S-1 1 d96446ds1.htm REGISTRATION STATEMENT ON FORM S-1 Registration Statement on Form S-1
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Index to Financial Statements

As filed with the Securities and Exchange Commission on June 12, 2018

Registration No. 333-          

 

 

 

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, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer   ☒  (Do not check if a smaller reporting company)    Smaller reporting company  
     Emerging Growth Company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided to Section 7(a)(2)(B) of the Securities Act.  ☐

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of
Securities to be Registered
  Proposed
Maximum
Aggregate
Offering Price(1)(2)
  Amount of
Registration Fee

Class A Common Stock, par value $0.0001 per share

 

$100,000,000

  $12,450

 

 

(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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The information in this preliminary prospectus is not complete and may be changed. We 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 these securities and we are not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion, dated June 12, 2018

                SHARES

 

 

LOGO

CLASS A COMMON STOCK

 

 

This is an initial public offering of Bloom Energy Corporation’s shares of Class A common stock.

We are offering to sell              shares of our Class A common stock in this offering. We have two classes of authorized common stock, Class A common stock and Class B common stock. The rights of the holders of Class A common stock and Class B common stock are identical, except with respect to voting and conversion rights. Each share of Class A common stock is entitled to one vote per share. Each share of Class B common stock is entitled to ten votes per share and is convertible into one share of Class A common stock. Outstanding shares of Class B common stock will represent approximately     % of the voting power of our outstanding capital stock immediately following the completion of this offering, with our directors, executive officers, and 5% stockholders, and their respective affiliates, holding approximately     %, assuming in each case no exercise of the underwriters’ option to purchase additional shares.

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

We have applied to list the Class A common stock on the New York Stock Exchange 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 Class A common stock involves risks. See “Risk Factors” on page 20 to read about factors you should consider before buying shares of Class A common stock.

 

     Per
Share
     Total  

Initial public offering price

   $                   $               

Underwriting discount(1)

   $      $  

Proceeds, before expenses, to us

   $      $  

 

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

To the extent that the underwriters sell more than                 shares of Class A common stock, the underwriters have the option to purchase up to an additional                 shares of Class A common stock from us 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                     , 2018.

 

 

 

J.P. Morgan       Morgan Stanley

 

Credit Suisse

 

  

 

KeyBanc Capital Markets

 

  

 

BofA Merrill Lynch

 

Baird   Cowen   HSBC    Oppenheimer & Co.    Raymond James

Prospectus dated                     , 2018


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TABLE OF CONTENTS

 

     Page  

Prospectus Summary

     1  

Risk Factors

     20  

Special Note Regarding Forward-Looking Statements

     48  

Industry and Market Data

     49  

Use of Proceeds

     50  

Dividend Policy

     50  

Capitalization

     51  

Dilution

     55  

Letter from our Chief Financial Officer

     58  

Selected Consolidated Financial Data

     61  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     70  

Business

     134  

Management

     158  

Executive Compensation

     168  

Related Party Transactions

     178  

Principal Stockholders

     181  

Description of Capital Stock

     186  

Shares Eligible for Future Sale

     197  

Material U.S. Federal Income Tax Considerations for Non-U.S. Holders

     200  

Underwriting

     205  

Experts

     216  

Legal matters

     216  

Where You Can Find More Information

     216  

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. Neither we nor the underwriters have 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 and the underwriters are offering to sell, and seeking offers to buy, shares of our Class A 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 Class A common stock.

Neither we 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 Class A common stock and the distribution of this prospectus outside of the United States.

Through and including                     , 2018 (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 of our Class A common stock 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, and affordable energy for everyone in the world. To fulfill this mission, we have developed a distributed, on-site electric power solution that is redefining the $2.4 trillion electric power market and transforming how power is generated and delivered. The commercial and industrial (C&I) segments are our initial focus. Our solution, the Bloom Energy Server, is a stationary power generation platform built for the digital age and capable of delivering highly reliable, uninterrupted, 24x7 constant (or base load) power that is also clean and sustainable. 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 harmful emissions than conventional fossil fuel generation. A typical configuration produces 250 kilowatts of power in a footprint roughly equivalent to that of half of a standard 30 foot shipping container, or approximately 125 times more space-efficient than solar power generation. 250 kilowatts of power is roughly equivalent to the constant power requirement of a typical big box retail store. Any number of these Energy Server systems can be clustered together in various configurations to form solutions from hundreds of kilowatts to many tens of megawatts. Some of our largest customers are AT&T, Caltech, Delmarva Power & Light Company, Equinix, The Home Depot, Kaiser Permanente and The Wonderful Company. We also work actively with financing partners, such as The Southern Company, that purchase our systems that are deployed at end customers’ facilities in order to provide the electricity as a service. In 2017, our largest customers were Southern Company, which finances our Energy Servers for a large number of end customers, and Delmarva. Our customer base included 25 of the Fortune 100 companies as of March 31, 2018.

