shares of our common stock.

The number of shares of our common stock to be outstanding after this offering is based on 131,314,076 shares of our common stock outstanding as of December 31, 2015, and excludes:

 

    12,660,639 shares of our common stock issuable upon exercise of outstanding stock options as of December 31, 2015 with a weighted average exercise price of $14.38 per share under our 2002 Equity Incentive Plan and 2012 Equity Incentive Plan;

 

    556,303 shares of our common stock issuable upon settlement of restricted stock units (RSUs) outstanding as of December 31, 2015 under our 2012 Equity Incentive Plan;

 

    50,000 shares of our common stock issuable upon the exercise of outstanding warrants to purchase common stock as of December 31, 2015, with an exercise price of $25.76 per share;

 

    1,554,445 shares of our common stock issuable upon the exercise of outstanding warrants to purchase Series F convertible preferred stock and Series G convertible preferred stock as of December 31, 2015, with a weighted average exercise price of $20.47 per share, which, if not exercised prior to the completion of this offering, shall convert in accordance with their terms into warrants to purchase common stock;

 



 

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    up to 400,000 shares of our common stock issuable to one of our customers on the occurrence of certain installation milestones;

 

    200,000 shares of common stock issuable 180 days from the date of this prospectus. These shares will be issued as part of a dispute settlement with a securities placement agent as described in “Description of Capital Stock—Securities Acquisition Agreement”;

 

                 shares of our common stock issuable upon the conversion of our outstanding 5.0% Convertible Senior Secured PIK Notes due 2020 (5% Notes) as of December 31, 2015, based on an assumed initial public offering price of $        per share, which is the midpoint of the price range set forth on the cover page of this prospectus, which notes will be convertible at the option of the holders thereof following the completion of this offering (for each $1.00 increase or decrease in the public offering price per share, the number of shares issuable upon such conversion would increase or decrease, as applicable, by              shares); and

 

                 shares of common stock reserved for future issuance under our equity-based compensation plans, consisting of 1,419,954 shares of common stock reserved for issuance under our 2012 Equity Incentive Plan as of December 31, 2015,            shares of common stock reserved for issuance under our 2016 Equity Incentive Plan, and            shares of common stock reserved for issuance under our 2016 Employee Stock Purchase Plan, and excluding shares that become available under the 2016 Equity Incentive Plan and 2016 Employee Stock Purchase Plan pursuant to provisions of these plans that automatically increase the share reserves each year, as more fully described in “Executive Compensation—Employee Benefit Plans.”

Except as otherwise indicated, all information in this prospectus assumes:

 

    the automatic conversion of all outstanding shares of our convertible redeemable preferred stock into an aggregate of 107,425,783 shares of common stock, effective upon the closing of this offering;

 

    the automatic conversion of all of our outstanding 8% subordinated secured convertible promissory notes (8% Notes) into shares of our Series G convertible redeemable preferred stock at a per share price of $25.76 as of December 31, 2015, and the subsequent automatic conversion of such shares of Series G convertible redeemable preferred stock into an aggregate of 8,097,795 shares of common stock effective upon the closing of this offering;

 

    no issuance of shares upon the exercise or settlement of outstanding stock options, warrants or restricted stock units subsequent to December 31, 2015, except for an aggregate of 413,261 shares of common stock that we expect to issue upon the exercise of outstanding warrants exercisable for shares of our Series F convertible preferred stock, which warrants would otherwise expire immediately prior to the completion of this offering;

 

    the issuance and exercise of warrants to purchase 469,333 shares of our common stock at an exercise price of $0.01 per share to certain purchasers of our 5% Notes, as described in “Description of Capital Stock—5.0% Convertible Senior Secured PIK Notes due 2020,” which warrants will automatically be deemed exercised pursuant to their terms immediately prior to the completion of this offering;

 

    the filing of our amended and restated certificate of incorporation and adoption of our amended and restated bylaws immediately prior to the closing of this offering; and

 

    the underwriters will not exercise their option to purchase additional shares of common stock from us and the selling stockholders in this offering.

 



 

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SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA

You should read the summary consolidated financial data set forth below in conjunction with our consolidated financial statements, the notes to our consolidated financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained elsewhere in this prospectus.

The summary consolidated statements of operations data for the years ended December 31, 2014 and 2015 and the consolidated balance sheet data as of December 31, 2015 are derived from our audited consolidated financial statements included elsewhere in this prospectus. You should read the following selected consolidated financial data below in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements, related notes and other financial information included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results to be expected in the future. The selected consolidated financial data in this section are not intended to replace the consolidated financial statements and are qualified in their entirety by the consolidated financial statements and related notes included elsewhere in this prospectus.

Please see the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Operating Metrics” for information regarding how we define our system acceptances and total megawatts deployed, and the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Measures” for information regarding how we define non-GAAP total revenue, non-GAAP gross profit (loss) and non-GAAP loss from operations and the limitations of those measures.

 



 

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     Years Ended
December 31,
 
     2014     2015  
     (in thousands, except
operating metrics and per
share data)
 

Consolidated statements of operations data:

    

Revenue

    

Product

   $ 174,450      $ 122,441   

Service

     26,437        36,944   

Electricity

     47,253        55,311   
  

 

 

   

 

 

 

Subtotal

     248,140        214,696   

PPA I decommissioning

     —          (41,807
  

 

 

   

 

 

 

Total revenue

     248,140        172,889   

Cost of revenue

    

Product

     231,800        187,731   

Service

     105,657        135,470   

Electricity

     24,305        31,372   
  

 

 

   

 

 

 

Total cost of revenue

     361,762        354,573   
  

 

 

   

 

 

 

Gross profit (loss)

     (113,622     (181,684
  

 

 

   

 

 

 

Operating expenses

    

Research and development

     53,001        43,933   

Sales and marketing

     16,434        19,543   

General and administrative

     50,573        58,976   
  

 

 

   

 

 

 

Total operating expenses

     120,008        122,452   
  

 

 

   

 

 

 

Loss from operations

     (233,630     (304,136

Interest expense

     (21,606     (40,633

Other expense, net

     (4,350     (2,891

Gain (loss) on revaluation of warrant liabilities

     (1,825     2,686   
  

 

 

   

 

 

 

Loss before income taxes

     (261,411     (344,974

Income tax provision

     574        707   
  

 

 

   

 

 

 

Net loss

     (261,985     (345,681

Net loss attributable to noncontrolling interest and redeemable noncontrolling interests

     (44,369     (4,678
  

 

 

   

 

 

 

Net loss attributable to common stockholders

   $ (217,616   $ (341,003
  

 

 

   

 

 

 

Net loss per share attributable to common stockholders, basic and diluted

   $ (15.45   $ (23.34
  

 

 

   

 

 

 

Weighted average shares used to compute net loss per share attributable to common stockholders, basic and diluted

     14,088        14,611   
  

 

 

   

 

 

 

Pro forma net loss per share attributable to common stockholders, basic and diluted

     $ (2.61
    

 

 

 

Pro forma weighted average shares used to compute pro forma net loss per share attributable to common stockholders, basic and diluted

       130,554   
    

 

 

 

Key operating metrics:

    

Acceptances during the period (in 100 kilowatt systems)

     351        349   

Total megawatts deployed as of the year ended

     152        187   

 



 

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Our consolidated balance sheet as of December 31, 2015 is presented on:

 

    an actual basis;

 

    a pro forma basis to give effect to (i) the automatic conversion of all outstanding shares of our preferred stock into 107,425,783 shares of common stock immediately prior to the closing of this offering, (ii) the automatic conversion of all outstanding 8% Notes to Series G convertible preferred stock at a per share price of $25.76, and the conversion of such Series G convertible preferred stock into 8,097,795 shares of common stock immediately prior to the completion of this offering, (iii) the issuance and exercise of warrants to purchase 469,333 shares of our common stock at an exercise price of $0.01 per share to certain purchasers of our 5% Notes, as described in “Description of Capital Stock—5.0% Convertible Senior Secured PIK Notes due 2020,” which warrants will automatically be deemed exercised pursuant to their terms immediately prior to the completion of this offering, and (iv) the effectiveness of our amended and restated certificate of incorporation immediately prior to the completion of this offering; and

 

    a pro forma as adjusted basis to give effect to (i) the pro forma adjustments set forth above, (ii) the issuance of 413,261 shares of common stock that we expect to issue upon the exercise of warrants that would expire if not exercised prior to the completion of this offering, and (iii) the sale and issuance of             shares of common stock by us in this offering at an assumed initial public offering price of $        per share, which is the midpoint of the price range on the cover of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

     As of December 31, 2015  
     Actual      Pro Forma      Pro Forma As
Adjusted(1)
 
     (in thousands)  

Consolidated balance sheet data:

        

Cash and cash equivalents

   $ 135,030       $ 135,035       $                

Working capital

     169,028         169,028      

Total assets

     944,501         944,501      

Non-recourse PPA entity debt

     330,403         330,403      

Recourse debt

     309,579         100,980      

Total liabilities

     1,038,652         830,048      

Convertible redeemable preferred stock

     1,459,506         —        

Stockholders’ deficit

     (1,686,784      (18,674   

 

  (1)  Each $1.00 increase or decrease in the assumed initial public offering price of $        per share, the midpoint of the price range on the cover of this prospectus, would increase or decrease, as applicable, our cash and cash equivalents, working capital, total assets and stockholders’ deficit by approximately $        million, assuming that the number of shares we offer, as stated on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions.

 



 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider these risk factors, together with all of the other information included in this prospectus, including the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes, before you decide to purchase shares of our common stock. While we believe the risks and uncertainties described below include all material risks currently known by us, it is possible that these may not be the only ones we face. If any of the risks actually occur, our business, financial condition, operating results and prospects could be materially and adversely affected. In that event, the market price of our common stock could decline, and you could lose part or all of your investment.

Risks Relating to Our Business and Industry

Our limited operating history and our nascent industry makes evaluating our business and future prospects difficult.

From our inception in 2001 through 2008, 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. 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.

Our Energy Server is a new type of product in the nascent distributed energy industry. 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 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 and uncertainties emerging companies encounter when introducing a new product into a nascent industry.

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, 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 in our business model and lack of awareness of our product. Because this is an emerging industry, broad acceptance of our products and service is subject to 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 December 31, 2015, we had an accumulated deficit of $1.8 billion. We expect to continue to expand our operations, including by investing in manufacturing, sales and marketing, research and development, staffing systems and infrastructure to support our growth. We anticipate that we will incur net losses for the foreseeable future. Our ability to achieve profitability in the future will depend on a number of factors, including:

 

    growing our sales volume;

 

    increasing sales to existing customers and attracting new customers;

 

    attracting and retaining financing partners who are willing to provide financing for sales on a timely basis and with attractive terms;

 

    continuing to improve the useful life of our fuel cell technology and reducing our warranty servicing costs;

 

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    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; and

 

    attracting and retaining key talent in a competitive marketplace.

Even if we do achieve profitability, we may be unable to sustain or increase our profitability in the future.

Our Energy Servers have significant upfront costs, and we will need to attract investors to help customers finance purchases.

Our Energy Servers have significant upfront costs. In order to assist our customers in obtaining financing for our products, we have leasing programs with two leasing partners who have prequalified our product and provide financing for customers both in the form of traditional leasing and in sale-leaseback sublease arrangements we refer to as managed services. In addition to the leasing model, we also offer power purchase agreements (PPAs) in which the cost of the Energy Server is funded by an investment entity which is financed by us and third-party investors (PPA entities).

We will need to grow committed financing capacity with existing partners, or attract additional partners to support our growth, and these partners may discontinue their relationship with us at any time. Our ability to attract third-party financing depends on many factors that are outside of our control, including the investors’ ability to utilize tax credits and other government incentives, our perceived creditworthiness and the condition of credit markets generally. Our leasing partners’ financing of customer purchases is subject to certain conditions, and if these conditions are not satisfied, we could experience cancellations and an adverse effect on our revenue in a particular period. We currently have committed funding from our PPA entities for new PPAs through December 31, 2016; however, such funding may not be adequate, and it is subject to certain conditions. If we are unable to help our customers arrange financing for our Energy Servers, our business will be harmed.

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. Field conditions such as the quality of the natural gas supply and utility processes which vary by region have affected the performance of our Energy Servers and are not always possible to predict until the system 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, we may encounter new and unanticipated field conditions. Changes in our supply chain or the failure of our suppliers to otherwise provide us with components or materials that meet our specifications could also introduce defects into our products. In addition, as we grow our manufacturing volume, the chance of manufacturing defects could increase. Any manufacturing defects or other failures of our Energy Servers to perform as expected could cause us to incur significant re-engineering costs, divert the attention of our engineering personnel from product development efforts and significantly and adversely affect customer satisfaction, market acceptance and our business reputation.

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 generally offer our 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 certain of their components. We also provide performance

 

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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 or refund their cost to the customer, or require us to make cash payments to the customer based on actual performance, as compared to expected performance, capped at a percentage of the relevant equipment purchase prices. Early generations of our Energy Server did not have the useful life and did not perform at an output and efficiency level that we expected. As further described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” we are implementing a fleet decommissioning program for our early generation Energy Servers, 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. 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 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, the accuracy of which may be hindered due to our limited operating history operating at our current scale.

Our business currently depends on the availability of rebates, tax credits and other financial incentives. 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 certain 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 tax 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.

Currently, the U.S. federal government offers a 30% Investment Tax Credit under Section 48 of the Internal Revenue Code, or the federal business energy investment tax credit (ITC), for the installation of certain fuel cell properties. Without government action, this tax credit will terminate for fuel cells installed after December 31, 2016. The credit is equal to 30% of expenditures applied against system cost and installation, and the credit for fuel cells is capped at $1,500 per 0.5 kilowatt of capacity. In addition to the ITC, our Energy Servers have qualified for tax exemptions, incentives, or other customer incentives in many states including the states of New Jersey, Connecticut, New York and California. Some states have utility procurement programs and/or renewable portfolio standards for which our technology is eligible. Our Energy Servers are currently installed in 10 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. For example, the California Self Generation Incentive Program (SGIP) is a program administered by the California Public Utilities Commission (CPUC) which provides incentives to investor-owned utility customers that install eligible distributed energy resources. The SGIP will expire on January 1, 2021. In November 2015, the Energy Division staff of the CPUC proposed to modify the SGIP in a manner that may exclude our Energy Servers from the program. A final decision by CPUC has not yet been made. We cannot predict the results of this proceeding and it is possible that CPUC will determine that technologies like ours should either receive a lower incentive or no longer qualify for the program. 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 impact our business results.

We rely on tax equity financing arrangements to realize the benefits provided by investment tax credits and accelerated tax depreciation.

If we continue to utilize our Bloom Electrons program, our PPA financing program, we expect that any PPA entities we create will receive capital from tax equity investors. Tax 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

 

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Recovery System (MACRS) depreciation, until these investors achieve their respective agreed rates of return. The number of and available capital from potential tax equity investors is limited, and we compete with other energy companies eligible for these tax benefits to access such investors. Concerns regarding our limited operating history and lack of profitability 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 and the market for our Energy Servers. In addition, conditions in financial and credit markets generally 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 attract the capital needed to fund our Bloom Electrons program 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 and therefore harm our business, financial condition and results of operations.

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, for the year ended December 31, 2014, approximately 91% of our revenue came from our top 20 customers, with one customer accounting for approximately 27% of our total revenue. In 2015, our top 20 customers accounted for approximately 85% of our total revenue and two customers, that were not in our top 20 customers for 2014, accounted for approximately 22% of our total revenue. Since we recognize the product revenue for customer-financed purchases at the time that the Energy Server is accepted, rather than recognizing the product revenue ratably over the life of the contract, a customer that self-finances a purchase could have an outsize effect on revenue in the period in which that customer’s Energy Server is accepted.

In addition, two customers accounted for approximately two-thirds of our backlog as of December 31, 2015. The loss of any large customer order, or delays in installations of new Energy Servers with any large customer, 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 it could harm our business.

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 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 nine to twelve months or more. This lengthy sales and installation cycle is subject to a number of significant risks over which we have little or no control. Because of both the long sales and 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 fail to satisfy their payment obligations or 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, although they will generally be charged for any installation and site preparations costs incurred prior to cancellation. Cancellation rates can be between 10% and 20% in any given period, due to such factors as an inability to install an Energy Server at the customer’s chosen location because of permitting or other regulatory issues 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

 

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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 business is subject to risks associated with construction, 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 do not recognize revenue on the sales of our Energy Servers until installation and acceptance, our financial results are dependent, to a large extent, on the timeliness of the installation of our Energy Servers. Furthermore, in some cases, the installation of our Energy Servers may be on a fixed price basis, which subjects us to the risk of cost overruns or other unforeseen expenses in the installation process.

The construction, installation and operation of our Energy Servers at a particular site is generally subject to oversight and regulation in accordance with national, state and local laws and ordinances relating to building codes, safety, utility interconnection and metering, environmental protection and related matters, and typically requires 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 increase the cost so substantially that the project is no longer attractive to us or our customers. Furthermore, unforeseen delays in the review and permitting process could delay the timing of the installation of our Energy Servers and could therefore adversely affect the timing of the recognition of revenue related to the installation, which could harm our operating results in a particular period.

In addition, the completion of many of our installations is dependent upon the availability of and timely connection to the natural gas grid and the local electric grid. In some jurisdictions, the local municipality has denied our request for connection. 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 party general contractors to install Energy Servers at our customers’ sites. We currently work with a limited number of general contractors, which has impacted and may continue to impact our ability to make installations as planned. Our work with contractors or their sub-contractors may have the effect of us being required to comply with additional rules (including rules unique to our customers), working conditions, site remediation and other union requirements, which can add costs and complexity to an installation project. The timeliness, thoroughness and quality of the installation-related services performed by 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.

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 certain raw materials and components for our Energy Servers. We also conduct, either directly or indirectly through our extended supply chain, certain raw

 

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material operations in order to help ensure our access to such raw materials. 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 timeframes and cause order cancellations. We have had to create our own supply chain for some of the components and materials utilized in our fuel cells. We have made significant expenditures in the past to develop our supply chain. In many cases we entered into contractual relationships with suppliers to jointly develop the components we needed. These activities were time and capital intensive. Accordingly, the number of suppliers we have for certain components and materials is limited and in some cases sole sourced. Some of our suppliers use proprietary processes to manufacture components. We may be unable to obtain comparable components from alternative suppliers without considerable delay, expense or at all, as replacing these suppliers could require us either to make significant investments to bring the capability in house or to invest in a new supplier 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 operations, which would negatively impact our sales volumes and cash flows.