Grid power prices continue to rise in most regions where we serve customers. 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 U.S. Energy Information Administration (EIA) projects that grid power prices for all classes of customers including commercial and industrial are expected to increase by over 40% through 2026 in the U.S. By contrast, in the regions where the majority of our Energy Servers are deployed, our solution typically provides a lower cost of electricity to our customers than traditional grid power. In addition, our solution provides greater cost predictability versus rising grid prices. Through a relentless focus on cost reduction, we have driven down materials cost of our Energy Servers by 75% since 2009. This cost reduction, coupled with the use of abundant, low-cost natural gas as a fuel source and very high conversion efficiencies, has allowed us to expand our market opportunity.

The traditional grid is vulnerable to natural disasters as well as cyber-attacks and physical sabotage, which have become more frequent. The 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 to provide uninterruptible power, 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 able to deliver this very high level of availability to our customers in part because they are modular, redundant, and can be “hot swapped,” or serviced without interruption.



 

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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 harmful emissions. There is also a rising demand for clean electric power 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 and quality. Our Energy Servers address these requirements and operate on-site at very high efficiencies using natural gas or biogas, offering significant emissions reductions, and, unlike prevalent renewable technologies such as wind and solar, provide a viable alternative to the constant base load electricity generated by a central power plant.

We have continuously innovated and evolved our technology over time. The latest generation Energy Server delivers five times the energy output of the first generation in a constant footprint. Similarly, we have also improved the beginning-of-life electrical efficiency (the rate at which fuel is converted into electricity) of our Energy Servers from 45% to 65% today, representing the highest delivered power efficiency of any commercially available power solution. In addition, we have expanded the range of available accessories which extend the capability and functionality of our Energy Servers to meet additional customer requirements, such as an uninterruptable power capability. Our team has decades of experience in the various specialized disciplines and systems engineering concepts unique to this technology. We had 209 issued patents in the United States and 90 issued patents internationally as of March 31, 2018.

Our solution is capable of addressing customer needs across a wide range of industry verticals. The industries we currently serve consist of banking and financial services, cloud services, technology and data centers, communications and media, consumer packaged goods and consumables, education, government, healthcare, hospitality, logistics, manufacturing, real estate, retail and utilities. We believe that, thus far we are capturing only a small percentage of our largest customers’ total energy spend, which gives us a significant opportunity for expansion and growth. Moreover, as the price of our products decreases and the price of grid power increases, more markets will become available for our products. As of March 31, 2018, we had 312 megawatts in total deployed systems, representing an average annual growth rate of approximately 25% since 2014. In addition, as of March 31, 2018, we had an additional product sales backlog of 108.2 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 total revenues of $2.4 trillion in 2016, and is projected to continue to grow at a compound annual growth rate of 4.3% to $2.9 trillion in 2021. 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 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 2017. The electric power grid has suffered from insufficient investment in critical infrastructure as a result of complexities surrounding the ownership, operation and regulation of grid infrastructure, compounded by the challenges of large capital costs and lack of adequate innovation. The Edison Electric Institute estimated that between 2017 and 2019, U.S. investor-owned electric utilities will need to make total capital expenditure investments of approximately $336 billion. U.S. EIA data



 

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demonstrates that the average commercial and industrial electricity prices have both increased at 2.4% and 2.7% CAGR from 2000 to 2015, respectively. According to this data, the average commercial and industrial electricity prices are expected to continue to rise.

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, 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. Similarly, in 2011, a dropped transmission line in Arizona cascaded and created a massive outage across Southern California.

Furthermore, the limits of this design, coupled with aging and underinvested infrastructure, leaves the grid vulnerable to natural disasters such as hurricanes, earthquakes, drought, wildfires, flooding and extreme temperatures. According to data from the U.S. Department of Energy (DOE), the United States electric grid loses power 285% more often than in 1984, when data collections on blackouts began. These outages result in an annual loss to American businesses of as much as $150 billion, with weather-related disruptions costing the most per event.

In addition to potential disruptions to the grid, there is also an increasing concern over the threat of cyber-attack and physical sabotage to the centralized grid infrastructure. In 2017, Accenture Consulting published the report “Outsmarting Grid Security Threats,” which stated that “57% of utility executives believe their countries could see interruption of electricity supply due to cyber-attacks within five years” and that “only 48% of utility executives think they are well prepared for the challenges of an interruption from cyber-attack”.

Intermittent generation sources such as wind and solar are negatively impacting grid stability

Electricity generation from wind and solar has grown dramatically over recent years and is expected to account for a greater percentage of total generation going forward. 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, solutions are needed which provide constant base load 24x7 electric power which is reliable, clean and without the shortcomings of the existing grid infrastructure or intermittent sources such as wind or solar. This need is especially acute in the 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.

Increasing focus on reducing harmful emissions

In response to rising concern over harmful emissions, the 2015 United Nations Climate Change Conference, or COP 21, 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 harmful emissions from power generation are widespread, including the adoption of renewable portfolio standards or mandated targets for low-or zero-carbon power generation.



 

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Lack of access to affordable and reliable electricity in developing countries

According to the International Energy Agency (IEA) in their 2017 World Energy Outlook, 1.1 billion people worldwide live without electricity. 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.

Our Solution

The Bloom Energy Server delivers reliable, resilient, clean and affordable energy, particularly in areas of high electricity costs, by its advanced distributed power generation system that is customizable, always-on and a source of primary base load power.

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 primary input to the system is standard low-pressure natural gas or biogas from local gas lines. The high-quality electrical output of the Energy Server is connected to the customer’s main electrical feed, which avoids 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 parallels the example of smart phones – a single core platform that can be highly personalized to the needs of its user through the addition of any of a wide variety of applications that extend features and provide benefits to the user. Like a smart phone, the Bloom Energy Server is easily customizable and upgradeable to add new energy accessories 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 has five key elements which allow us to deliver a better electron: reliability, resiliency, cost savings and predictability, sustainability and personalization. While the relative importance of these attributes can vary by customer, our ability to deliver these attributes 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 five 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. 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 power quality, voltage, and current, which can be tuned to specific customer requirements. The Bloom Energy Server can be configured to eliminate the need for traditional backup power equipment such as diesel generators, batteries or uninterruptible power systems (UPS).

Resiliency. Our Energy Servers avoid the vulnerabilities of conventional transmission and distribution lines by generating power on-site, where the electricity is consumed. The system operates at very high availability due



 

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to its modular and fault-tolerant design, which includes multiple independent power generation modules that can be hot swapped. Importantly, our systems utilize the natural gas infrastructure, which is a mesh network buried underground, unlike the 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.

Cost Savings and Predictability. 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 (other than the price of natural gas) over the long-term. In the regions where the majority of our Energy Servers are deployed, our solution typically provides a lower cost of electricity to our customers than traditional grid power. In addition, our solution provides greater cost predictability versus rising grid prices. Moreover, we provide customers with a solution that includes all of the fixed equipment and maintenance costs for the life of the contract. With the addition of an optional integrated storage solution, Bloom can also help customers to load shift and peak shave – reducing their exposure to peak power costs from the grid. We also enable our customers to scale from a few hundred kilowatts to many megawatts on a “pay-as-you-grow” basis.

Sustainability. Bloom Energy Servers provide clean power and because they are fuel-flexible, customers can choose the fuel source that best fits their needs based on availability, cost and carbon footprint. Bloom Energy Servers deployed since 2012 running on natural gas produce nearly 60% less carbon emissions compared to the average of U.S. combustion power generation. Bloom Energy Servers can also utilize renewable biogas to generate carbon-neutral electricity. As of March 31, 2018, approximately 9% of our deployed fleet of Energy Servers, by megawatts deployed, utilized biogas. In both cases, our Energy Servers emit virtually no criteria air pollutants, including NOx or SOx. Bloom Energy Servers also use virtually no water in normal operation. By comparison, to produce one megawatt per hour for a year, thermoelectric power generation for the U.S. grid withdraws approximately 156 million gallons of water more than Bloom Energy Servers.