Moreover, we may experience unanticipated disruptions to operations or other difficulties with our supply chain or internalized supply processes due to exchange rate fluctuations, volatility in regional markets from where materials are obtained, particularly China and Taiwan, changes in the general macroeconomic outlook, political instability, expropriation or nationalization of property, civil strife, strikes, insurrections, acts of terrorism, acts of war or natural disasters. The failure by us to obtain raw materials or components in a timely manner, or to obtain raw materials or components that meet our quantity and cost requirements, could impair our ability to manufacture our Energy Servers or increase their costs. If we cannot obtain substitute materials or components on a timely basis or on acceptable terms, we could be prevented from delivering our Energy Servers to our customers within required timeframes, which could result in sales and installation delays, cancellations, penalty payments, or damage to our reputation, any of which could have a material adverse effect on our business and results of operations. In addition, we rely on our suppliers to meet certain quality standards, and the failure of our suppliers to meet or exceed those quality standards could cause delays in the delivery of our products, unanticipated servicing costs and damage to our reputation.

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 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, particularly on a non-GAAP basis, we recognize in a given period is materially dependent on the volume of installations of our Energy Servers in that period, and the amount of GAAP product revenue that we recognize in a given period is materially dependent on the type of financing used by the customer. As an example, our total revenue on a GAAP basis was approximately $277.7 million, $248.1 million and $172.9 million in 2013, 2014 and 2015, respectively. This decrease was due in large part to decreases in sales that required revenue recognition up front, as well as sales in 2014 being affected by a lower average sales price as a result of a direct purchase for a large customer site with the installation managed by the customer.

In addition to the other risks described in this “Risk Factors” section, 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;

 

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    the mix in the type of purchase or financing options used by customers in a period;

 

    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;

 

    the length of the sales and installation cycle for a particular customer;

 

    the timing and level of additional purchases by existing customers; and

 

    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.

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 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 among customers, suppliers, financing partners and other parties in our liquidity and long-term business prospects. 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;

 

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    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, and price predictability of electricity generated by our Energy Servers in comparison to the retail price and future price outlook of electricity from the local utility grid and other renewable energy sources. In certain 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 prices of grid electricity do 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 a very significant 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 grid electricity, such as traditional utilities, have longer operating histories, customer incumbency advantages, access to and influence with local and state governments, and more capital resources than we do. 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, we will limit our growth and 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.

 

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    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.

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, thereby increasing our per unit fixed cost, which would have a negative impact on our financial condition and results of operations.

We have in some instances, entered into long-term, firm commitment supply agreements that could result in excess or insufficient inventory and negatively affect our results of operations.

We have entered into long-term, firm commitment supply agreements with certain suppliers. Some of these supply agreements provide for fixed or inflation-adjusted pricing, substantial prepayment obligations, and firm purchase commitments that require us to pay for the supply whether or not we accept delivery. If such agreements require us to purchase more raw materials or components than required to meet our actual customer demand over time, the resulting excess inventory could materially and negatively impact our results of operations. If instead our agreements provide insufficient inventory at the level of quality 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. 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 secure new long-term supply agreements. Any of the foregoing could materially harm our financial condition and results of operations.

We, and some of our suppliers, obtain certain 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.

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. While we have been successful in reducing our manufacturing 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

 

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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. Increases in any of these costs 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 prospects.

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 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, prospects, operating results and financial condition. Our future operating results depend to a large extent on our ability to manage this expansion and growth successfully.

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 and 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, protect our trade secrets, or 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, prospects and reputation.

We rely primarily on patent, trade secret and trademark laws, and non-disclosure, confidentiality, and other types of contractual restrictions to establish, maintain, and enforce our intellectual property and proprietary rights. However, our rights under these laws and agreements afford us only limited protection and the actions we take to establish, maintain, and enforce our intellectual property rights may not be adequate. For example, our trade secrets and other confidential information could be disclosed in an unauthorized manner to third parties, our owned or licensed intellectual property rights could be challenged, invalidated, circumvented, infringed, or misappropriated or our intellectual property rights may not be sufficient to provide us with a competitive advantage, any of which could have a material adverse effect on our business, financial condition or operating results. In addition, the laws of some countries do not protect proprietary rights as fully as do the laws of the United States. As a result, we may not be able to protect our proprietary rights adequately abroad.

Our patent applications may not result in issued patents, and our issued patents may not provide adequate protection, 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

 

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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, prospects, and operating results.

We may need to defend ourselves against claims that we infringe, have misappropriated or otherwise violate 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 would prevent, limit, or interfere with our ability to make, use, develop, or sell our Energy Servers or components, which could make it more difficult for us to operate our business. Companies holding patents or other intellectual property rights allegedly relating to our technologies may make claims or bring suits alleging infringement, misappropriation, or other violations of such rights, or otherwise asserting their rights and 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 may therefore be required to defend our customers against such claims. If 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 license may not be available on reasonable terms or at all; or

 

    redesign our products, 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.

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

 

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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 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 technology, sales, marketing and support personnel, could adversely impact our business, prospects, financial condition, and 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 change often. 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 in our ability to build out, equip and operate our facilities, as well as service our fleet which would adversely impact our business, prospects, financial condition and 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 for the investigation and cleanup of contaminated soil and ground water, for building contamination and impacts to human health and for damages to natural resources. Contamination at properties formerly owned or operated by us, as well as at properties we will own or operate, and properties to which hazardous substances were sent by us, may result in liability for us 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 and regulations 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 operating results.

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 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, and this 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, increasing the cost to our customers of using our Energy Servers and making them less economically attractive. In addition, our Delmarva project 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, and requires FERC authorization to make wholesale sales of electric energy, capacity, and ancillary services. 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.

 

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We may become subject to product liability claims, which could harm our financial condition and liquidity if we are not able to successfully defend or insure against such claims.

We may in the future become subject to product liability claims. Our Energy Servers are considered high energy systems because they use flammable fuels and may operate at 480 volts. Although our Energy Servers are certified to meet ANSI, IEEE, ASME and NFPA design and safety standards, if not properly handled in accordance with our servicing and handling standards and protocols, there could be a system failure and resulting liability. These claims could require us to incur significant costs to defend. Furthermore, any successful product liability claim could require us to pay a substantial monetary award. Moreover, a product liability claim could generate substantial negative publicity about our company and our Energy Servers, which could harm our brand, business, prospects, and 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 financial condition.

Current or future litigation or administrative proceedings could have a material adverse effect on our business, financial condition and 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, even though we were not named as a party and the litigation was ultimately settled, 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 challenging certain aspects of our arrangement with Delmarva Power and the state of Delaware. 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 certain 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, financial condition, and results of operations. In addition, settlement of claims could adversely affect our financial condition and 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 monitored by our centralized remote monitoring service. 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 and affect our ability to assess our Energy Server performance in the field and could result in the loss or misuse of our data or sensitive information, disruption to our business, legal or regulatory breaches 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. The occurrence of a natural disaster, such as an earthquake, drought, flood, localized extended outages of critical

 

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utilities or transportation systems, or any critical resource shortages, could cause a significant interruption in our business, damage or destroy our facilities, manufacturing equipment, or inventory, and cause us to incur significant costs, any of which could harm our business, financial condition, and 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 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 and India. 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.

 

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If we discover a material weakness in our internal control over financial reporting or otherwise fail to maintain effective internal control over financial reporting, our ability to report our financial results on a timely and accurate basis and the market price of our common stock may be adversely affected.

The Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley Act) requires, among other things, that we evaluate the effectiveness of our internal control over financial reporting and disclosure controls and procedures. Although we did not discover any material weaknesses in internal control over financial reporting at December 31, 2015, subsequent testing by us or our independent registered public accounting firm, which has not performed an audit of our internal control over financial reporting, may reveal deficiencies in our internal control over financial reporting that are deemed to be material weaknesses. To comply with Section 404A, we may incur substantial cost, expend significant management time on compliance-related issues and hire additional accounting, financial and internal audit staff with appropriate public company experience and technical accounting knowledge. Moreover, if we are not able to comply with the requirements of Section 404A in a timely manner or if we or our independent registered public accounting firm identify deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, we could be subject to sanctions or investigations by the Securities and Exchange Commission (SEC) or other regulatory authorities, which would require additional financial and management resources. Any failure to maintain effective disclosure controls and procedures or internal control over financial reporting could have a material adverse effect on our business and operating results, and cause a decline in the price of our common stock.

Our ability to use our deferred tax assets to offset future taxable income may be subject to certain 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. At December 31, 2015, we had federal and state net operating loss carryforwards (NOLs) of $1.4 billion and $1.1 billion, respectively, which will expire, if unused, beginning in 2022 and 2016, respectively. A lack of future taxable income would adversely affect our ability to utilize these NOLs. In addition, under Section 382 of the Internal Revenue Code of 1986, as amended (the Code), a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its NOLs to offset future taxable income. Changes in our stock ownership, including this offering or future offerings, 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 these limitations. Our NOLs may also be impaired under similar provisions of state law. In addition, as of December 31, 2015, we had approximately $13.9 million of federal research credit, $4.8 million of federal investment tax credit, and $12.2 million of state research credit carryforwards. Our deferred tax assets may expire unutilized or underutilized, which could prevent us from offsetting future taxable income.

Our substantial indebtedness may limit our financial and operating activities and may adversely affect our ability to incur additional debt to fund future needs.

As of December 31, 2015, we and our subsidiaries had approximately $640.0 million of total consolidated indebtedness, of which an aggregate of $309.6 million represented indebtedness which is recourse to us. Of this amount, $208.6 million represented debt under our 8% Notes which will convert automatically into common stock immediately prior to completion of this offering, $11.0 million represented operating debt, $330.4 million represented debt of our PPA entities and $160.0 million represented debt under our 5% Notes which could remain outstanding following this offering. Our substantial indebtedness and any new indebtedness could:

 

    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;

 

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    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;

 

    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.

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, financial condition, liquidity and 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 conduct certain of our operations through, and receive equity allocations from, our PPA entities, which contribute to our cash flow. These PPA entities are separate and distinct legal entities, do not guarantee our debt obligations and will have no obligation, contingent or otherwise, to pay amounts due under our debt obligations or to make any funds available to pay those amounts, whether by dividend, distribution, loan or other payments. In many cases, distributions by such PPA entities to us are precluded under these arrangements if there is an event of default or if certain financial covenants are not met, even if there is not otherwise an event of default, and certain arrangements prohibit the payment of distributions in excess of specified thresholds. Furthermore, under the terms of some of our PPA entity financing arrangements, substantially all of the cash flows generated from our PPA entities in excess of debt service obligations are distributed to tax equity investors until the investors achieve a targeted internal rate of return, which is generally after a period of five or more years (the flip date), when we start receiving a larger portion of these cash flows. 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, the payment of principal at maturity or other payments that may be required from time to time under the terms of our debt instruments, we may have to undertake alternative financing plans, such as refinancing or restructuring our debt, selling assets, reducing or delaying capital investments or seeking to raise additional capital. We cannot provide assurance that any refinancing would be possible, that any assets could be sold, or, if sold, of the timing of the sales and the amount of proceeds realized from those sales, that additional financing could be obtained on acceptable terms, if at all, or that additional financing would be permitted under the terms of our various debt instruments then in effect. Furthermore, the ability to refinance indebtedness would depend upon the condition of the finance and credit markets at the time, which have in the past been, and may in the future be, volatile. Our inability to generate sufficient cash to satisfy our debt obligations, or to refinance our obligations on commercially reasonable terms or on a timely basis, would have an adverse effect on our business, results of operations and financial condition.

 

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Under some circumstances, we may be required to or elect to make additional payments to our PPA entities or the PPA entity investors.

Our PPA entities are structured in a manner such that other than the amount of any equity investment we have made, we generally do not have any further liability for the debts or other obligations of the PPA entities. In some cases, we were required to guarantee certain obligations of the PPA entities, such as the performance and operating efficiency warranties of the Energy Servers, certain representations and warranties made to the other investors in the PPA entity and the performance of certain covenants. As a result, we could be obligated to make payments to these PPA entities or the other investors in the event of a breach of these representations, warranties or covenants.

In addition, many 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 power purchase agreements. If the operating entities experience unexpected, increased costs, such as insurance costs, interest expense, construction overruns or taxes, or if end customers are unable to continue to purchase power under their power purchase agreements, 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 investors. If this were to occur, 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 make additional payments to avoid an event of default, which could adversely affect our business or financial condition.

Restrictions imposed by the agreements governing certain of our and our PPA entities’ outstanding indebtedness contain various covenants that limit our ability to take certain actions.

The agreements governing certain of our outstanding indebtedness contain, and any of 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 in certain instances;

 

    incur liens;

 

    make certain asset dispositions;

 

    make certain loans or investments;

 

    issue or sell share capital of our subsidiaries;

 

    issue certain guarantees;

 

    enter into transactions with affiliates; and

 

    merge, consolidate, or sell, lease or transfer all or substantially all of our assets.

Certain of our and our PPA entities’ debt agreements require the maintenance of specified ratios or the satisfaction of specified financial tests. 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 certain events such as a change in control of our company, certain 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 5% 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 5% Notes and our 8% Notes, contain events of default. If an event of default were to occur, the trustee or the lenders could, among other things,

 

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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. 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 engage in other business activities that may be in our interest, or react to adverse market developments.

If our PPA entities default on their obligations under non-recourse financing agreements, we may decide to make payments to prevent such PPA entities’ creditors from foreclosing on the relevant collateral as such a foreclosure would result in our losing our ownership interest in the PPA entity or in some or all of its assets, or a material part of our assets, as the case may be. To satisfy these obligations, we may be required to use amounts distributed by our other PPA entities as well as other sources of available cash, 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, financial condition and results of operations.

We are an “emerging growth company” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.

We are an “emerging growth company,” as defined in the JOBS Act, and we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies,” including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We may take advantage of these exemptions for so long as we are an “emerging growth company,” which could be as long as five years following the completion of this offering. We cannot predict if investors will find our common stock less attractive because we will rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

Risks Related to this Offering

There has been no prior public market for our common stock, the stock price of our common stock may be volatile or may decline regardless of our operating performance, and you may not be able to resell your shares at or above the initial public offering price.

There has been no public market for our common stock prior to this offering. The initial public offering price for our common stock will be determined through negotiations among the underwriters, us, and the selling stockholders and may vary from the market price of our common stock following this offering. The market prices of the securities of newly public companies such as us have historically been highly volatile. An active or liquid market in our common stock may not develop following this offering or, if it does develop, may not be sustainable. The market price of our common stock may fluctuate significantly in response to numerous factors, many of which are beyond our control, including:

 

    overall performance of the equity markets;

 

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    actual or anticipated fluctuations in our revenue and other operating results;

 

    changes in the financial projections we may provide to the public or our failure to meet these projections;

 

    failure of securities analysts to initiate or maintain coverage of us, changes in financial estimates by any securities analysts who follow our company, or our failure to meet these estimates or the expectations of investors;

 

    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 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 become involved in securities litigation, it could 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 common stock in the public markets, or the perception that they might occur, could cause the market price of our common stock to decline.

Sales of a substantial number of shares of our common stock into the public market, particularly sales by our directors, executive officers, and principal stockholders, or the perception that these sales might occur, could cause the market price of our common stock to decline.

Substantially all of our securities outstanding prior to this offering, other than the shares offered by our selling stockholders, which will be freely tradable following this offering, are currently restricted from resale as a result of lock-up and market standoff agreements. See the section titled “Shares Eligible for Future Sale” for additional information. These securities will become available to be sold 181 days after the date of this prospectus. J.P. Morgan Securities LLC may, in its discretion, permit our security holders to sell shares prior to the expiration of the restrictive provisions contained in the lock-up agreements. Shares held by directors, executive officers, and other affiliates will also be subject to volume limitations under Rule 144 under the Securities Act and various vesting agreements.

In addition, as of December 31, 2015, we had options and RSUs outstanding that, if fully exercised or settled, would result in the issuance of 13,216,942 shares of common stock. All of the shares of common stock issuable upon the exercise of stock options or settlement of RSUs, and the shares reserved for future issuance

 

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under our equity incentive plans, will be registered for public resale under the Securities Act. Accordingly, these shares will be able to be freely sold in the public market upon issuance subject to the lock-up agreements described above, existing lock-up or market standoff agreements and applicable vesting requirements.

Immediately following this offering, the holders of            shares of our common stock have rights, subject to some conditions, to require us to file registration statements for the public resale of the common stock issuable upon conversion of such shares or to include such shares in registration statements that we may file for us or other stockholders.

If securities or industry analysts do not publish research, or publish inaccurate or unfavorable research, about our business, the market price of our common stock and trading volume could decline.

The market price for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. Securities and industry analysts do not currently, and may never, publish research on our company. If few securities analysts commence coverage of us, or if industry analysts cease coverage of us, the trading price for our common stock would be negatively affected. If one or more of the analysts who cover us downgrade our common stock or publish inaccurate or unfavorable research about our business, our 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 common stock could decrease, which might cause our common stock price and trading volume to decline.

Because the initial public offering price of our common stock will be substantially higher than the pro forma as adjusted net tangible book value per share of our outstanding common stock following this offering, new investors will experience immediate and substantial dilution.

The initial public offering price will be substantially higher than the pro forma as adjusted net tangible book value per share of our common stock immediately following this offering based on the total value of our tangible assets less our total liabilities. Therefore, if you purchase shares of our common stock in this offering, based on the midpoint of the price range set forth on the cover page of this prospectus, and the issuance of            shares of common stock in this offering, you will experience immediate dilution of $        per share, the difference between the price per share you pay for our common stock and its pro forma as adjusted net tangible book value per share as of December 31, 2015. See the section titled “Dilution” for additional information.

We will have broad discretion in the use of the net proceeds to us from this offering and may not use them effectively.

We will have broad discretion in the application of the net proceeds to us from this offering, including for any of the purposes described in the section titled “Use of Proceeds,” and you will not have the opportunity as part of your investment decision to assess whether the net proceeds are being used appropriately. Because of the number and variability of factors that will determine our use of the net proceeds from this offering, their ultimate use may vary substantially from their currently intended use. The failure by our management to apply these funds effectively could harm our business. Pending their use, we may invest the net proceeds from this offering in short-term, investment-grade interest-bearing securities such as money market accounts, certificates of deposit, commercial paper, and guaranteed obligations of the U.S. government that may not generate a high yield to our stockholders. These investments may not yield a favorable return to our investors.

We do not intend to pay dividends for the foreseeable future.

We have never declared or paid any cash dividends on our common 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

 

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future will be at the discretion of our board of directors. Accordingly, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investments.

Insiders will continue to have substantial control over us after this offering, which could limit your ability to influence the outcome of key transactions, including a change of control.

Our directors, executive officers and each of our stockholders who own greater than 5% of our outstanding common stock and their affiliates, in the aggregate, will beneficially own a total of approximately     % of the outstanding shares of our common stock after this offering. As a result, these stockholders, if acting together, would be able to influence or control matters requiring approval by our stockholders, including the election of directors and the approval of mergers, acquisitions or other extraordinary transactions. They may have interests that differ from yours and may vote in a way with which you disagree and that may be adverse to your interests. This concentration of ownership may have the effect of delaying, preventing or deterring a change of control of our company, could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company and might affect the market price of our common stock.

Provisions in our charter documents and under Delaware law could make an acquisition of our company more difficult, limit attempts by our stockholders to replace or remove our current management, limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, or employees, and limit the market price of our common stock.

Provisions in our restated certificate of incorporation and amended and restated bylaws that will be in effect immediately following the completion of this offering 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 that our board of directors will be classified into three classes of directors with staggered three year terms;

 

    permit the board of directors to establish the number of directors and fill any vacancies and newly created directorships;

 

    require super-majority voting to amend some provisions in our restated certificate of incorporation and amended and restated bylaws;

 

    authorize the issuance of “blank check” preferred stock that our board of directors could use to implement a stockholder rights plan;

 

    provide that only the chairman of our board of directors, our chief executive officer, or a majority of our board of directors will be authorized to call a special meeting of stockholders;

 

    prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders;

 

    provide that 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 will 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. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes

 

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with us or any of our directors, officers, or other employees, which 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 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, operating results, and financial condition.

Moreover, Section 203 of the Delaware General Corporation Law may discourage, delay, or prevent a change in control of our company. Section 203 imposes certain restrictions on mergers, business combinations, and other transactions between us and holders of 15% or more of our common stock. See the section titled “Description of Capital Stock” for additional information.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements within the meaning of the federal securities laws. All statements contained in this prospectus 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,” “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 prospectus 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 prospectus. 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 prospectus. 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.

The forward-looking statements made in this prospectus 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 prospectus to reflect events or circumstances after the date of this prospectus 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.

 

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INDUSTRY AND MARKET DATA

This prospectus contains statistical data, estimates and forecasts that are based on independent industry publications or reports or other publicly available information, as well as other information based on our internal sources. This information involves a number of assumptions and limitations, is subject to risks and uncertainties, and is subject to change based on various factors, including those discussed in the section titled “Risk Factors” and elsewhere in this prospectus. These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.

The source of certain statistical data, estimates and forecasts contained in this prospectus are the following independent industry publications or reports:

 

    United Nations Development Programme (UNDP) and Action 4 Energy, “Climate and disaster resilience, Sustainable energy,” March 2016.

 

    MarketLine, “MarketLine Industry Profile: Global Electricity Retailing,” February 2015.

 

    United States Department of Energy, “Quadrennial Energy Review: Energy Transmission, Storage, and Distribution Infrastructure,” April 2015.

 

    American Society of Civil Engineers, “2013 Report Card for America’s Infrastructure,” 2013.

 

    Edison Electric Institute, “Company Reports, SNL Financial,” September 2015.

 

    President’s Council of Economic Advisers and Office of Electricity Delivery and Energy Reliability, U.S. Department of Energy, “Economic Benefits of Increasing Electric Grid Resilience to Weather Outages,” August 2013.

 

    The White House Office of the Press Secretary, “Fact Sheet: Administration Announces New Agenda to Modernize Energy Infrastructure: Releases Quadrennial Energy Review,” April 2015.

 

    Technavio, “Global Microgrid Market 2015-2019,” 2015.

 

    Technavio, “Global Data Center Power Market 2015-2019,” 2015.

 

    Eaton, “Blackout Tracker: United States Annual Report 2015,” 2016.

 

    United States Energy Information Administration, “State Electricity Profiles,” July 2015.

 

    United States Energy Information Administration, “Electric Power Monthly,” February 2016.

 

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USE OF PROCEEDS

We estimate that the net proceeds from the sale of shares of our common stock that we are selling in this offering will be approximately $            million, based on an assumed initial public offering price of $            per share, which is the midpoint of the price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters’ option to purchase additional shares from us is exercised in full, we estimate that our net proceeds would be approximately $            million, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We will not receive any proceeds from the sale of shares of our common stock by the selling stockholders.

Each $1.00 increase or decrease in the assumed initial public offering price of $            per share would increase or decrease the net proceeds that we receive from this offering by approximately $            million, assuming that the number of shares of common stock offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions.

We intend to use the net proceeds that we receive from this offering for general corporate purposes, including research and development and sales and marketing activities, general and administrative matters and capital expenditures. We may also use a portion of the net proceeds to invest in or acquire complementary businesses, products, services, technologies or other assets.

We currently have no specific plans for the use of the net proceeds that we receive from this offering. Accordingly, we will have broad discretion in using these proceeds. Pending their use as described above, we plan to invest the net proceeds in short-term, interest-bearing obligations, investment-grade instruments, certificates of deposit, or direct or guaranteed obligations of the U.S. government.

DIVIDEND POLICY

We have never declared or paid cash dividends on our capital stock. We currently intend to retain all available funds and any future earnings for use in the operation of our business and do not anticipate paying any cash dividends in the foreseeable future. Any decision to declare and pay dividends in the future will be made at the discretion of our board of directors and will depend on, among other things, our results of operations, cash requirements, financial condition, contractual restrictions including compliance with covenants under our credit facilities and other factors that our board of directors may deem relevant.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and our capitalization as of December 31, 2015 on:

 

    an actual basis;

 

    a pro forma basis to give effect to (1) the automatic conversion of all outstanding shares of our preferred stock into 107,425,783 shares of common stock immediately prior to the closing of this offering, (2) the effectiveness of our amended and restated certificate of incorporation immediately prior to the completion of this offering, (3) the automatic conversion of all outstanding 8% Notes to Series G convertible preferred stock at a per share price of $25.76, and the conversion of such Series G convertible preferred stock into 8,097,795 shares of common stock immediately prior to the completion of this offering and (4) the issuance and exercise of warrants to purchase 469,333 shares of our common stock at an exercise price of $0.01 per share to certain purchasers of our 5% Notes, as described in “Description of Capital Stock—5.0% Convertible Senior Secured PIK Notes due 2020,” which warrants will automatically be deemed exercised pursuant to their terms immediately prior to the completion of this offering; and

 

    a pro forma as adjusted basis to give effect to (1) the pro forma adjustments set forth above, (2) the issuance of 413,261 shares of common stock that we expect to issue upon the exercise of warrants that would expire if not exercised prior to the completion of this offering and (3) the sale and issuance of             shares of common stock by us in this offering at an assumed initial public offering price of $            per share, which is the midpoint of the price range on the cover of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

    As of December 31, 2015  
    Actual     Pro Forma     Pro Forma,
As Adjusted (1)
 
    (in thousands, except share and per share data)  

Cash and cash equivalents

  $ 135,030      $ 135,035      $                        
 

 

 

   

 

 

   

 

 

 

Indebtedness:

     

5% Convertible Senior Secured PIK Notes

  $ 89,948      $ 89,948      $     

8% Subordinated Convertible Secured Promissory Notes

    208,599        —       

Other indebtedness—recourse

    6,530        6,530     

Other indebtedness—non-recourse

    300,779        300,779     

Warrant liabilities

    17,027        17,027     

Convertible redeemable preferred stock, $0.0001 par value: 120,692,417 shares authorized and 107,425,783 issued and outstanding, actual; no shares authorized, issued and outstanding, pro forma and pro forma as adjusted

    1,459,506        —       

Stockholders’ deficit:

     

Preferred stock, $0.0001 par value: no shares authorized, issued and outstanding, actual;              shares authorized, no shares issued and outstanding pro forma and pro forma as adjusted

     

Common stock, $0.0001 par value: 170,000,000 shares authorized, 14,907,904 shares issued and outstanding, actual; 170,000,000 shares authorized, 130,900,815 shares issued and outstanding, pro forma;              shares authorized,              shares issued and outstanding, pro forma as adjusted

    1        13     

Additional paid-in capital

    102,449        1,770,547     

Accumulated other comprehensive loss

    (844     (844)     

Accumulated deficit

    (1,788,390     (1,788,390)     
 

 

 

   

 

 

   

 

 

 

Total stockholders’ deficit

    (1,686,784     (18,674)     
 

 

 

   

 

 

   

 

 

 

Total capitalization

  $ 395,605      $ 395,610      $     
 

 

 

   

 

 

   

 

 

 

 

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  (1)  Each $1.00 increase or decrease in the assumed initial public offering price of $        per share, the midpoint of the price range on the cover of this prospectus, would increase or decrease, respectively, the amount of cash, additional paid-in capital, total stockholders’ deficit and total capitalization by approximately $            million, assuming the number of shares we offer, as stated on the cover of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions.

The preceding table is based on the number of shares of our common stock outstanding as of December 31, 2015, and excludes:

 

    12,660,639 shares of our common stock issuable upon exercise of outstanding stock options as of December 31, 2015 with a weighted average exercise price of $14.38 per share under our 2002 Equity Incentive Plan and 2012 Equity Incentive Plan;

 

    556,303 shares of our common stock issuable upon settlement of RSUs outstanding as of December 31, 2015 under our 2012 Equity Incentive Plan;

 

    50,000 shares of our common stock issuable upon the exercise of outstanding warrants to purchase common stock as of December 31, 2015, with an exercise price of $25.76 per share;

 

    1,554,445 shares of our common stock issuable upon the exercise of outstanding warrants to purchase Series F convertible preferred stock and Series G convertible preferred stock as of December 31, 2015, with a weighted average exercise price of $20.47 per share, which, if not exercised prior to the completion of this offering, shall convert in accordance with their terms into warrants to purchase common stock;

 

    up to 400,000 shares of our common stock issuable to one of our customers on the occurrence of certain installation milestones;

 

    200,000 shares of common stock issuable 180 days from the date of this prospectus. These shares will be issued as part of a dispute settlement with a securities placement agent, as described in “Description of Capital Stock—Securities Acquisition Agreement”;

 

                shares of our common stock issuable upon the conversion of our outstanding 5% Notes as of December 31, 2015, based on an assumed initial public offering price of $        per share, which is the midpoint of the price range set forth on the cover page of this prospectus, which notes will be convertible at the option of the holders thereof following the completion of this offering; and

 

                shares of common stock reserved for future issuance under our equity-based compensation plans, consisting of 1,419,954 shares of common stock reserved for issuance under our 2012 Equity Incentive Plan as of December 31, 2015,             shares of common stock reserved for issuance under our 2016 Equity Incentive Plan and             shares of common stock reserved for issuance under our 2016 Employee Stock Purchase Plan, and excluding shares that become available under the 2016 Equity Incentive Plan and 2016 Employee Stock Purchase Plan pursuant to provisions of these plans that automatically increase the share reserves each year, as more fully described in “Executive Compensation—Employee Benefit Plans.”

 

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DILUTION

If you invest in our common stock, your interest will be diluted to the extent of the difference between the public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock after this offering. Our pro forma net tangible book value as of December 31, 2015 was $        million, or $        per share of common stock. Pro forma net tangible book value per share represents total tangible assets less total liabilities, divided by the number of shares of common stock outstanding as of December 31, 2015, after giving effect to (i) the automatic conversion of all outstanding shares of our preferred stock into 107,425,783 shares of common stock immediately prior to the closing of this offering, (ii) the effectiveness of our amended and restated certificate of incorporation immediately prior to the completion of this offering, (iii) the automatic conversion of all outstanding 8% Notes to Series G convertible preferred stock at a per share price of $25.76, and the conversion of such Series G convertible preferred stock into 8,097,795 shares of common stock immediately prior to the completion of this offering, (iv) the issuance of 413,261 shares of common stock that we expect to issue upon the exercise of warrants that would expire if not exercised prior to the completion of this offering and (v) the issuance and exercise of warrants to purchase 469,333 shares of our common stock at an exercise price of $0.01 per share to certain purchasers of our 5% Notes, as described in “Description of Capital Stock—5.0% Convertible Senior Secured PIK Notes due 2020,” which warrants will automatically be deemed exercised pursuant to their terms immediately prior to the completion of this offering. Our pro forma as adjusted net tangible book value per share gives further effect to our sale of our common stock in this offering at the assumed initial public offering price of $        per share, the midpoint of the price range on the cover of this prospectus, after deducting the estimated underwriting discounts and commissions and our estimated offering expenses. Our pro forma as adjusted net tangible book value as of December 31, 2015 would have been $        million, or $        per share. This represents an immediate increase in net tangible book value of $        per share to our existing stockholders and an immediate dilution of $        per share to new investors purchasing shares of common stock in this offering. The following table illustrates this dilution on a per share basis:

 

Assumed initial public offering price per share

      $               

Pro forma net tangible book value per share as of December 31, 2015

   $                  

Increase in pro forma net tangible book value per share attributable to new investors purchasing shares in this offering

     
  

 

 

    

Pro forma as adjusted net tangible book value per share after giving effect to this offering

     
     

 

 

 

Dilution per share to new investors in this offering

      $    
     

 

 

 

Each $1.00 increase or decrease in the assumed initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease our pro forma as adjusted net tangible book value per share after this offering by $                    , and would increase or decrease dilution per share to investors in this offering by $                    , assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The following table illustrates, on a pro forma as adjusted basis described above, as of December 31, 2015 the differences between the number of shares of common stock purchased from us, the total consideration paid, and the average price per share paid by existing stockholders and new investors purchasing shares of our common stock in this offering based on an assumed initial public offering price of $        per share, the midpoint of the price range on the cover of this prospectus, and before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

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     Shares Purchased     Total Consideration     Average
Price Per

Share
 
   Number      Percent     Amount      Percent    
    

(dollars in millions, except per share amounts)

 

Existing Stockholders

     131,314,076         100.0   $ 1,662.2         100.0   $ 12.66   

New Investors

            
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

        100.0   $           100.0  
  

 

 

    

 

 

   

 

 

    

 

 

   

Sales of shares of common stock by the selling stockholders in this offering will reduce the number of shares of common stock held by existing stockholders to                     , or approximately         % of the total shares of common stock outstanding after this offering, and will increase the number of shares held by new investors to                     , or approximately         % of the total shares of common stock outstanding after this offering.

If the underwriters exercise their option to purchase additional shares in full, the percentage of shares of common stock held by existing stockholders will decrease to approximately        % of the total number of shares of our common stock outstanding after this offering, and the number of shares held by new investors will be increased to            , or approximately        % of the total number of shares of our common stock outstanding after this offering.

As of December 31, 2015, there were options outstanding to purchase a total of 12,660,639 shares of common stock at a weighted average exercise price of $14.38 per share, RSUs outstanding that may be settled for 556,303 shares of common stock, warrants outstanding to purchase a total of 50,000 shares of common stock at an exercise price of $25.76 per share, and warrants outstanding to purchase a total of 1,554,445 shares of our Series F convertible preferred stock and Series G convertible preferred stock, with a weighted-average exercise price of $20.47 per share. We expect warrants to purchase 413,261 shares of common stock, which would expire if not exercised prior to completion of this offering, will be exercised prior to the completion of this offering. In addition, we will issue 200,000 shares of common stock 180 days from the date of this prospectus, as part of a dispute settlement with a securities placement agent, as described in “Description of Capital Stock—Securities Acquisition Agreement,” and up to 400,000 shares of our common stock to one of our customers on the occurrence of certain installation milestones. To the extent outstanding options or warrants are exercised, or restricted stock units settle, or we issue additional shares of common stock in the future, there will be further dilution to new investors.

The preceding table is based on the number of shares of our common stock outstanding on a pro forma basis as of December 31, 2015, and excludes:

 

    12,660,639 shares of our common stock issuable upon exercise of outstanding stock options as of December 31, 2015 with a weighted average exercise price of $14.38 per share under our 2002 Equity Incentive Plan and 2012 Equity Incentive Plan;

 

    556,303 shares of our common stock issuable upon settlement of RSUs outstanding as of December 31, 2015 under our 2012 Equity Incentive Plan;

 

    50,000 shares of our common stock issuable upon the exercise of outstanding warrants to purchase common stock as of December 31, 2015, with an exercise price of $25.76 per share;

 

    1,554,445 shares of our common stock issuable upon the exercise of outstanding warrants to purchase Series F convertible preferred stock and Series G convertible preferred stock as of December 31, 2015, with a weighted average exercise price of $20.47 per share, which, if not exercised prior to the completion of this offering, shall convert in accordance with their terms into warrants to purchase common stock;

 

    up to 400,000 shares of our common stock issuable to one of our customers on the occurrence of certain installation milestones;

 

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    200,000 shares of common stock issuable 180 days from the date of this prospectus. Those shares will be issued as part of a dispute settlement with a securities placement agent, as described in “Description of Capital Stock—Securities Acquisition Agreement”;

 

                shares of our common stock issuable upon the conversion of our outstanding 5% Notes as of December 31, 2015, based on an assumed initial public offering price of $        per share, which is the midpoint of the price range set forth on the cover page of this prospectus, which notes will be convertible at the option of the holders thereof following the completion of this offering; and

 

                shares of common stock reserved for future issuance under our equity-based compensation plans, consisting of 1,419,954 shares of common stock reserved for issuance under our 2012 Equity Incentive Plan as of December 31, 2015,            shares of common stock reserved for issuance under our 2016 Equity Incentive Plan and            shares of common stock reserved for issuance under our 2016 Employee Stock Purchase Plan, and excluding shares that become available under the 2016 Equity Incentive Plan and 2016 Employee Stock Purchase Plan pursuant to provisions of these plans that automatically increase the share reserves each year, as more fully described in “Executive Compensation—Employee Benefit Plans.”