Personalization. The Bloom Energy Server is designed as a platform which can be customized to the needs of each individual customer delivering the level of reliability, resiliency, sustainability as well as cost savings and predictability required by that customer. Analogous to a smart phone, the base Energy Server platform can easily accommodate accessories that extend capabilities and provide for customization. For example, the Energy Server can be customized with uninterruptible power components to deliver higher levels of reliability and grid independent operation, or storage can be added to reduce peak power consumption and improve the predictability of economics for the customer.

Our Market Opportunity

Economic growth and development worldwide will increasingly be powered by electricity. Global electricity demand is forecasted to rise by 60% between 2015 and 2040, accounting for 55% of the world’s energy demand growth. In addition, as the world consistently accelerates the adoption of digital technologies (i.e., widespread deployment of data centers, electric and autonomous cars, intelligent home systems, additive manufacturing), overall energy use will continue to increase. These facts offer challenges alongside opportunities, and will alter the global energy landscape. The retail electricity market represents the market for power delivered to the end-customers or the consumer of electricity. The price of retail electricity generally reflects the cost of generation, transmission and distribution. Generating power onsite (i.e., at the point of consumption, rather than centrally) eliminates the cost, complexity, interdependencies, and inefficiencies associated with electrical transmission and distribution.

According to data from MarketLine, the total addressable market (TAM) for electricity at the point of customer consumption was approximately $2.4 trillion in 2016. Of this market, MarketLine determined that 68% consisted of commercial, industrial and public services (CI&P), or $1.6 trillion.



 

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We believe that the current global serviceable addressable market (SAM) for Bloom is the retail electricity market for CI&P customers in the world’s ten largest electricity markets. These markets include, in order of decreasing size, the United States, India, Japan, Germany, Canada, Brazil, South Korea, France, the United Kingdom and Mexico. We do not include China or Russia in calculating our SAM due to a lack of reliable market data in these markets. Based on country-by-country generation data from the U.S. EIA and publically-available retail power prices in each of these countries, we believe that our SAM is approximately $800 billion. Bloom primarily participates in the retail market for CI&P customers, and on that basis has calculated the TAM and SAM. From time to time, Bloom also selectively participates in wholesale market opportunities which have not been incorporated into this TAM and SAM analysis.

We currently have installations or purchase orders in eleven states in the United States (California, Connecticut, Delaware, Maryland, Massachusetts, North Carolina, New Jersey, New York, Pennsylvania, Utah and Virginia) as well as in Japan, India and South Korea. According to the EIA, the total size of the retail markets for C&I customers in the U.S. states is approximately $76 billion. In addition, we estimate that the combined retail market for C&I customers in Japan, the Indian state of Karnataka (the state in India where we currently have deployed our solution) and the available market for new-build fuel cell generation in South Korea is approximately $99 billion. Collectively, we estimate that the size of our current market is approximately $175 billion.

In order to assess the market opportunity for our Energy Servers in the U.S., we have used EIA data to estimate the potential addressable market. The total size of the electricity market for C&I customers in all fifty states is currently estimated to be $212 billion. Outside of the U.S., we estimate our market opportunity by focusing on the ten largest international electricity markets (Japan, Germany, United Kingdom, India, Brazil, France, South Korea, Mexico, Canada and Saudi Arabia). We exclude China and Russia from this analysis as we have no plans to enter these markets for the foreseeable future. Based on information published by IEA, as well as select energy regulatory authorities regarding C&I demand and power prices, we estimate that the market opportunity in these ten international markets is approximately $608 billion.

Our Customers

To date, the breadth, depth and scale of Bloom’s commercial customer adoption is significant for a new product in the electric power industry. As of March 31, 2018, we have installed 312 megawatts of Bloom Energy Servers at customer sites across the U.S., Japan and India.