 

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LETTER FROM OUR CHIEF FINANCIAL OFFICER

The best way for you to understand Bloom Energy is to think of us as a technology company that sells a product that sits on our customers’ sites to meet their electric power needs, whether it is reliability, resiliency, sustainability, cost savings and/or cost predictability. In addition, our customers are able to purchase service contracts for ongoing operations and maintenance, which creates an attractive services business model opportunity. Similar to the Moore’s law for semiconductor technology companies, our product has consistently improved in performance and efficiency at a rapid pace since we rolled out our first generation product in 2008. Simply put, we are a unique company in the electric power sector and our business model is very different from other energy companies, including solar panel makers or project finance companies.

We sell our products using various models to suit our customers’ needs. The sale typically includes our product—the Bloom Energy Server, installation, and ongoing operations and maintenance service or “service”. We are generally able to offer competitive pricing versus the grid in our target markets. We measure performance in these three parts of our business:

 

    Product;

 

    Installation; and

 

    Service.

The simplest way to think about our business model is we get paid upfront for the sale of product and installation. Separately, we also get paid for services when the warranty period expires at the end of first year, at which time our customers enter into an annual service contract with us. On a portfolio basis, this mix typically is comprised of approximately 85% for the product and approximately 15% for installation. Separately, we expect to generate significant additional maintenance and services fees over the period during which our products are in service with our customers.

On product, our strategy is to continuously drive down the cost to manufacture our systems. However, we are in a unique position where the pricing for our customers from the electricity grid, our primary competitor, has actually been steadily rising. In our current target markets, this dynamic gives us an opportunity to improve profitability as these cost savings generally fall through to the bottom line. Additionally, our lower system costs allow us to expand into new markets. These additional opportunities help us to drive operating leverage.

Our strategy with respect to our installations is pretty simple – we want to break even and continuously drive down our installation cost – why? Because lower installation cost should translate to higher revenue and margin for our product business. Installation costs vary from site to site and are dependent on customization required for a given customer set-up and size of an installation. Our goal is to be margin neutral on installation on a portfolio basis.

Now, let us focus on our strategy pertaining to service. In the early days of Bloom Energy’s commercial shipments, we recognized that we needed a statistically meaningful “field installed base” and real time data from those installations to understand performance of our Energy Servers in real world conditions and use that learning to improve reliability and robustness in our systems. It was also necessary learning to drive innovation and performance improvements in our entire value chain. For this reason, we installed Energy Servers that had a lifespan below break-even, relative to service revenue versus service cost. We made an informed judgment call that this strategy was the best way to be a market pioneer and leader and had utmost confidence in our extremely capable engineering team to extend the product life to achieve positive margins in service. We incorporated the costs of this strategy in our business plans.

 

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The large losses in service, particularly during the period between 2013 and 2015, were the price we were willing to pay for this strategy. Towards the end of 2015 through the first few months of 2016, we have seen progress in service financial performance driven by two primary events:

 

    “time to stack replacement” primarily driven by our fuel cell stack lives - in the early years were 12 to 18 months, and today we are seeing initial field data suggesting 4 years on average, and

 

    the cost to refurbish (which include our fuel cell stacks) is coming down . . . since 2014, we have driven this cost down by approximately 25%.

At today’s costs, we believe we can achieve break even in our service business provided the time between stack replacement across all of our fleet is at four years or better. Longer term, like many companies with a service business, our strategy is to make our service business a profitable part of our overall business, with a predictable recurring annual revenue stream.

A key metric that we monitor is our year-end backlog. We book an order at the time of contract signing and at that time the order is recorded in our backlog. On a quarter-to-quarter basis, booked orders tend to be lumpy. For example, a big box retailer might place an order for hundreds of stores at one time. However, the Energy Server deployments (installations, translating to revenue) might span nine to 12 months from the time the order is booked. It takes us only about two months to manufacture, install and commission the system, which we define as bringing the system to full power. This generally allows us well over six months to diligence, design, permit and construct the infrastructure necessary to deploy our systems. As we build sufficient scale and backlog, we would expect that our revenue will become smoother and more predictable, despite lumpy orders booked. An order is generally recognized as revenue at the time of commissioning the system, which we refer to as “acceptance.” The product sales price and installation price is set for each system at the time of the contracted order. Since we know the system configuration for each site, we can determine with a high level of confidence our product costs, and thus product margins associated with that order.

Internally, we use 100 kilowatts of rated power from an Energy Server as our base unit of measure. We call this a “system.” Our installation size varies from a few hundred kilowatts to several megawatts at a site. The use of a 100 kilowatt system concept helps to convey the volume of product we manufacture and accept in a very simple way. For example, if in a particular quarter we plan to install our Energy Servers in several sites and the cumulative rated power of all these installations is 20 megawatts, we would refer to this as 200 systems (200 systems times 100 kilowatts equals 20,000 kilowatts or 20 megawatts).

Now, let me discuss revenue recognition and the non-GAAP financial measures we use. At Bloom, we offer several purchase options supported by a variety of financing models to sell our Energy Servers. This is consistent with our philosophy of customizing our energy solution to meet our customer needs in all aspects of our business. In general, we sell our Energy Servers to customers through a direct sale, through a lease, or through one of our Bloom Electrons financing programs (where the customer pays based on the energy delivered). For some customers we sell our Energy Servers through a combination of these financing models. Under GAAP accounting, our product revenue recognition varies from either being recognized ratably over the contract term for some financing models versus all up front at the time of acceptance for others. Because of this variability, we believe a useful way to understand the performance of our business is through our non-GAAP financial measures where we are consistent in the way we recognize revenue. We recognize the product and installation portion of total non-GAAP revenue upfront at the time of acceptance of the Energy Server. We monitor, operate and maintain the Energy Servers for our customers and collect a fee for this service. We call this “service revenue.” We generally recognize service revenue ratably over each contract year.

Generally, under any of the financing models we sell under, we receive a certain amount of the sales price in advance payments to help us offset working capital requirements. This may include upfront deposits and/or advanced payments prior to manufacturing and site construction. This improves our working capital position and our overall cash cycle days.

 

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In summary, we think of ourselves as a product company that is a technology innovator focused on providing energy solutions in developed economies, where customers want a reliable, resilient, sustainable energy solution with predictable economics. In the future, our goal is to offer this same energy solution in emerging economies where power infrastructure today is inadequate or non-existent.

 

 

Randy Furr
Chief Financial Officer

 

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SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated statements of operations data for the years ended December 31, 2014 and 2015 and the consolidated balance sheet data as of December 31, 2014 and 2015 are derived from our audited consolidated financial statements included elsewhere in this prospectus. You should read the following selected consolidated financial data below in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements, related notes and other financial information included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results to be expected in the future. The selected consolidated financial data in this section are not intended to replace the consolidated financial statements and are qualified in their entirety by the consolidated financial statements and related notes included elsewhere in this prospectus.

Please see the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Operating Metrics” for information regarding how we define our system acceptances and total megawatts deployed, and the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Measures” for information regarding how we define non-GAAP total revenue, non-GAAP gross profit (loss) and non-GAAP loss from operations and the limitations of those metrics.

 

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     Years Ended
December 31,
 
     2014     2015  
     (in thousands, except
operating metrics and per
share data)
 

Consolidated statements of operations data:

    

Revenue

    

Product

   $ 174,450      $ 122,441   

Service

     26,437        36,944   

Electricity

     47,253        55,311   
  

 

 

   

 

 

 

Subtotal

     248,140        214,696   

PPA I decommissioning

     —          (41,807
  

 

 

   

 

 

 

Total revenue

     248,140        172,889   

Cost of revenue

    

Product

     231,800        187,731   

Service

     105,657        135,470   

Electricity

     24,305        31,372   
  

 

 

   

 

 

 

Total cost of revenue

     361,762        354,573   
  

 

 

   

 

 

 

Gross profit (loss)

     (113,622     (181,684
  

 

 

   

 

 

 

Operating expenses

    

Research and development

     53,001        43,933   

Sales and marketing

     16,434        19,543   

General and administrative

     50,573        58,976   
  

 

 

   

 

 

 

Total operating expenses

     120,008        122,452   
  

 

 

   

 

 

 

Loss from operations

     (233,630     (304,136

Interest expense

     (21,606     (40,633

Other expense, net

     (4,350     (2,891

Gain (loss) on revaluation of warrant liabilities

     (1,825     2,686   
  

 

 

   

 

 

 

Loss before income taxes

     (261,411     (344,974

Income tax provision

     574        707   
  

 

 

   

 

 

 

Net loss

     (261,985     (345,681

Net loss attributable to noncontrolling interest and redeemable noncontrolling interests

     (44,369     (4,678
  

 

 

   

 

 

 

Net loss attributable to common stockholders

   $ (217,616   $ (341,003
  

 

 

   

 

 

 

Net loss per share attributable to common stockholders, basic and diluted

   $ (15.45   $ (23.34
  

 

 

   

 

 

 

Weighted average shares used to compute net loss per share attributable to common stockholders, basic and diluted

     14,088        14,611   
  

 

 

   

 

 

 

Pro forma net loss per share attributable to common stockholders, basic and diluted

     $ (2.61
    

 

 

 

Pro forma weighted average shares used to compute pro forma net loss per share attributable to common stockholders, basic and diluted

       130,554   
    

 

 

 

Key operating metrics:

    

Acceptances during the period (in 100 kilowatt systems)

     351        349   

Total megawatts deployed as of the year ended

     152        187   

 

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     As of December 31,  
     2014      2015  
     (in thousands)  

Consolidated balance sheet data:

     

Cash and cash equivalents

   $ 107,028       $ 135,030   

Working capital

     212,728         169,028   

Total assets

     926,908         944,501   

Non-recourse PPA entity debt

     284,943         330,403   

Recourse debt

     183,935         309,579   

Total liabilities

     759,622         1,038,652   

Convertible redeemable preferred stock

     1,456,931         1,459,506   

Stockholders’ deficit

     (1,367,380      (1,686,784

Non-GAAP financial measures

     
     Years Ended December 31,  
     2014      2015  
     (in thousands)  

Non-GAAP total revenue

     

Product

   $ 282,305       $ 279,060   

Installation

     27,216         48,297   

Service

     33,812         56,697   
  

 

 

    

 

 

 

Total Non-GAAP revenue

   $ 343,333       $ 384,054   
  

 

 

    

 

 

 
     Years Ended December 31,  
     2014      2015  
     (in thousands)  

Non-GAAP gross profit (loss)

     

Product

   $ 14,053       $ 22,793   

Installation

     (5,277      (8,787

Service

     (71,460      (78,268
  

 

 

    

 

 

 

Total Non-GAAP gross profit (loss)

   $ (62,684    $ (64,262
  

 

 

    

 

 

 
     Years Ended December 31,  
     2014      2015  
     (in thousands)  

Non-GAAP loss from operations

   $ (159,278    $ (159,303
  

 

 

    

 

 

 

GAAP to Non-GAAP Revenue Reconciliation Methodology

We believe certain non-GAAP financial measures provide additional useful information to measure the performance of our business. For GAAP reporting, revenue recognition is impacted by the financing model a customer uses to procure Bloom Energy Servers. Generally, GAAP requires revenue to be recognized over the contract period of the PPAs and other certain lease arrangements. From an operational standpoint, procurement of materials, production, and installation of systems is not dependent on the financing model. Among other items, our non-GAAP financial measures remove the revenue timing elements required by GAAP accounting to reflect the operational pace of the business.

In addition to the revenue timing noted above, we manage our business by measuring three non-GAAP components of non-GAAP revenue: product, installation and service. GAAP revenue accounting tracks three revenue components, as well: product, electricity and service. These revenue components do not align due to the

 

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revenue recognition accounting required for the PPAs under our Bloom Electrons program, which results in electricity revenue that is recognized ratably over the contract term.

In order to derive total non-GAAP revenue from GAAP revenue, we make two primary adjustments. The principal adjustment is related to timing of revenue recognition. To calculate non-GAAP revenue, we adjust GAAP revenue to recognize revenue related to product and installation at the time of system acceptance. This in effect recognizes non-GAAP product and installation revenue up front that would otherwise have been recognized ratably over the life of a PPA contract as electricity revenue under GAAP. A second adjustment is to match product and service revenue to the amounts specified in customer contracts as opposed to the fair value allocation required by GAAP, which could have the effect of increasing the amount of non-GAAP product revenue recognized on acceptance of an Energy Server and decreasing the amount of non-GAAP service revenue recognized in later years upon renewal of the operations and maintenance services agreements.

We also adjust the components of GAAP revenue by first reclassifying electricity revenue to either service or product revenue and then reclassifying certain product revenue to installation revenue. Non-GAAP product and installation revenue are recognized at acceptance and non-GAAP service revenue is recognized over the service period.

Please see the section titled “Management Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Measures” for information regarding how we define non-GAAP total revenue, non-GAAP gross profit (loss) and non-GAAP loss from operations and the limitations of those measures.

 

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Reconciliation of Non-GAAP Measures

GAAP to Non-GAAP Revenue Reconciliation

 

    GAAP
Revenue
    Adjustment
for Ratable
Revenue at
Acceptance(1)
    Adjustment to
Contracted
Amounts(2)
    Interbusiness Allocation(3)     Total Revenue
Adjustment
    Non-GAAP
Revenue
 

Year Ended December 31, 2015

        Installation
Revenue
    Electricity
Revenue
     
    (in thousands)  

Revenue

             

Product

  $ 122,441      $ 169,263      $ 11,802      $ (48,297   $ 23,851      $ 156,619      $ 279,060   

Installation

    —          —          —          48,297        —          48,297        48,297   

Service

    36,944        —          (756     —          20,509        19,753        56,697   

Electricity

    55,311        (10,951     —          —          (44,360     (55,311     —     

PPA I decommissioning(4)

    (41,807     —          —          —          —          41,807        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 172,889      $ 158,312      $ 11,046      $ —        $ —        $ 211,165      $ 384,054   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
                                           

Year Ended December 31, 2014

                         
       

Revenue

             

Product

  $ 174,450      $ 77,435      $ 25,510      $ (27,216   $ 32,126      $ 107,855      $ 282,305   

Installation

    —          —          —          27,216        —          27,216        27,216   

Service

    26,437        —          (126     —          7,501        7,375        33,812   

Electricity

    47,253        (7,626     —          —          (39,627     (47,253     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 248,140      $ 69,809      $ 25,384      $ —        $ —        $ 95,193      $ 343,333   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) This adjustment is to recognize revenue at the time of acceptance. We first add to GAAP revenue the portion of product revenue that would otherwise be recognized ratably over the life of the contract (10 to 21 years) for sales made through our Bloom Electrons Program and certain lease financing arrangements. We then deduct amounts we previously recognized as non-GAAP product revenue from electricity revenue.
(2) This adjustment is made to record as non-GAAP product and non-GAAP service revenue, the amounts specified in our contracts with the individual customer. Under GAAP, for certain contracts where product revenue is recognized up-front at acceptance, an allocation is made in accordance with ASC 605-25 from product revenue to service revenue, which is recognized ratably over the life of the service contract. Compared to the customer contract, this GAAP allocation reduces the amount of up-front product revenue and increases the amount of ratable service revenue that would be recognized in future periods. The adjustment in this column removes the impact of this allocation, aligning the non-GAAP product revenue and non-GAAP service revenue with the contracted amounts.
(3) This adjustment to the components of GAAP revenue reclassifies certain product revenue to installation revenue that is bundled in product revenue for GAAP and reclassifies electricity revenue to either service or product revenue.
(4) This adjustment removes the impact of the PPA I decommissioning program (see Note 14, PPA I Decommissioning, to our consolidated financial statements included in this prospectus).

 

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GAAP to Non-GAAP Gross Profit (Loss) Reconciliation

 

    GAAP
Gross
Profit
    Total
Revenue
Adjustment(1)
    Adjustments
for Ratable
Costs at
Acceptance(2)
    Stock-Based
Comp and
Other One
Time Item
    Interbusiness Allocation(3)     Non-GAAP
Gross
Profit
 

Year Ended December 31, 2015

          Installation
Costs
    Electricity
Costs
   
    (in thousands)  

Gross profit

             

Product

  $ (65,290   $ 156,619      $ (127,190   $ 11,173      $ 57,573      $ (10,092   $ 22,793   

Installation

    —          48,297        —          489        (57,573     —          (8,787

Service

    (98,526     19,753        —          505        —          —          (78,268

Electricity

    23,939        (55,311     21,280        —          —          10,092        —     

PPA I decommissioning(4)

    (41,807     41,807        —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total gross profit (loss)

  $ (181,684   $ 211,165      $ (105,910   $ 12,167      $ —        $ —        $ (64,262
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Year Ended December 31, 2014

                                         

Gross profit

             

Product

  $ (57,350   $ 107,855      $ (61,923   $ 4,387      $ 32,854      $ (11,770   $ 14,053   

Installation

    —          27,216        —          361        (32,854     —          (5,277

Service

    (79,220     7,375        —          385        —          —          (71,460

Electricity

    22,948        (47,253     12,535        —          —          11,770        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total gross profit (loss)

  $ (113,622   $ 95,193      $ (49,388   $ 5,133      $ —        $ —        $ (62,684
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)  See “—GAAP to Non-GAAP Revenue Reconciliation” above.
(2)  This adjustment matches non-GAAP cost of product revenue with non-GAAP product revenue recognized at time of acceptance. We then adjust electricity cost of revenue to match the electricity revenue adjustment.
(3)  This adjustment matches the installation and electricity cost of revenue with the installation and electricity interbusiness revenue reclassification.
(4)  This adjustment removes the impact of the PPA I decommissioning program (see Note 14, PPA I Decommissioning, to our consolidated financial statements included in this prospectus).