Factors Driving Customer Adoption

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

Customers are driving a growing requirement for customized, high-quality and reliable power in the increasingly pervasive digital economy. The proliferation of cloud services and big data, and the associated rapid increase 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 batteries, 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, including equipment, installation, operations and maintenance that is designed to provide customers with a competitive and predictable cost for their electricity for periods of up to 20 years in the regions where the majority of our Energy Servers are



 

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deployed. The only component of cost of Bloom’s solution that is not fixed at time of contracting is fuel supply—usually natural gas, which typically represents about 25% of Bloom’s delivered cost of electricity to the customer. However, even if there are significant variations in natural gas commodity prices, wholesale prices of electricity are also highly dependent on the price of natural gas and our current generation Energy Server is 14% to 31% more efficient than natural gas power plants. Customers also have the option to enter into long-term natural gas contracts at fixed prices for up to ten years, which is not an option available for grid electricity.

According to the U.S. EIA, the average commercial and industrial electricity rate increased at a 2.7% CAGR from 2000 to 2015. According to data from the EIA, the average C&I electricity prices will continue to rise. As a result, we expect Bloom’s market opportunity to continue to expand.

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 312 megawatts in total as of March 31, 2018. The Bloom Energy Server has performed for our customers 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 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. The United States’ abundant supply of recoverable natural gas is expected to last over 80 years, according to data from the Potential Gas Committee and the U.S. EIA.

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 introduced only nine years ago, while staying within approximately the same service footprint.

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 (BOL) efficiencies of 65%, and we expect to further improve the efficiency in succeeding generations. While the Bloom Energy Server is capable of operating at peak efficiency, typically efficiency of the latest generation of Energy Servers can range from 53% to 65% over the project term depending on environmental conditions and the age of the power modules. We have the flexibility to maintain efficiency at specific levels to comply with customer sustainability, regulatory compliance, or other requirements by managing the replacement cycle of the power modules in the Energy Server.



 

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Expanded feature sets and sizing options to address new market opportunities. The Bloom Energy Server was designed as a technology platform which can support extended capabilities from Bloom and other suppliers. The Bloom Energy Server platform provides the hardware and software building blocks that can be deployed in different configurations to provide customer-specific solutions. For example, we are now offering the option of adding a storage solution provided by PowerSecure (a unit of The Southern Company) to help customers avoid peak grid electricity power rates, and to provide greater resiliency to grid outages. We may also provide smaller or custom solutions which could allow us to address additional markets, such as powering cell sites in the mobile telephony market and franchise retail, in the future. Our current offering is well suited for multi-tenant housing, a segment that we intend to address in emerging economies as we expand to international markets. The platform components can also be configured to provide larger systems for utility or large industrial applications.

Acquire new customers and grow wallet share with existing customers

We currently target industry leading Fortune 500 companies, along with public and private organizations that are large consumers of electric power. Our success in landing industry leading customers has encouraged other new customers—companies and organizations in those industries, with similar scale and electricity demand—to follow suit. We employ a “land and expand” model through our direct sales force, which recognizes that new customers typically pilot a limited scale solution initially to gain experience with our fuel cell solutions. As we prove the value of Bloom solutions through these pilot projects, our customers will often expand their Bloom deployments by adding more capacity at existing sites and by adding new facilities from across their real estate portfolio. Our sales mix illustrates this dynamic: Since 2011, over half of our sales contracts, or the number of purchase orders signed, are with new customers, while approximately three quarters of our sales volume has been derived from repeat customers as they utilize our Energy Servers as a larger share of their energy wallet and create more value across more of their facilities over time. These repeat orders provide better visibility into our sales pipeline and also lower our cost of sales. The quality and staying power of our customers are important factors contributing to our confidence in this strategy. Since we target customers with very significant electric power spend, we view the current low penetration rate as a significant opportunity for growth.

Drive production cost reductions to expand our market

Since our initial commercial deployments eight years ago, we have continually reduced the production cost of our systems, enabling us to expand into new markets. We believe our technology innovation will drive further cost reductions as each successive generation of Bloom Energy Servers builds on the design and field experience of all previous generations. In addition, increased production volumes should lead to further cost reductions based on economies of scale, enabling market expansion and 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 first generation Energy Server to our current generation Energy Server. We drove these material costs per unit down by over 50% over the life of our second generation system and by over 35% over the life of our fifth generation system to date. With each successive new generation, we have been able to reduce the material costs compared to the prior generation’s material costs.