GAAP to Non-GAAP Loss from Operations Reconciliation

 

     Years Ended December 31,  
     2014     2015  
     (in thousands)  

GAAP loss from operations

   $ (233,630   $ (304,136

Total Revenue Adjustment

     95,193        211,165   

Total Cost of Revenue Adjustment

     (44,255     (93,743

Stock-based compensation

     13,112        15,374   

PPA entity set up costs and other one-time legal expenses

     10,302        12,037   
  

 

 

   

 

 

 

Non-GAAP loss from operations

   $ (159,278   $ (159,303
  

 

 

   

 

 

 

For a further description of these non-GAAP measures and their limitations, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Measures.”

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes to those statements included elsewhere in this prospectus. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. 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” and elsewhere in this prospectus.

Overview

We provide an advanced distributed electric power generation solution, based 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. Our solution, the Bloom Energy Server, is an on-site stationary power generation platform, capable of delivering uninterrupted, 24x7 base load power that is fault tolerant, resilient and clean. We currently primarily target commercial and industrial customers. Our most significant deployment milestones to date include:

 

    Our first commercial deployment: 400 kilowatt deployment for a major internet company in August 2008;

 

    Our first deployment under a PPA financing: Completion of the first deployment in October 2010 that was financed pursuant to a PPA;

 

    The largest commercial customer deployment of fuel cell technology in the United States: 10 megawatt deployment at a major consumer technology company’s data center completed in December 2012;

 

    The first large scale deployment of fuel cell technology to provide mission critical, primary power to a data center, without traditional backup power from diesel generators, batteries and UPS systems: 9.8 megawatt deployment in Utah in two phases completed in September 2013 and March 2015;

 

    The largest utility scale deployment of fuel cell technology in the United States: 30 megawatt deployment in Delaware for Delmarva Power completed in November 2013;

 

    The first international deployments: First site deployed in Japan to provide uninterruptible power completed in June 2013; first site expected to be deployed in India in the second quarter of 2016; and

 

    Major cumulative deployment milestones: Cumulative deployment of 50 megawatts by September 2012, cumulative deployment of 100 megawatts by September 2013 and 187 megawatts as of December 31, 2015.

We market and sell our Energy Servers primarily through our direct sales organization in the United States. Recognizing that deploying our solutions requires a material financial commitment from our customers, we typically seek to engage customers that have the financial capability to either purchase our Energy Servers directly or arrange creditworthy counterparties to financing agreements. Our typical target customer has 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. Given that our customers are typically large institutions with multi-level decision making processes, we generally experience a lengthy sales process.

We serve a diverse set of customers across a wide range of industry verticals, including big box retail and grocery stores, high-tech campuses, telecommunication towers and large-scale data centers. Our Energy Servers are deployed at customer sites across 10 states in the United States, as well as in India and Japan. Our customer base included 24 of the Fortune 100 companies as of December 31, 2015. We believe that we are currently

 

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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.

On a GAAP basis, total revenue from eBay, Inc. represented 14% of our total revenue in 2015. In 2014, total revenue from Apple, Inc. represented 27% of our total revenue. To date, substantially all of our revenue has been derived from customers based in the United States. However, we have started to increase our sales efforts outside of the United States, with initial customer installations in India and Japan.

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 December 31, 2015, we had deployed 1,872 of such systems, which is equivalent to 187 total megawatts.

We manufacture our Energy Servers at our facilities in California and Delaware. Due to the intensive manufacturing process necessary to build our systems, a significant portion of our manufacturing costs are fixed. We obtain our materials and components through 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. As we have commercialized and introduced successive generations of our Energy Servers, we have been focused on reducing their production costs. Our product costs per system manufactured have generally declined since delivering our first commercial product. These cost declines are the result of continuous improvements and increased automation in our manufacturing processes as well as our ability to reduce the costs of our materials and components, allowing us to gain greater economies of scale with our growth.

We believe we have made significant improvements in our efficiency and the quality of our products. Our success depends in part on our ability to increase our products’ useful life, which would significantly reduce our cost of services to maintain the Energy Servers over time.

Purchase Options

Our customers may choose to purchase our Energy Servers outright or may choose to lease them through one of our financing partners as a traditional lease or a sale-leaseback sublease arrangement, which we refer to as managed services. Our customers may also purchase electricity through Bloom Electrons, our PPA financing program. Depending on the financing arrangement, either our customers or the financing provider may utilize investment tax credits and other government incentives.

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. Payment for the purchase of our product 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 for 24 hours, unless as otherwise agreed with the customer. 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.

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.

 

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Under the traditional lease arrangement, the customer enters into a lease directly with a financing partner, which pays us for the Energy Servers. We recognize product revenue upon acceptance. After the initial 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.

Under managed services, we initially enter into a master lease with the financing partner, which holds title to the Energy Server. Once a customer is identified, we enter into an additional operating lease with the financing partner and a service agreement with the customer. 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 operating lease payments to the financing partner. Under the service agreement with the customer, there are two payment components: 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.

The timing of the product-related cash flows to Bloom is generally consistent across all the above financing options, whether direct purchase arrangements, leases or managed services.

We provide certain warranties and performance guarantees regarding the Energy Servers’ efficiency and output under all of our financing arrangements. Under direct purchase and traditional lease options, the warranty and guarantee is included in the price of the Energy Server for the first year. The warranty and guarantee 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 20 years. Historically, our customers have almost always exercised their option to renew under these operations and maintenance services agreements. Under the managed services program, the operations and maintenance performance guarantees are included in the price of the Energy Server for a fixed period of 10 years, which may be extended at the option of the parties for up to an additional 10 years with all payments made annually.

Our capacity to offer our Energy Servers through any 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 offerings for our customers. Additionally, the managed services option is limited by the creditworthiness of the customer and, as with all leases, the customer’s willingness to commit to making fixed payments regardless of the output of the system.

 

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Bloom Electrons Financing Program

 

LOGO

In 2010, we began offering our Energy Servers through Bloom Electrons, our PPA financing program. This program is financed via special purpose investment entities (PPA entities), which are majority-owned by third-party investors and by us as a minority investor. 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 power generated by the Energy Server at a specified rate per kilowatt hour for a specified term, which can range from 10 to 21 years. As with our purchase and leasing arrangements, the first year warranty and guarantees are included in the price of the product to the PPA entity. The PPA entity typically enters into an operations and maintenance services agreement with us following the first year of service to extend the warranty services and performance guarantees. This service agreement is renewed and paid for on an annual basis by the PPA entity.

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 each 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 purchasing an Energy Server from us.

Under our PPA financing arrangements, we and our PPA tax equity investors contribute funds into a limited liability company, which is treated as a partnership for U.S. federal income tax purposes, and which owns the operating entity that acquires Energy Servers. This operating entity then contracts with us to operate and service the Energy Servers. The operating entity sells the electricity produced to the end customers under power purchase agreements, or PPAs. Any debt incurred by the PPA entities is non-recourse to us. Cash generated by the electricity sales, as well as from any applicable government incentive programs, is used to pay operating

 

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expenses of the operating entity (including the operations and maintenance services we provide) and to service the non-recourse debt, with the remaining cash flows distributed to the PPA investors. The PPA tax equity investors receive substantially all of the value attributable to the long-term recurring customer payments, investment tax credits, accelerated tax depreciation and, in some cases, other incentives until the PPA tax equity investors receive their contractual rate of return. In some cases, after the PPA tax equity investors receive their contractual rate of return, we expect to receive substantially all of the remaining value attributable to the long-term recurring customer payments and the other incentives. As of December 31, 2015, none of our customers under our PPAs have defaulted on their payment obligations.

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 investors from U.S. Treasury Department 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 Department grants as a reduction to depreciation of the associated Energy Servers over the term of the PPA.

We have determined that we are the primary beneficiary in these investment entities. 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 investors’ share of the net assets of the investment entities as noncontrolling interests in subsidiaries in our consolidated balance sheet. We recognize the amounts that are contractually payable to these investors in each period as distributions to noncontrolling interests in our consolidated statements of convertible redeemable preferred stock and equity. Our consolidated statements of cash flows reflect cash received from these investors as proceeds from investments by noncontrolling interests in subsidiaries. Our consolidated statements of cash flows also reflect cash paid to these investors as distributions paid to noncontrolling interests in subsidiaries. We reflect any unpaid distributions to these investors as distributions payable to noncontrolling interests in subsidiaries on our consolidated balance sheets.

We have established six different PPA entities to date. Four PPA entities have utilized their entire available financing capacity. We expect the remaining two PPA entities to complete their purchases of Energy Servers during 2016.

Through our Bloom Electrons financing program, a total of approximately $760.9 million in financing has been funded through December 31, 2015, including approximately $385.7 million in equity investments and an additional $375.2 million in non-recourse debt to support an aggregate deployment of approximately 87 megawatts of Energy Servers as of December 31, 2015. 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.

For further information about our PPA entities, see Note 13, Power Purchase Agreement Programs, to our consolidated financial statements included in this prospectus.

Factors Affecting Our Future Performance

Delivery and Installation of Our Product

The timing of delivery and installations of our products have a significant impact on the timing of the recognition of product revenue. Many factors can cause a lag between the time that a customer signs a purchase order and our recognition of product revenue. These factors include the number of Energy Servers installed per site, local permitting and utility requirements, environmental, health and safety requirements, weather and customer facility construction schedules. Many of these factors are unpredictable and their resolution is often outside of our or our customers’ control. Customers may also ask us to delay an installation for reasons unrelated

 

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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.

Our product sales backlog was $662.8 million, equivalent to 879 systems, or 87.9 megawatts, as of December 31, 2015. We define product sales backlog as signed customer product sales orders received prior to the period end, but not yet accepted.

Cost to Service Our Energy Servers

We generally offer our 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. 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 certain of their components, particularly the fuel cell stacks. 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 or refund their cost to the customer, or require us to make cash payments to the customer based on actual performance, as compared to expected performance, capped at a percentage of the relevant equipment purchase prices.

Availability of Capital and Investments for Power Purchase Agreements

We rely on access to equity and debt financing to provide attractively-priced financing for our customers. Our future success depends on our and our customers’ ability to raise capital from third parties on competitive terms to help finance the deployment of our systems. It is therefore possible that the amounts investors are willing to invest in the future would not be enough to support customer demand or could decrease from current levels, or we may be required to provide a larger allocation of customer payments to investors in any future PPA structures as a result of changes in the financing markets.

Government Incentives and Regulation

Our cost of capital, the price we can charge for electricity, the cost of our systems and the demand for particular types of energy generation are impacted by a number of federal, state and local government incentives and regulations. These include tax credits, particularly the federal ITC, tax abatements, and state incentive programs. These programs have been challenged from time to time by utilities, governmental authorities and others. The ITC is currently scheduled to expire on December 31, 2016. Other incentives may also decrease in the future. A reduction in such incentives could make our products less attractive relative to other alternatives and could adversely affect our results of operations, cost of capital and growth prospects.

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, competition with utilities, and the interconnection of customer-owned electricity generation. In the United States, governments continuously modify these statutes and regulations. Governments, often acting through state utility or public service commissions, change and adopt different rates for commercial customers on a regular basis. These changes can have a positive or negative impact on our ability to deliver cost savings to customers for the purchase of electricity.

 

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Value Proposition in Current and New Markets

Our customers purchase our products to generate electricity. We expect that changes in the prices of our Energy Servers, grid electricity and natural gas, will significantly affect demand for our product. We have sold our Energy Servers to customers across 10 states in the United States, as well as in Japan and India. We have focused on these states, and the two international markets we have entered, because the utility-generated energy prices, regulatory policies and/or government incentives in these locations have provided the most compelling markets for distributed fuel cell energy. We believe that these markets remain significantly underpenetrated, and we intend to further penetrate these markets by investing, marketing and expanding our reach within these regions. We also plan to expand into additional states and international markets where we believe we can offer our Energy Servers at attractive prices to customers relative to local grid electricity and where natural gas is readily available at attractive prices. Our ability to be successful in these markets will largely depend on the level of grid prices in such markets.

Key Operating Metrics

We monitor several key operating metrics, including those set forth below, to help us evaluate growth trends, measure the effectiveness of our sales and marketing efforts, and assess operational efficiencies.

 

     Years Ended December 31,  
     2014      2015  

Acceptances during the period (in 100 kilowatt systems)

     351         349   

Total megawatts deployed as of the year ended

     152         187   

Acceptances During the Period. We deem an acceptance to occur when our Energy Servers sold have been installed and running at full power for 24 hours, unless we have an agreement with the customer defining acceptance differently. We measure each system manufactured, shipped and accepted in terms of 100 kilowatt equivalents.

Total Megawatts Deployed. We measure the electricity-generating capacity of our deployed Energy Servers in megawatt capacity. Megawatt capacity is the expected maximum output an Energy Server can produce (i.e., the nameplate capacity). Total megawatts deployed represent the aggregate megawatt capacity of operating Energy Servers in the field on a given date. Actual production may be less or more than the megawatt capacity assigned to a particular Energy Server. We believe total megawatts deployed is indicative of the growth of our business from period to period.

Components of GAAP Results of Operations

Revenue

We primarily recognize revenue from the sale and installation of Energy Servers and by providing services under operations and maintenance services contracts.

Our total revenue is comprised of the following:

Product Revenue

All of our product revenue is generated from the sale and installation of our Energy Servers to direct purchase and lease customers. We generally begin to recognize product revenue from contracts with customers for the sales of our Energy Servers once we achieve acceptance; that is, generally when the system has been installed and running at full power for 24 hours.

Our product offerings contain multiple elements representing a combination of revenue from Energy Servers, installation and operations and maintenance services. Upon acceptance, we allocate fair value to each of

 

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these elements, and we limit the amount of revenue recognized for delivered elements to an amount that is not contingent upon future delivery of additional products or services or meeting any specified performance conditions.

The amount of product revenue we recognize in a given period is materially dependent on the volume and size of installations of our Energy Servers in a given period and on the type of financing used by the customer. As an example, our total revenue on a GAAP basis was approximately $277.7 million, $248.1 million and $172.9 million in 2013, 2014 and 2015, respectively. These decreases were due in large part to decreases in sales that required revenue recognition up front, as well as sales in 2014 being affected by a lower average sales price as a result of a direct purchase for a large customer site with the installation managed by the customer.

Service Revenue

Service revenue is generated from operations and maintenance services agreements that extend the standard warranty service coverage beyond the initial one-year warranty for Energy Servers sold under direct purchase and lease sales. Customers can renew their operating and maintenance services agreements on an annual basis for up to 20 years, at prices predetermined at the time of purchase of the Energy Server. Revenue is recognized from such operations and maintenance services based on the fair value allocated to such operations and maintenance services under GAAP, ratably over the renewed one-year service period. 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.

PPA I Decommissioning

During 2015, we recorded a reduction in product revenue totaling $41.8 million for the decommissioning of our PPA I Energy Servers.

Our PPA I sales arrangements qualified as sales-type leases, and therefore, product revenue was recognized upfront at acceptance and a customer financing receivable was recorded on the balance sheet. The product revenue related to these arrangements was recognized during the period from 2010 through 2012. To date, we have incurred significant costs to service and maintain these first and second generation Energy Servers deployed in these arrangements which are still in service. Our new generation Energy Servers being deployed have longer lives with lower service and maintenance costs than the earlier generation Energy Servers. In an effort to minimize the financial effect of these service costs in future periods from these legacy systems, in December 2015, we agreed to a PPA I fleet decommissioning program with our tax equity investor whereby we would seek to renegotiate our existing PPA arrangements and purchase the tax equity investor’s interest in PPA I.

In the quarter ending March 31, 2016, we issued an additional $25.0 million of our 5% Notes for the purchase of such tax equity investor’s interest. Since the decommissioning impacts existing customers, we have and will continue to convert these existing customers from a PPA I sales arrangement to either a new Bloom Electrons agreement or another lease arrangement and will install a newer generation Energy Server. A significant portion of our non-GAAP product and installation revenue in the quarter ended December 31, 2015 was attributable to new contracts replacing agreements that were terminated in connection with our PPA I decommissioning program. As the original sale was recognized as product revenue upfront under the assumption that the lease payments were non-cancellable, we recorded the related decommissioning charge as a reduction in product revenue on the consolidated statement of operations and a related asset impairment charge of $31.8 million related to the customer financing receivable as this receivable will not be collectible.

 

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Additionally, for PPA I, our policy is that cash grants received under the American Recovery and Reinvestment Act of 2009 (ARRA) are treated as a revenue when received. Charges for estimated future cash expenditures were recorded in December 2015 for the estimated loss of $10.0 million related to estimated reimbursements of such cash grants received due to certain recapture provisions under the grant program. The decommissioning program is expected to be completed by the fourth quarter of 2016.

Cost of Revenue

Our total cost of revenue consists of cost of product revenue, cost of service revenue and cost of electricity revenue. It also includes personnel costs associated with our operations and global customer support organizations consisting of salaries, benefits, bonuses, stock-based compensation and facility level depreciation allocated based on headcount.

Cost of Product Revenue

Cost of product revenue consists of costs of Energy Servers that we sell to direct and lease customers, including costs of materials, personnel costs, certain allocated costs, shipping costs, provisions for excess and obsolete inventory, and the depreciation costs of our equipment. Because the sale of our Energy Servers includes a one-year warranty, cost of product revenue also includes first year warranty costs. We provide certain warranties and performance guarantees regarding the Energy Servers’ efficiency and output during the first year warranty period. 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. On a per unit basis, which we measure in dollars-per-kilowatt, we have reduced our material costs by over 75% from the inception of our first generation Energy Server to our current generation Energy Server. Material costs per unit came down by more than 50% over the life of our first generation system and by over 40% over the life of our second generation system. With each successive new generation, we have been able to reduce the material costs compared to the prior generation’s material costs: Our second generation had material costs at the start of production that were approximately 60% lower per kilowatt than our first generation and our third generation had material costs at the start of production that were more than 35% lower per kilowatt than our second generation.

Cost of Service Revenue

Cost of service revenue consists of costs incurred under maintenance service contracts for all customers including direct sales, lease and PPA customers. Such costs include personnel costs for our customer support organization, certain allocated costs, and extended maintenance-related product repair and replacement costs. After the initial included warranty period expires, customers have the opportunity to renew their operations and maintenance services agreements on an annual basis, for up to 20 years, at prices predetermined at the time of purchase of the Energy Server. We expect our cost of service revenue to increase in absolute dollars as our end-customer base of megawatts deployed grows.