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 or purchase orders in the United States, Japan, India, and South Korea, and we are actively targeting additional international markets such as Ireland and Great Britain.

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



 

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Data Centers. When configured to provide uninterruptible power, we can provide primary power for data centers with up to Tier III availability and reliability without reliance on traditional back up or power conditioning equipment. A customer-commissioned study by the University of Illinois, Champaign-Urbana projects that a Bloom Energy solution configured to provide mission-critical power would be significantly more reliable than a traditional topology of grid power plus uninterruptible power systems and diesel backup. According to Technavio, the total worldwide cost of power for data centers was $17.4 billion in 2016. This figure is expected to grow by 12.9% annually over the next five years. Within the U.S., the total cost of power for data centers was $3.3 billion. This cost is expected to rise by 8.0% annually over the same forecast period.

Healthcare. According to the EIA, the healthcare industry in the U.S. accounts for approximately 6% of total commercial energy consumption. Based on our estimate of the total C&I market opportunity in the U.S. ($212 billion), this implies that the healthcare industry in the U.S. spends approximately $12 billion annually on energy purchases.

Microgrids. New segments like microgrids, when powered by our Energy Servers, offer our customers the opportunity to disconnect from the traditional grid, protection from prolonged grid outages and mitigation of the rising risk of cyber-attacks against the grid. As communities and organizations look to mitigate the risk of grid power outages, there is significant and growing interest in microgrids, which combine distributed power generation and storage into a network that can be isolated from the larger grid. Our flexible architecture allows integration of our systems with other distributed generation sources and technologies, such as solar and storage, while Bloom provides the stable always-on primary power—a key requirement for a microgrid solution. According to Technavio, the global microgrid market was valued at $14.6 billion in 2017 and is expected to reach $23.1 billion by 2022, growing at a compound annual growth rate of 9.7%.

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. We have developed multiple options for our customers to acquire the power our Energy Servers produce. These offerings provide a range of options that enable customers to do business with us and secure power best customized to their needs. 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), that combine the cost of our systems, warranty and service, financing, and in some cases fuel into monthly payments based on the electricity produced.

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;


 

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    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 tax benefits, and other financial incentives. The reduction, modification, or elimination of government economic incentives could cause our revenue to decline and harm our financial results;

 

    it will be difficult for us to raise additional debt financing;

 

    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;

 

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

 

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

 

    the dual class structure of our common stock will have the effect of concentrating voting control with those stockholders who held our capital stock prior to the completion of this offering, including our directors, executive officers, and 5% stockholders holding approximately     % of the voting power of our outstanding capital stock immediately following the completion of this offering, assuming no exercise of the underwriters’ option to purchase additional shares.

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 incorporated by reference into, and 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



 

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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 $1.07 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 $1.07 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 JOBS Act. We intend to take advantage of the 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

 

Class A common stock offered

            shares

 

Option to purchase additional shares of Class A common stock offered

            shares

 

Class A common stock outstanding after this offering

             shares (             shares if the option to purchase additional shares is exercised in full)

 

Class B common stock outstanding after this offering

            shares

 

Total Class A and Class B common stock to be outstanding after this offering

            shares

 

Use of proceeds

We estimate that the net proceeds from the sale of shares of our Class A 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 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.”

 

Voting rights

Shares of Class A common stock are entitled to one vote per share. Shares of Class B common stock are entitled to ten votes per share.

 

  Holders of our Class A common stock and Class B common stock will generally vote together as a single class, unless otherwise required by law or our restated certificate of incorporation. Following the completion of this offering, each share of our Class B common stock will be convertible into one share of our Class A common stock at any time and will convert automatically upon certain transfers and upon the earliest to occur of (i) immediately prior to the close of business on the fifth anniversary of the closing of this offering, (ii) immediately prior to the close of business on the date on which the outstanding shares of Class B common stock represent less than five percent (5%) of the aggregate number of shares of Class A common stock and Class B common stock then outstanding, (iii) the date and time, or the occurrence of an event, specified in a written conversion election delivered by KR Sridhar, our Chairman and Chief Executive Officer, to our Secretary or Chairperson of our Board of Directors to so convert all shares of Class B common stock, or (iv) immediately following the date of the death of KR Sridhar.