Cost of Electricity Revenue

Cost of electricity revenue primarily consists of the depreciation of the cost of 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. The cost of electricity revenue is generally recognized over the term of the customer’s PPA. The cost of depreciation of the Energy Servers is reduced by the amortization of any U.S. Treasury Department 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 systems in the field, the mix of financing options

 

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used, and the mix of revenue between product, service and electricity. We expect 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, although our research and development expense may fluctuate as a percentage of total revenue.

Sales and Marketing

Sales and marketing expense consists primarily of personnel costs, including commission costs. 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 expense to continue to increase in absolute dollars as we increase the size of our sales and marketing organizations and to expand our international presence, although our sales and marketing expense may fluctuate as a percentage of total revenue.

General and Administrative

General and administrative expense consists of personnel costs, as well as fees for professional services. 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, although our general and administrative expense may fluctuate as a percentage of total revenue.

Interest Expense

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 charges to decrease in the near term as a result of pay downs of the debt obligations over the course of the debt arrangements.

Other Expense, Net

Other expense, net primarily consists of gains or losses associated with foreign currency fluctuations, net 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 certain 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. Some of the warrants issued are mandatorily convertible to common stock and subsequent to the completion of this offering, 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 account for income taxes using the

 

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liability method under Financial Accounting Standards Board Accounting Standards Codification Topic 740, “Income Taxes” (ASC 740). Under this method, deferred tax assets and liabilities are determined based on net operating loss carryforwards, research and development credit carryforwards, and temporary differences resulting from the different treatment of items for tax and financial reporting purposes. Deferred items are measured using the enacted tax rates and laws that are expected to be in effect when the differences reverse. Additionally, we must assess the likelihood that deferred tax assets will be recovered as deductions from future taxable income. 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, 2015, we had federal and state net operating loss carryforwards of $1.4 billion and $1.1 billion, respectively, which will expire, if unused, beginning in 2022 and 2016, respectively.

Net Income (Loss) Attributable to Noncontrolling Interests

We determine the net income (loss) attributable to common stockholders 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 entity structure. The determination of equity in earnings under the HLBV method requires management to determine how proceeds upon a hypothetical liquidation of the entity at book value would be allocated between its investors. However, the redeemable noncontrolling interests balance is at least equal to the redemption amount. The noncontrolling interests and redeemable noncontrolling interests balance is presented as a component of permanent equity in the consolidated balance sheets or as temporary equity in the mezzanine section of the consolidated balance sheets as redeemable noncontrolling interests when the third-parties have the right to redeem their interests in the funds for cash or other assets.

For income tax purposes, the tax equity partner, who has committed to invest in the consolidated partnerships, will receive a greater proportion of the share of losses and other income tax benefits. This includes the allocation of investment tax credits, which will be distributed to the tax equity partner and to one of our wholly-owned subsidiaries based on the allocation specified in each respective partnership agreement until the tax equity partner’s targeted rate of return under the partnership agreement is met. For certain entities, after the PPA tax equity investors receive their contractual rate of return, we receive substantially all of the remaining value attributable to the long-term recurring customer payments and the other incentives.

 

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GAAP Results of Operations

The following table sets forth selected consolidated statements of operations data for each of the periods indicated:

 

     Years Ended December 31,  
             2014                     2015          
     (in thousands)   

Consolidated statements of operations data:

    

Revenue

    

Product

   $ 174,450      $ 122,441   

Service

     26,437        36,944   

Electricity

     47,253        55,311   
  

 

 

   

 

 

 

Subtotal

     248,140        214,696   

PPA I decommissioning

     —          (41,807
  

 

 

   

 

 

 

Total revenue

     248,140        172,889   

Cost of revenue

    

Product

     231,800        187,731   

Service

     105,657        135,470   

Electricity

     24,305        31,372   
  

 

 

   

 

 

 

Total cost of revenue

     361,762        354,573   
  

 

 

   

 

 

 

Gross profit (loss)

     (113,622     (181,684
  

 

 

   

 

 

 

Operating expenses

    

Research and development

     53,001        43,933   

Sales and marketing

     16,434        19,543   

General and administrative

     50,573        58,976   
  

 

 

   

 

 

 

Total operating expenses

     120,008        122,452   
  

 

 

   

 

 

 

Loss from operations

     (233,630     (304,136

Interest expense

     (21,606     (40,633

Other expense, net

     (4,350     (2,891

Gain (loss) on revaluation of warrant liabilities

     (1,825     2,686   
  

 

 

   

 

 

 

Loss before income taxes

     (261,411     (344,974

Income tax provision

     574        707   
  

 

 

   

 

 

 

Net loss

     (261,985     (345,681

Net loss attributable to noncontrolling interest and redeemable noncontrolling interests

     (44,369     (4,678
  

 

 

   

 

 

 

Net loss attributable to common stockholders

   $ (217,616   $ (341,003
  

 

 

   

 

 

 

Includes stock-based compensation as follows:

 

     Years Ended
December 31,
 
     2014      2015  
    

(in thousands)

 

Cost of revenue

   $ 5,135       $ 5,525   

Research and development

     3,915         3,804   

Sales and marketing

     2,542         3,298   

General and administrative

     6,655         8,272   
  

 

 

    

 

 

 

Total stock-based compensation

   $ 18,247       $ 20,899   
  

 

 

    

 

 

 

 

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Comparison of the Years Ended December 31, 2014 and 2015

Total Revenue

 

     Years Ended
December 31,
     Change 2015 vs. 2014  
     2014      2015          Amount             %      
     (dollars in thousands)  

Product

   $ 174,450       $ 122,441       $ (52,009     (29.8 )% 

Service

     26,437         36,944         10,507        39.7   

Electricity

     47,253         55,311         8,058        17.1   
  

 

 

    

 

 

    

 

 

   

Subtotal

     248,140         214,696         (33,444     (13.5

PPA I decommissioning

     —           (41,807      (41,807  
  

 

 

    

 

 

    

 

 

   

Total revenue

   $ 248,140       $ 172,889       $ (75,251     (30.3
  

 

 

    

 

 

    

 

 

   

Total revenue decreased approximately $75.3 million, or 30.3% for the year ended December 31, 2015, as compared to the year ended December 31, 2014. In 2015, we recorded a reduction in revenue totaling $41.8 million for the decommissioning of our PPA I program (see Note 14, PPA I Decommissioning), which partially contributed to the overall revenue decline.

Product revenue decreased approximately $93.8 million, or 53.8%, for the year ended December 31, 2015, as compared to the year ended December 31, 2014, which includes the impact of the decommissioning of our PPA I program described above. In addition to the impact of the PPA I decommissioning, this decrease was attributable in part to a higher mix of orders through our Bloom Electrons financing program, where revenue is recognized over the term of the agreement (generally 10 to 21 years) as electricity revenue, compared to direct purchase transactions, where revenue is generally recognized as product revenue on acceptance.

Service revenue increased approximately $10.5 million, or 39.7%, for the year ended December 31, 2015, as compared to the year ended December 31, 2014. This was primarily due to the increase in the number of annual maintenance contract renewals, driven by our expanding customer base and corresponding total megawatts deployed.

Electricity revenue increased approximately $8.1 million, or 17.1% for the year ended December 31, 2015, as compared to the year ended December 31, 2014. This was due to the fact that in 2015, we generated higher sales through our Bloom Electrons financing program, resulting in an increase of total megawatts deployed under the Bloom Electrons program to 86.9 from 71.3 in the prior year.

Total Cost of Revenue and Gross Profit (Loss)

 

     Years Ended
December 31,
     Change 2015 vs. 2014  
     2014     2015          Amount         %  
     (dollars in thousands)  

Cost of revenue:

         

Product

   $ 231,800      $ 187,731       $ (44,069     (19.0 )% 

Service

     105,657        135,470         29,813        28.2   

Electricity

     24,305        31,372         7,067        29.1   
  

 

 

   

 

 

    

 

 

   

Total cost of revenue

     361,762        354,573         (7,189     (2.0
  

 

 

   

 

 

    

 

 

   

Gross profit (loss)

   $ (113,622   $ (181,684    $ (68,062     (59.9
  

 

 

   

 

 

    

 

 

   

Total cost of revenue decreased approximately $7.2 million, or 2.0%, for the year ended December 31, 2015, as compared to the year ended December 31, 2014. This decrease in cost of revenue was primarily

 

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attributable to a higher mix of orders through Bloom Electrons, our PPA financing program, in which cost of revenue is recognized over the term of the agreement (10 to 21 years) as cost of electricity revenue. This decrease was offset by a $29.8 million increase in service cost associated with ongoing operations and maintenance of deployed Energy Servers in the ordinary course of business.

Gross profit decreased $68.1 million, or 59.9%, in the year ended December 31, 2015, as compared to the year ended December 31, 2014. This decrease was a result of lower revenue and higher cost of service revenue as discussed above.

Operating Expenses

 

     Years Ended
December 31,
     Change 2015 vs. 2014  
     2014      2015          Amount         %  
     (dollars in thousands)  

Research and development

   $ 53,001       $ 43,933       $ (9,068     (17.1 )% 

Sales and marketing

     16,434         19,543         3,109        18.9   

General and administrative

     50,573         58,976         8,403        16.6   
  

 

 

    

 

 

    

 

 

   

Total

   $ 120,008       $ 122,452       $ 2,444        2.0   
  

 

 

    

 

 

    

 

 

   

Research and development expenses decreased approximately $9.1 million, or 17.1%, in the year ended December 31, 2015, as compared to the year ended December 31, 2014. This decrease was driven primarily by reductions in prototype materials of $6.4 million, a reduction in depreciation expense of $1.4 million, and $0.9 million in compensation related expense due to lower headcount.

Sales and marketing expenses increased approximately $3.1 million, or 18.9%, in the year ended December 31, 2015, as compared to the year ended December 31, 2014. Sales commissions increased by $1.0 million due to a higher volume of orders placed during the period. Compensation related costs increased $2.1 million from the prior period.

General and administrative expenses increased approximately $8.4 million, or 16.6%, in the year ended December 31, 2015, as compared to the year ended December 31, 2014. The increase in general and administrative expenses was due to an increase in legal related expenses of $3.4 million as we established a new PPA entity during the year, an increase of $1.8 million in insurance expenses, and increases in stock compensation expenses of $1.4 million, offset in part by savings in consulting and depreciation expenses of $1.2 million.

Other Income and Expenses

 

     Years Ended
December 31,
     Change 2015 vs. 2014  
     2014     2015          Amount         %  
     (dollars in thousands)  

Interest expense

   $ (21,606   $ (40,633    $ (19,027     (88.1 )% 

Other expense, net

     (4,350     (2,891      1,459        33.5   

Gain (loss) on revaluation of warrant liabilities

     (1,825     2,686         4,511        247.2   
  

 

 

   

 

 

    

 

 

   

Total

   $ (27,781   $ (40,838    $ (13,057     (47.0
  

 

 

   

 

 

    

 

 

   

Total other expenses increased $13.1 million, or 47.0%, in the year ended December 31, 2015, as compared to the year ended December 31, 2014. This increase was due to interest expense increasing $19.0 million, or

 

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88.1%, in the year ended December 31, 2015, as compared to the year ended December 31, 2014. The increase is consistent with the higher balances of financing obligations and outstanding debt in 2015, compared to the prior year.

This increase was offset by, other expense, net, decreasing $1.5 million, or 33.5%, in the year ended December 31, 2015, as compared to the year ended December 31, 2014. In addition, for the year ended December 31, 2015, we recorded a gain on the revaluation of warrants of $2.7 million. The revaluation related to a change in the value of previously issued warrants.

Provision for Income Taxes

 

     Years Ended December 31,      Change 2015 vs. 2014  
     2014      2015          Amount          %  
     (dollars in thousands)  

Income tax provision

   $ 574       $ 707         $    133         23.2

Income tax expense increased approximately $0.1 million, or 23.2%, in the year ended December 31, 2015, as compared to the year ended December 31, 2014 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.

 

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Quarterly Results of Operations

The following tables set forth selected unaudited quarterly statements of operations data for each of the eight quarters in the two years ended December 31, 2015. The information for each of these quarters has been prepared on the same basis as the audited annual financial statements included elsewhere in this prospectus and, in the opinion of management, includes all adjustments, which includes only normal recurring adjustments, necessary for the fair presentation of the results of operations for these periods in accordance with generally accepted accounting principles in the United States. This data should be read in conjunction with our audited consolidated financial statements and related notes included elsewhere in this prospectus. These quarterly operating results are not necessarily indicative of our operating results for a full year or any future period.

 

    Three Months Ended  
    Mar. 31, 2014     Jun. 30, 2014     Sep. 30, 2014     Dec. 31, 2014     Mar. 31, 2015     Jun. 30, 2015     Sep. 30, 2015     Dec. 31, 2015  
    (in thousands)  

Consolidated statements of operations data:

               

Revenue

               

Product

  $ 22,158      $ 23,945      $ 29,483      $ 98,864      $ 65,246      $ 10,976      $ 4,920      $ 41,299   

Service

    5,437        6,167        6,808        8,025        8,383        9,127        9,217        10,217   

Electricity

    11,830        11,690        11,759        11,974        12,565        13,677        14,264        14,805   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal

    39,425        41,802        48,050        118,863        86,194        33,780        28,401        66,321   

PPA I decommissioning

    —          —          —          —          —          —          —          (41,807
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    39,425        41,802        48,050        118,863        86,194        33,780        28,401        24,514   

Cost of revenue

               

Product

    36,334        49,096        46,433        99,937        79,006        26,086        24,572        58,067   

Service

    15,305        16,726        43,748        29,878        42,829        23,651        35,105        33,885   

Electricity

    3,642        3,606        7,143        9,914        8,496        5,993        9,455        7,428   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

    55,281        69,428        97,324        139,729        130,331        55,730        69,132        99,380   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit (loss)

    (15,856     (27,626     (49,274     (20,866     (44,137     (21,950     (40,731     (74,866
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating Expenses

               

Research and development

    14,101        12,928        13,182        12,790        11,960        10,619        10,961        10,393   

Sales and marketing

    3,698        4,254        4,427        4,055        4,292        5,508        4,859        4,884   

General and administrative

    11,186        11,016        16,413        11,958        11,585        19,827        13,864        13,700   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (44,841     (55,824     (83,296     (49,669     (71,974     (57,904     (70,415     (103,843

Interest expense

    (4,305     (4,845     (5,367     (7,089     (9,406     (8,551     (11,572     (11,104

Other expense, net

    (381     (2,750     (41     (1,178     (2,300     (90     (332     (169

Gain (loss) on revaluation of warrant liabilities

    290        70        68        (2,253     —          2,658        995        (967
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

    (49,237     (63,349     (88,636     60,189        (83,680     (63,887     (81,324     (116,083

Income tax provision

    261        228        264        (179     98        187        204        218   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

    (49,498     (63,577     (88,900     (60,010     (83,778     (64,074     (81,528     (116,301

Net loss attributable to noncontrolling interest and redeemable noncontrolling interests

               
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

               
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Quarterly Revenue Trends

Product revenue can vary quarter to quarter due to changes in the buying behavior of our customers as customers shift to or from Bloom Electrons orders where revenue is recognized over the term of the agreement, as opposed to purchase or lease transactions, where revenue is generally recognized up front. Since we offer these different types of purchase options and the accounting treatment for these options can differ, the timing of revenue recognition quarter by quarter could be impacted by the mix of purchase, lease and Bloom Electrons orders in a particular quarter. Additionally, service revenue and electricity revenue have increased over time due to the continued expansion of our deployed fleet.

In addition, quarterly revenue is likely to fluctuate based on, among other things, the factors discussed under “—Factors Affecting Our Future Performance.” For example, in the quarters ended December 31, 2014 and March 31, 2015, large installations were accepted by customers under direct purchase arrangements, resulting in higher product revenue in those periods.

Quarterly Gross Profit Trends

Quarterly gross profit (loss) fluctuates with total revenue, the level of investment associated with maintaining and upgrading the deployed fleet, and to a lesser extent, the ability to achieve estimated installation cost for new site installations. Quarterly gross profit (loss) exhibited larger losses in the quarters where product revenue was lowest and investments in the deployed fleet are highest.

Quarterly Operating Expenses Trends

Total operating expenses increased year-over-year for all periods presented primarily due to the addition of personnel and the ongoing legal expenses related to deploying new PPA entities. Research and development expense decreased over the year ended December 31, 2015 due to savings in materials and reductions in staffing compared to the year ended December 31, 2014. General and administrative expense were higher in the three months ended June 30, 2015 and the three months ended September 30, 2014, primarily due to the legal costs incurred to set up PPA entities during those periods.

Non-GAAP Financial Measures

To supplement our consolidated financial statements presented in accordance with GAAP, we monitor and consider non-GAAP total revenue, non-GAAP gross profit (loss), and non-GAAP loss from operations, which are non-GAAP financial measures. These measures are not prepared in accordance with GAAP, and should not be considered in isolation from, or as an alternative to, measures prepared in accordance with GAAP. These non-GAAP financial measures are not based on any standardized methodology prescribed by GAAP and are not necessarily comparable to similarly-titled measures presented by other companies.

We use these non-GAAP financial measures to evaluate our operating performance and trends and make planning decisions. We believe that these measures can provide useful supplemental information to help investors better understand underlying trends in our business. Accordingly, we believe these non-GAAP financial measures provide useful information to investors and others in understanding and evaluating our operating results, enhancing the overall understanding of our past performance and future prospects, and allowing for greater transparency with respect to key financial metrics used by our management in its financial and operational decision-making.

There are a number of limitations related to the use of these non-GAAP financial measures. These limitations include:

 

   

non-GAAP total revenue does not reflect the effect of relative selling price allocations between separate units of accounting, as required under GAAP, to ensure fair value is consistently applied

 

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across product, installation and maintenance service fees. Rather, for non-GAAP revenue, the selling price allocations are based on the amounts specified in the customer agreement. This has the effect of increasing the amount of non-GAAP product revenue recognized on acceptance of an Energy Server and decreasing the amount of non-GAAP service revenue recognized in later years;

 

    non-GAAP total revenue and non-GAAP gross profit (loss) record product and installation revenue upon acceptance for transactions that are, in substance, operating leases under GAAP, whereas GAAP would require revenue to be recorded over the contract period;

 

    non-GAAP gross profit (loss) and non-GAAP loss from operations excludes stock-based compensation expense, which has recently been, and will continue to be for the foreseeable future, a significant recurring expense for our business and an important part of our employee compensation strategy;

 

    non-GAAP loss from operations excludes the revaluation of our redeemable convertible preferred stock warrant liability, which was a historical recurring non-cash charge prior to this initial public offering;

 

    non-GAAP total revenue, non-GAAP gross profit (loss) and non-GAAP loss from operations, exclude the impact of the PPA I decommissioning program; and

 

    non-GAAP loss from operations excludes the expense incurred due to the formation of new PPA entities which are one-time in nature for each PPA, but will recur as part of an ongoing sales strategy.

For a reconciliation of our non-GAAP financial measures to measures computed in accordance with GAAP, see “Selected Consolidated Financial Data.”

 

     Years Ended December 31,  
     2014      2015  
     (in thousands)  

Non-GAAP total revenue

     

Product

   $ 282,305       $ 279,060   

Installation

     27,216         48,297   

Service

     33,812         56,697   
  

 

 

    

 

 

 

Total non-GAAP revenue

   $ 343,333       $ 384,054   
  

 

 

    

 

 

 
     Years Ended December 31,  
     2014      2015  
     (in thousands)  

Non-GAAP gross profit (loss)

     

Product

   $ 14,053       $ 22,793   

Installation

     (5,277      (8,787

Service

     (71,460      (78,268
  

 

 

    

 

 

 

Total non-GAAP gross profit (loss)

   $ (62,684    $ (64,262
  

 

 

    

 

 

 
     Years Ended December 31,  
     2014      2015  
     (in thousands)  

Non-GAAP loss from operations

   $ (159,278    $ (159,303
  

 

 

    

 

 

 

Non-GAAP Total Revenue. Non-GAAP total revenue has three components: product, installation and service.

 

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Non-GAAP product revenue is recognized upon acceptance for all systems accepted during a given period, regardless of the financing model. For example, under GAAP, revenue attributable to the value of the Energy Server acquired under our Bloom Electrons program would be recognized over the term of the applicable PPA; however, we recognize non-GAAP product revenue up front at the time of acceptance.

Non-GAAP installation revenue is the contracted value of the installation recognized at the time of acceptance. Under GAAP, installation revenue is recognized either as part of product revenue or electricity revenue, depending on the financing model used.

Non-GAAP service revenue includes all operations and maintenance services agreement renewals, which are recognized ratably over the life of the service contract, which is generally one year.

In addition, we allocate revenue between product, service and installation at the amounts specified in the individual customer agreement. This differs from GAAP, which requires us to allocate fair market value between product, installation and service.

Electricity revenue is not a component of non-GAAP total revenue and is reallocated to product and service, as described above. The portion that is allocated to service is based on the contracted service rate between us and the PPA entity. The portion that is allocated to product and installation represents the net present value of future electricity revenue not attributable to service.

We also exclude from non-GAAP revenue the impact of the PPA I decommissioning program.

The resulting non-GAAP revenue for the years ended December 31, 2013, 2014 and 2015 was $470.6 million, $343.3 million and $384.1 million, respectively. For 2013 non-GAAP revenue, we adjusted 2013 GAAP revenue of $277.7 million by adding to it $196.8 million of non-GAAP revenue, which recognizes such revenue at acceptance that would otherwise be recognized ratably over the life of the contract for sales made through our Bloom Electrons Program and certain lease financing arrangements, less $3.9 million of electricity revenue that would have been previously recognized, to arrive at non-GAAP total revenue of $470.6 million.

We believe non-GAAP total revenue provides useful information regarding the success of our business, as recognizing revenue on acceptance is more consistent with the timing of the product and installation related cash receipts.

Non-GAAP Gross Profit (Loss). Non-GAAP gross profit (loss) includes the non-GAAP revenue for product, installation and service, as described above, and the associated costs for that revenue. We also exclude stock compensation expense and other non-recurring expenses from non-GAAP gross profit (loss).

Non-GAAP Loss from Operations. We define non-GAAP loss from operations as non-GAAP gross profit (loss), as defined above, less operating expenses, excluding stock-based compensation expense, PPA entity set-up costs and other one-time expenses.

Non-GAAP Total Revenue

 

     Years Ended December 31,      Change 2015 vs. 2014  
     2014      2015          Amount              %      
     (dollars in thousands)  

Non-GAAP total revenue

           

Product

   $ 282,305       $ 279,060       $ (3,245      (1.1 )% 

Installation

     27,216         48,297         21,081         77.5   

Service

     33,812         56,697         22,885         67.7   
  

 

 

    

 

 

    

 

 

    

Total non-GAAP revenue

   $ 343,333       $ 384,054       $ 40,721         11.9   
  

 

 

    

 

 

    

 

 

    

 

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Non-GAAP total revenue increased approximately $40.7 million, or 11.9%, for the year ended December 31, 2015, as compared to the year ended December 31, 2014. The increase was primarily attributable to an increase in service revenue driven mainly by the growth of our installed base and the renewal of customer maintenance contracts and higher installation revenue. Installation revenue increased due primarily to an increase in the average installation revenue billed to our customers per site. Average installation revenue per site was driven by a change in mix from generally many servers per single site to fewer servers located per site, as well as a large installation in 2014 which was largely managed by the customer rather than us. Our non-GAAP product revenue was flat in 2015 as we experienced some delays in installing our systems against customer orders. In 2015, we made investments to improve our installation processes and to increase our installation capacity. A significant portion of our non-GAAP product and installation revenue in the quarter ended December 31, 2015 was attributable to new contracts replacing agreements that were terminated in connection with our PPA I decommissioning program.

Non-GAAP Gross Profit (Loss)

 

     Years Ended December 31,     Change 2015 vs. 2014  
           2014                 2015               Amount         %  
     (dollars in thousands)  

Non-GAAP gross profit (loss)

        

Product

   $ 14,053      $ 22,793      $ 8,740        62.2

Installation

     (5,277     (8,787     (3,510     (66.5

Service

     (71,460     (78,268     (6,808     (9.5
  

 

 

   

 

 

   

 

 

   

Total non-GAAP gross profit (loss)

   $ (62,684   $ (64,262   $ (1,578     (2.5
  

 

 

   

 

 

   

 

 

   

Non-GAAP gross profit decreased approximately $1.6 million, or 2.5%, for the year ended December 31, 2015, as compared to the year ended December 31, 2014. We achieved higher profit from product by $8.7 million, or 62.2%, due to manufacturing efficiencies and lower product cost. This increase was offset by an increase in service cost associated with ongoing operations and maintenance of the deployed Energy Servers in the ordinary course of business, as well as an increase in the costs to install our Energy Servers. The installation cost per site increased, driven by a change in mix from generally many servers per single site to fewer servers located per site. Fixed costs associated with site diligence, permits, installation and monitoring infrastructure support result in a site with many servers costing less per kilowatt, compared to a site with just one server.

Non-GAAP Loss from Operations

 

     Years Ended
December 31,
    Change 2015 vs. 2014  
     2014     2015         Amount         %  
     (dollars in thousands)  

Non-GAAP loss from operations

   $ (159,278   $ (159,303   $ (25     (0.0 )% 
  

 

 

   

 

 

   

 

 

   

Non-GAAP loss from operations was flat for the year ended December 31, 2015, as compared to the year ended December 31, 2014.

 

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Quarterly Non-GAAP Financial Measures

 

    Three Months Ended  
    Mar. 31,
2014
    Jun. 30,
2014
    Sep. 30,
2014
    Dec. 31,
2014
    Mar. 31,
2015
    Jun. 30,
2015
    Sep. 30,
2015
    Dec. 31,
2015
 
    (in thousands)  

Non-GAAP revenue

               

Product

  $ 56,609      $ 41,508      $ 50,491      $ 133,697      $ 93,580      $ 55,651      $ 43,270      $ 86,559   

Installation

    6,287        6,977        7,073        6,879        14,974        11,008        7,829        14,486   

Service

    6,136        7,061        9,064        11,551        12,675        13,838        14,541        15,643   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Non-GAAP revenue

  $ 69,032      $ 55,546      $ 66,628      $ 152,127      $ 121,229      $ 80,497      $ 65,640      $ 116,688   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    Three Months Ended  
    Mar. 31,
2014
    Jun. 30,
2014
    Sep. 30,
2014
    Dec. 31,
2014
    Mar. 31,
2015
    Jun. 30,
2015
    Sep. 30,
2015
    Dec. 31,
2015
 
    (in thousands)  

Non-GAAP gross profit (loss)

               

Product

  $ 1,820      $ (11,624   $ (1,563   $ 25,420      $ 5,532      $ 5,047      $ (3,403   $ 15,617   

Installation

    244        (1,353     (2,414     (1,754     (4,711     (4,052     (1,613     1,589   

Service

    (9,090     (9,580     (34,587     (18,203     (30,024     (9,687     (20,437     (18,120
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Non-GAAP gross profit (loss)

  $ (7,026   $ (22,557   $ (38,564   $ 5,463      $ (29,203   $ (8,692   $ (25,453   $ (914
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    Three Months Ended  
    Mar. 31,
2014
    Jun. 30,
2014
    Sep. 30,
2014
    Dec. 31,
2014
    Mar. 31,
2015
    Jun. 30,
2015
    Sep. 30,
2015
    Dec. 31,
2015
 
    (in thousands)  

Non-GAAP loss from operations

  $ (30,526   $ (46,847   $ (63,317   $ (18,588   $ (53,413   $ (32,072   $ (49,544   $ (24,274
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Reconciliation of Non-GAAP Quarterly Measures

GAAP to Non-GAAP Revenue Reconciliation

 

Quarter Ended March 31, 2014

  GAAP
Revenue
    Adjustments
for Ratable
Revenue at
Acceptance(1)
    Adjustment
to Contracted
Amounts(2)
    Interbusiness Allocation(3)     Total
Revenue
Adjustment
    Non-
GAAP
Revenue
 
        Installation
Revenue
    Electricity
Revenue
     
    (in thousands)  

Revenue

             

Product

  $ 22,158      $ 30,169      $ 1,638      $ (6,287   $ 8,931      $ 34,451      $ 56,609   

Installation

    —          —          —          6,287        —          6,287        6,287   

Service

    5,437        —          —          —          699        699        6,136   

Electricity

    11,830        (2,200     —          —          (9,630     (11,830     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 39,425      $ 27,969      $ 1,638      $ —        $ —        $ 29,607      $ 69,032   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Quarter Ended June 30, 2014

                                         

Revenue

             

Product

  $ 23,945      $ 12,663      $ 2,677      $ (6,977   $ 9,200      $ 17,563      $ 41,508   

Installation

    —          —          —          6,977        —          6,977        6,977   

Service

    6,167        —          (1     —          895        894        7,061   

Electricity

    11,690        (1,595     —          —          (10,095     (11,690     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 41,802      $ 11,068      $ 2,676      $ —        $ —        $ 13,744      $ 55,546   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Quarter Ended September 30, 2014

                                         

Revenue

             

Product

  $ 29,483      $ 16,544      $ 4,028      $ (7,073   $ 7,509      $ 21,008      $ 50,491   

Installation

    —          —          —          7,073        —          7,073        7,073   

Service

    6,808        —          (20     —          2,276        2,256        9,064   

Electricity

    11,759        (1,974     —          —          (9,785     (11,759     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 48,050      $ 14,570      $ 4,008      $ —        $ —        $ 18,578      $ 66,628   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Quarter Ended December 31, 2014

                                         

Revenue

             

Product

  $ 98,864      $ 18,059      $ 17,167      $ (6,879   $ 6,486      $ 34,833      $ 133,697   

Installation

    —          —          —          6,879          6,879        6,879   

Service

    8,025        —          (105     —          3,631        3,526        11,551   

Electricity

    11,974        (1,857     —          —          (10,117     (11,974     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 118,863      $ 16,202      $ 17,062      $ —        $ —        $ 33,264      $ 152,127   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) This adjustment is to recognize revenue at the time of acceptance. We first add to GAAP revenue the portion of product revenue that would otherwise be recognized ratably over the life of the contract (10 to 21 years) for sales made through our Bloom Electrons Program and certain lease financing arrangements. We then deduct amounts previously recognized as non-GAAP product revenue from electricity revenue.
(2) This adjustment is made to record as non-GAAP product and non-GAAP service revenue, the amounts specified in our contracts with the individual customer. Under GAAP, for certain contracts where product revenue is recognized up-front at acceptance, an allocation is made in accordance with ASC 605-25 from product revenue to service revenue, which is recognized ratably over the life of the service contract. Compared to the customer contract, this GAAP allocation reduces the amount of up-front product revenue and increases the amount of ratable service revenue that would be recognized in future periods. The adjustment in this column removes the impact of this allocation, aligning the non-GAAP product revenue and non-GAAP service revenue with the contracted amounts.
(3) This adjustment to the components of GAAP revenue reclassifies certain product revenue to installation revenue that is bundled in product revenue for GAAP and reclassifies electricity revenue to either service or product revenue.

 

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    GAAP
Revenue
    Adjustments
for Ratable
Revenue at
Acceptance(1)
    Adjustment
to Contracted
Amounts(2)
    Interbusiness Allocation(3)     Total
Revenue
Adjustment
    Non-
GAAP
Revenue
 

Quarter Ended March 31, 2015

        Installation
Revenue
    Electricity
Revenue
     
    (in thousands)  

Revenue

             

Product

  $ 65,246      $ 33,053      $ 3,960      $ (14,974   $ 6,295      $ 28,334      $ 93,580   

Installation

    —          —          —          14,974        —          14,974        14,974   

Service

    8,383        —          (114     —          4,406        4,292        12,675   

Electricity

    12,565        (1,864     —          —          (10,701     (12,565     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 86,194      $ 31,189      $ 3,846      $ —        $ —        $ 35,035      $ 121,229   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Quarter Ended June 30, 2015

                                         

Revenue

             

Product

  $ 10,976        48,987      $ 350      $ (11,008   $ 6,346      $ 44,675      $ 55,651   

Installation

    —          —          —          11,008        —          11,008        11,008   

Service

    9,127        —          (96     —          4,807        4,711        13,838   

Electricity

    13,677        (2,524     —          —          (11,153     (13,677     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 33,780      $ 46,463      $ 254      $ —        $ —          46,717      $ 80,497   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Quarter Ended September 30, 2015

                                         

Revenue

             

Product

  $ 4,920      $ 39,535      $ 439      $ (7,829   $ 6,205      $ 38,350      $ 43,270   

Installation

    —          —          —          7,829        —          7,829        7,829   

Service

    9,217        —          (224     —          5,548        5,324        14,541   

Electricity

    14,264        (2,511     —          —          (11,753     (14,264     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 28,401      $ 37,024      $ 215      $ —        $ —        $ 37,239      $ 65,640   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Quarter Ended December 31, 2015

                                         

Revenue

             

Product

  $ 41,299      $ 47,688      $ 7,053      $ (14,486   $ 5,005      $ 45,260      $ 86,559   

Installation

    —          —          —          14,486        —          14,486        14,486   

Service

    10,217        —          (322     —          5,748        5,426        15,643   

Electricity

    14,805        (4,052     —          —          (10,753     (14,805     —     

PPA I decommissioning (4)

    (41,807     —          —          —          —          41,807        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 24,514      $ 43,636      $ 6,731      $ —        $ —        $ 92,174      $ 116,688   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) This adjustment is to recognize revenue at the time of acceptance. We first add to GAAP revenue the portion of product revenue that would otherwise be recognized ratably over the life of the contract (10 to 21 years) for sales made through our Bloom Electrons Program and certain lease financing arrangements. We then deduct amounts previously recognized as non-GAAP product revenue from electricity revenue.
(2) This adjustment is made to record as non-GAAP product and non-GAAP service revenue, the amounts specified in our contracts with the individual customer. Under GAAP, for certain contracts where product revenue is recognized up-front at acceptance, an allocation is made in accordance with ASC 605-25 from product revenue to service revenue, which is recognized ratably over the life of the service contract. Compared to the customer contract, this GAAP allocation reduces the amount of up-front product revenue and increases the amount of ratable service revenue that would be recognized in future periods. The adjustment in this column removes the impact of this allocation, aligning the non-GAAP product revenue and non-GAAP service revenue with the contracted amounts.

 

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(3) This adjustment to the components of GAAP revenue reclassifies certain product revenue to installation revenue that is bundled in product revenue for GAAP and reclassifies electricity revenue to either service or product revenue.
(4) This adjustment removes the impact of the PPA I decommissioning program (see Note 14, PPA I Decommissioning, to our consolidated financial statements included in this prospectus).

GAAP to Non-GAAP Gross Profit (Loss) Reconciliation

 

    GAAP
Gross
Profit
    Total
Revenue
Adjustment(1)
    Adjustment
for Ratable
Costs at
Acceptance(2)
    Stock-Based
Comp and
Other
One Time
Item
    Interbusiness
Allocation(3)
    Non-GAAP
Gross
Profit
 

Quarter Ended March 31, 2014

          Installation
Costs
    Electricity
Costs
   
    (in thousands)  

Gross profit

             

Product

  $ (14,176   $ 34,451      $ (22,199   $ 1,006      $ 6,088      $ (3,350   $ 1,820   

Installation

    —          6,287        —          45        (6,088     —          244   

Service

    (9,868     699        —          79        —          —          (9,090

Electricity

    8,188        (11,830     292        —          —          3,350        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ (15,856   $ 29,607      $ (21,907   $ 1,130      $ —        $ —        $ (7,026
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Quarter Ended June 30, 2014

                                         

Gross profit

             

Product

  $ (25,151   $ 17,563      $ (10,493   $ 1,025      $ 8,418      $ (2,986   $ (11,624

Installation

    —          6,977        —          88        (8,418     —          (1,353

Service

    (10,559     894        —          85        —          —          (9,580

Electricity

    8,084        (11,690     620        —          —          2,986        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ (27,626   $ 13,744      $ (9,873   $ 1,198      $ —        $ —        $ (22,557
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Quarter Ended September 30, 2014

                                         

Gross profit

             

Product

  $ (16,950   $ 21,008      $ (13,759   $ 1,223      $ 9,597      $ (2,682   $ (1,563

Installation

    —          7,073        —          110        (9,597     —          (2,414

Service

    (36,940     2,256        —          97        —          —          (34,587

Electricity

    4,616        (11,759     4,461        —          —          2,682        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ (49,274   $ 18,578      $ (9,298   $ 1,430      $ —        $ —        $ (38,564
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Quarter Ended December 31, 2014

                                         

Gross profit

             

Product

  $ (1,073   $ 34,833      $ (15,472   $ 1,133      $ 8,751      $ (2,752   $ 25,420   

Installation

    —          6,879        —          118        (8,751     —          (1,754

Service

    (21,853     3,526        —          124        —          —          (18,203

Electricity

    2,060        (11,974     7,162        —          —          2,752        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ (20,866   $ 33,264      $ (8,310   $ 1,375      $ —        $ —        $ 5,463   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)  See “—GAAP to Non-GAAP Revenue Reconciliation” above.
(2)  This adjustment matches non-GAAP cost of product revenue with non-GAAP product revenue recognized at the time of acceptance. We then adjust electricity cost of revenue to match the electricity revenue adjustment.
(3)  This adjustment matches the installation and electricity cost of revenue with the installation and electricity interbusiness revenue reclassification.

 

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Quarter Ended March 31, 2015

  GAAP
Gross
Profit
    Total
Revenue
Adjustment(1)
    Adjustment
for Ratable
Costs at
Acceptance(2)
    Stock-Based
Comp and
Other
One Time
Item
    Interbusiness Allocation(3)     Non-GAAP
Gross
Profit
 
          Installation
Costs
    Electricity
Costs
   
    (in thousands)  

Gross profit

             

Product

  $ (13,760   $ 28,334      $ (27,587   $ 1,100      $ 19,805      $ (2,360   $ 5,532   

Installation

    —          14,974        —          120        (19,805     —          (4,711

Service

    (34,446     4,292        —          130        —          —          (30,024

Electricity

    4,069        (12,565     6,136        —          —          2,360        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ (44,137   $ 35,035      $ (21,451   $ 1,350      $ —        $ —        $ (29,203
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Quarter Ended June 30, 2015

                                         

Gross profit

             

Product

  $ (15,110   $ 44,675      $ (38,373   $ 1,118      $ 15,202      $ (2,465   $ 5,047   

Installation

    —          11,008        —          142        (15,202     —          (4,052

Service

    (14,524     4,711        —          126        —          —          (9,687

Electricity

    7,684        (13,677     3,528        —          —          2,465        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ (21,950   $ 46,717      $ (34,845   $ 1,386      $ —        $ —        $ (8,692
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Quarter Ended September 30, 2015

                                         

Gross profit

             

Product

  $ (19,652   $ 38,350      $ (29,971   $ 1,145      $ 9,559      $ (2,834   $ (3,403

Installation

    —          7,829        —          117        (9,559     —          (1,613

Service

    (25,888     5,324        —          127        —          —          (20,437

Electricity

    4,809        (14,264     6,621        —          —          2,834        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ (40,731   $ 37,239      $ (23,350   $ 1,389      $ —        $ —        $ (25,453
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Quarter Ended December 31, 2015

                                         

Gross profit

             

Product

  $ (16,768   $ 45,260      $ (31,259   $ 7,810      $ 13,007      $ (2,433   $ 15,617   

Installation

    —          14,486        —          110        (13,007     —          1,589   

Service

    (23,668     5,426        —          122        —          —          (18,120

Electricity

    7,377        (14,805     4,995        —          —          2,433        —     

PPA I decommissioning(4)

    (41,807     41,807        —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ (74,866   $ 92,174      $ (26,264   $ 8,042      $ —        $ —        $ (914
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)  See “—GAAP to Non-GAAP Revenue Reconciliation” above.
(2)  This adjustment matches non-GAAP cost of product revenue with non-GAAP product revenue recognized at the time of acceptance. We then adjust electricity cost of revenue to match the electricity revenue adjustment.
(3)  This adjustment matches the installation and electricity cost of revenue with the installation and electricity interbusiness revenue reclassification.
(4)  This adjustment removes the impact of the PPA I decommissioning program (See Note 14, PPA I Decommissioning, to our consolidated financial statements included in this prospectus).

 

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GAAP to Non-GAAP Loss from Operations Reconciliation

 

    Three Months Ended  
    Mar. 31,
2014
    Jun. 30,
2014
    Sep. 30,
2014
    Dec. 31,
2014
    Mar. 31,
2015
    Jun. 30,
2015
    Sep. 30,
2015
    Dec. 31,
2015
 
    (in thousands)  

GAAP loss from operations

  $ (44,841   $ (55,824   $ (83,296   $ (49,669   $ (71,974   $ (57,904   $ (70,415   $ (103,843

Total Revenue Adjustment

    29,607        13,744        18,578        33,264        35,035        46,717        37,239        92,174   

Total Cost of Revenue Adjustment

    (20,777     (8,675     (7,868     (6,935     (20,101     (33,459     (21,961     (18,222

Stock-based compensation

    3,223        3,261        3,393        3,235        3,306        3,746        3,739        4,583   

PPA entity set up costs and other one time legal expenses

    2,262        647        5,876        1,517        321        8,828        1,854        1,034   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-GAAP loss from operations

  $ (30,526   $ (46,847   $ (63,317   $ (18,588   $ (53,413   $ (32,072   $ (49,544   $ (24,274
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Quarterly Non-GAAP Revenue Trends

Non-GAAP revenue is based on the number of acceptances, which can fluctuate on a quarterly basis. The quarters ending December 2014 and March 2015 were characterized as having a greater percentage of sites with multiple servers. This resulted in our accepting more systems in those quarters and accounted for an increase in revenue in those quarters. In the quarters ended June 2015 and September 2015, we experienced an increase in the number of sites as a result of having a large percentage of sites with fewer single servers, resulting in installation delays and as a result delayed recognition of revenue. In 2015, we made investments to improve our installation processes and to increase our installation capacity.

In addition, quarterly non-GAAP revenue may fluctuate based on factors discussed under “Factors Affecting Our Future Performance.” For example, installations were accepted in the quarters ended December 31, 2014 and March 31, 2015, which resulted in higher product revenue in those periods.

Quarterly Non-GAAP Gross Profit (Loss) Trends

Non-GAAP quarterly gross profit (loss) fluctuates with product revenue, the investment in maintaining and upgrading the deployed fleet, and to a lesser extent, the ability to avoid exceeding estimated installation cost for new site installations. Non-GAAP quarterly gross profit (loss) exhibited larger losses in the quarters where product revenue was lowest and investments in the deployed fleet were highest.

Quarterly Non-GAAP Operating Loss Trends

Non-GAAP quarterly operating income fluctuates with gross profit (loss) as operating expenses have remained relatively flat quarter over quarter. The improvement in operating loss for the quarter ended December 31, 2015 reflects improvement in non-GAAP revenue resulting from higher acceptances, lower service costs and the leverage of our business model.

Liquidity and Capital Resources

We finance our operations, including the costs of acquisition and installation of Energy Servers, mainly through a variety of financing arrangements and PPA entities, credit facilities from banks, sales of our preferred stock, debt financings and cash generated from our operations. As of December 31, 2015, we had cash and cash equivalents of $135.0 million.

We believe that our existing cash and cash equivalents will be sufficient to meet our capital requirements for at least the next 12 months. Our future capital requirements may vary materially from those currently planned and will depend on many factors, including our rate of revenue growth, the timing and extent of spending on research and development efforts and other business initiatives, the rate of growth in the volume of system

 

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builds, the expansion of sales and marketing activities, market acceptance of our products and overall economic conditions. To the extent that current and anticipated future sources of liquidity are insufficient to fund our future business activities and requirements, we may be required to seek additional debt or equity financing. The sale of additional equity would result in additional dilution to our stockholders. The incurrence of debt financing would result in debt service obligations and the instruments governing such debt could provide for operating and financing covenants that would restrict our operations. Further, as most of our assets are collateralized in existing debt arrangements, new debt financing may be unsecured which may result in higher interest rate obligations.

Credit Facilities

Bloom Energy Indebtedness

In May 2013, we entered into a $5.0 million credit agreement and a $12.0 million financing agreement to help fund the building of a new facility in Newark, Delaware. The loan bears an annual interest rate of LIBOR, plus 4%. The weighted average interest rate of these borrowings was 4.2% and 4.2% for the years ended December 31, 2014 and 2015, respectively. The loan requires monthly payments and is secured by the manufacturing facility. As of December 31, 2015, the outstanding debt related to these credit agreements was $9.9 million. Under the terms of these credit agreements, we are required to comply with various restrictive covenants. As of December 31, 2015, we were in compliance with all of the covenants.

Between December 2014 and June 2015, we issued $193.2 million of three-year subordinated secured convertible promissory notes (the 8% Notes) to certain investors. The 8% Notes bear a fixed annual interest rate of 8.0%, compounded monthly, and are due at maturity in December 2017 and payable in cash or in kind at the election of the investor. The accrued interest would be due on each anniversary of the respective original issuance date of the 8% Notes. As of December 31, 2015, the outstanding principal and accrued interest on the 8% Notes was $208.6 million. The outstanding principal and accrued interest on each 8% Note will mandatorily convert into shares of our Series G convertible preferred stock at a conversion price per share of $25.76, and each such share of Series G convertible preferred stock will convert automatically into one share of our common stock, immediately prior to completion of an initial public offering.

In December 2015, we entered into two promissory note agreements with J.P. Morgan Securities LLC and Canadian Pension Plan Investment Board (CPPIB). The aggregate principal amount of the promissory notes is $160.0 million and bears a 5.0% fixed interest rate, (the 5% Notes), compounded monthly, and are due at maturity in December 2020. Interest on these notes is payable in cash or by the issuance of additional 5% Notes. As of December 31, 2015, the debt outstanding under the 5% Notes was $160.3 million, including accrued interest. Under the terms of the indenture governing the 5% Notes, we are required to comply with various restrictive covenants, including meeting certain reporting requirements, such as the preparation and delivery of audited consolidated financial statements, and restrictions on investments. As of December 31, 2015, we were in compliance with all of such covenants. In addition, we are required to maintain collateral which secures the 5% Notes in an amount equal to 200% of the principal amount of and accrued and unpaid interest on the outstanding notes. The outstanding principal and accrued interest do not mandatorily convert into common stock in the event of an initial public offering. At the election of the investors, the accrued interest and the unpaid principal can be converted into common stock at any time following an initial public offering with gross proceeds of at least $150.0 million (Qualified IPO) and prior to the maturity date. Following the Qualified IPO, the outstanding amount of the 5% Notes will be convertible into shares of common stock at a conversion price per share equal to the lower of $30.91 and 90% of the offering price of our common stock sold in this offering. These notes are also convertible upon a change of control prior to a Qualified IPO. Under certain circumstances, the notes are also redeemable at our option, in whole or in part, in connection with a change of control or if our common stock trades at a price equal to at least 150% of the public offering price per share for this offering for a period of 20 trading days during a period of 30 consecutive trading days at a redemption price equal to 100% of the principal amount of the notes plus accrued but unpaid interest. In January 2016, we issued an additional $25.0 million aggregate principal amount of these notes. In addition, in connection with the issuance of the these additional notes, we agreed to issue to certain purchasers of the notes, upon the occurrence of certain conditions, warrants to

 

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purchase up to a maximum of 469,333 shares of our common stock at an exercise price of $0.01 per share. The warrants will automatically be deemed exercised pursuant to their terms immediately prior to the completion of this offering.

PPA Entities’ Indebtedness

Bloom Electrons, our PPA financing program, is financed via special purpose investment entities (PPA entities). These entities are financed by third-party investors and Bloom. The capitalization of a PPA entity is generally comprised of equity investors, debt providers and Bloom, as a minority shareholder (generally less than 10% of the capital stock). The debt that is invested into the PPA entities is non-recourse to Bloom.

Our PPA entities have available lines of credit with a financial institution that allow them to borrow funds for purchase and construction of equipment, additional working capital, and general corporate purposes. These credit facilities are secured by certain of the PPA entities’ assets and subject to certain guaranties by Bloom.

On March 20, 2013, Diamond State Generation Partners, LLC (PPA Company II) entered into an agreement to refinance an existing loan. The total amount of the loan was $144.8 million, which included $28.8 million to repay outstanding principal of existing debt, $21.7 million for debt service reserves and transaction costs, and $94.3 million to fund the remaining system purchases. The loan is a fixed rate term loan that bears an annual interest rate of 5.22% payable quarterly. The loan has a fixed amortization schedule of the principal, beginning March 30, 2014, which requires repayment in full by March 30, 2025. The loan is also non-recourse and secured by all of the assets of PPA Company II. As of December 31, 2015, the debt outstanding was $119.1 million. Under the terms of this credit agreement, PPA Company II is required to comply with various covenants including restrictions on indebtedness, and must also maintain a debt service coverage ratio, as defined in the loan agreement, of at least 1.25:1.00 at the end of each fiscal quarter in order to make any distributions or pay any dividends. As of December 31, 2015, PPA Company II was in compliance with all of the covenants.

In December 2012, 2012 ESA Project Company, LLC (PPA Company IIIa) entered into a $46.8 million credit agreement to help fund the purchase and installation of our Energy Servers. The loan requires quarterly payments, is due in September 2028, and bears a fixed interest rate of 7.5% payable quarterly. The loan is secured by PPA Company IIIa’s machinery and equipment, account receivables, inventory and other assets, as well as the 100% equity interest in PPA Company IIIa held by 2012 V PPA Holdco, LLC. As of December 31, 2015, the debt outstanding was $43.8 million. Under the terms of this credit agreement, PPA Company IIIa is required to comply with various covenants, including meeting certain reporting requirements, such as the preparation and delivery of audited consolidated financial statements, and restrictions on indebtedness. PPA Company IIIa must also maintain a debt service coverage ratio, as defined in the credit agreement, of at least 1.10:1.00 at the end of each fiscal quarter in order to make any distributions or pay any dividends. As of December 31, 2015, PPA Company IIIa was in compliance with all of the covenants.

In September 2013, 2013B ESA Project Company, LLC (PPA Company IIIb) entered into a credit agreement to help fund the purchase and installation of our Energy Servers. In accordance with that agreement, PPA Company IIIb issued floating rate debt based on an annual LIBOR rate, plus a margin of 5.2%, paid quarterly. The debt requires quarterly principal payments and is due in October 2020. The weighted average interest rate of these borrowings was 5.5% and 5.6% for the years ended December 31, 2014 and 2015, respectively. The aggregate amount of the debt facility is $32.5 million, which includes $1.45 million to be placed in a debt service reserve account. The loan is secured by PPA Company IIIb’s machinery and equipment, account receivables, inventory and other assets, as well as the 100% equity interest in PPA Company IIIb held by 2013 ESA Holdco, LLC. As of December 31, 2015, the debt outstanding was $27.7 million. Under the terms of this credit agreement, PPA Company IIIb is required to comply with various covenants, including meeting certain reporting requirements, such as the preparation and delivery of audited consolidated financial statements, and restrictions on indebtedness. In addition, PPA Company IIIb must also maintain a historical debt service coverage ratio, as defined in the credit agreement, of 1.25:1.00, and a prospective debt service coverage ratio, as

 

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defined in the credit agreement, of 1.25:1:00 at the end of each fiscal quarter in order to make any distributions or pay any dividends. As of December 31, 2015, PPA Company IIIb was in compliance with all of the covenants.

In July 2014, 2014 ESA Project Company, LLC (PPA Company IV) issued senior secured notes (PPA IV Notes) amounting to $99.0 million to third parties to help fund the purchase and installation of our Energy Servers. The PPA IV Notes bear a fixed annual interest rate of 6.1%, payable quarterly. The principal amount of the PPA IV Notes is payable quarterly starting in December 2015 and ending in March 2030. The PPA IV Notes are secured by all the assets of the PPA Company IV. As of December 31, 2015, the aggregate balance outstanding under the PPA IV Notes was $98.9 million. Under the terms of the note purchase agreement, PPA Company IV is required to comply with various covenants, including meeting certain reporting requirements, such as the preparation and delivery of audited consolidated financial statements, and restrictions on indebtedness. In addition, PPA Company IV must also maintain a debt service coverage ratio, as defined in the loan agreement, of at least 1.15:1.00 at the end of each fiscal quarter in order to make any distributions or pay any dividends. As of December 31, 2015, PPA Company IV was in compliance with all of the covenants.

In June 2015, 2015 ESA Project Company, LLC (PPA Company V) entered into a $131.2 million credit agreement to help fund the purchase and installation of our Energy Servers. PPA Company V has issued floating rate debt with an interest rate based on LIBOR plus an applicable margin over LIBOR. The applicable margins used for calculating interest expense are 2.125% for the loan time period prior to the term conversion date; 2.25% for years 1-3 following the term conversion date and 2.5% for after Year 3 following the term conversion date. Interest is payable monthly. The weighted average interest rate of borrowings was 2.4% for the year ended December 31, 2015. The loan requires quarterly principal payments beginning in March 2017 and is due in December 2021. The loan is secured by PPA Company V’s machinery and equipment, account receivables, inventory and other assets, as well as the 100% equity interest in PPA Company V held by 2015 ESA Holdco, LLC. As of December 31, 2015, the debt outstanding was $57.7 million. Under the terms of this credit agreement, PPA Company V is required to comply with various covenants, including meeting certain reporting requirements, such as the preparation and delivery of audited consolidated financial statements, and restrictions on indebtedness, and must also maintain a debt service coverage ratio, as defined in the credit agreement, of at least 1.15:1.00 at the end of each fiscal quarter in order to make any distributions or pay any dividends. As of December 31, 2015, PPA Company V was in compliance with all of the covenants.

Cash Flows

The following table summarizes our cash flows for the periods indicated (in thousands):

 

     Years Ended
December 31,
 
     2014     2015  
     (in thousands)  

Net cash provided by (used in):

    

Operating activities

   $ (281,109   $ (309,691

Investing activities

     (95,407     49,494   

Financing activities

     212,181        288,199   
  

 

 

   

 

 

 

Net change in cash and cash equivalents

   $ (164,335   $ 28,002   
  

 

 

   

 

 

 

Operating Activities