 

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  The holders of our outstanding Class B common stock will hold     % of the voting power of our outstanding capital stock following this offering, with our directors, executive officers, and 5% stockholders and their respective affiliates holding     % in the aggregate. Additionally, following this offering, and after giving effect to voting agreements between KR Sridhar, our Chief Executive Officer and Chairman, and certain holders of Class B common stock, KR Sridhar will hold an aggregate of     % of the voting power of our outstanding capital stock. These holders will have the ability to control the outcome of matters submitted to our stockholders for approval, including the election of our directors and the approval of any change of control transaction. See the sections titled “Principal Stockholders” and “Description of Capital Stock” for additional information

 

Directed share program

At our request, the underwriters have reserved up to     % of the shares of Class A common stock offered by this prospectus for sale, at the initial public offering price, to our directors, officers and other individuals associated with them, and our employees, to the extent permitted by local securities laws and regulations. The sales will be made at our direction by Morgan Stanley & Co. LLC, an underwriter of this offering, and its affiliates through a directed share program. We do not know if these persons will choose to purchase all or any portion of these reserved shares, but any purchases they do make will reduce the number of shares available to the general public. Any reserved shares not so purchased will be offered by the underwriters to the general public on the same terms as the other shares of Class A common stock offered by this prospectus. Any shares sold in the directed share program to our directors, executive officers or stockholders who have entered into lock-up agreements described in “Underwriting” shall be subject to the provisions of such lock-up agreements. Employees and family members of employees who participate in the directed share program shall be subject to substantially similar lock-up provisions with respect to any shares sold to them pursuant to the directed share program.

 

Proposed New York Stock Exchange 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 Class A common stock.

The number of shares of our Class A and Class B common stock to be outstanding after this offering is based on no shares of our Class A common stock and 132,249,809 shares of our Class B common stock outstanding, in each case, as of March 31, 2018, and excludes:

 

    17,317,677 shares of our Class B common stock issuable upon exercise of outstanding stock options as of March 31, 2018 with a weighted average exercise price of $17.74 per share under our 2002 Equity Incentive Plan and 2012 Equity Incentive Plan;

 

    4,720,640 shares of our Class B common stock issuable upon settlement of restricted stock units (RSUs) outstanding as of March 31, 2018 under our 2012 Equity Incentive Plan;


 

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    44,406 shares of our Class B common stock issuable upon settlement of RSUs granted after March 31, 2018 under our 2012 Equity Incentive Plan;

 

    50,000 shares of our Class B common stock issuable upon the exercise of outstanding warrants to purchase common stock as of March 31, 2018, with an exercise price of $25.76 per share;

 

    1,141,184 shares of our Class B common stock issuable upon the exercise of outstanding warrants to purchase Series F convertible preferred stock and Series G convertible preferred stock as of March 31, 2018, with a weighted average exercise price of $21.18 per share, which, if not exercised prior to the completion of this offering, shall convert in accordance with their terms into warrants to purchase Class B common stock;

 

    up to 216,000 shares of our Class B common stock issuable to one of our customers on the occurrence of future bookings from that customer and the achievement of certain installation milestones on those future bookings;

 

    200,000 shares of Class B 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 Class B common stock issuable upon the conversion of our outstanding 6.0% Convertible Senior Secured PIK Notes due 2020 (6% Notes) as of March 31, 2018, 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);

 

    1,297,591 shares of our Class B common stock issuable upon the conversion of $33.4 million aggregate principal amount of our outstanding Subordinated Senior Convertible Promissory Note (Constellation Note), which may be converted, at the option of the holder, prior to the completion of this offering, into shares of Series G convertible preferred stock or, following the completion of this offering, into shares of Class B common stock; and

 

                shares of common stock reserved for future issuance under our equity-based compensation plans, consisting of 8,528,008 shares of Class B common stock reserved for issuance under our 2012 Equity Incentive Plan as of March 31, 2018,             shares of Class A common stock reserved for issuance under our 2018 Equity Incentive Plan, and shares of Class A common stock reserved for issuance under our 2018 Employee Stock Purchase Plan, and excluding shares that become available under the 2018 Equity Incentive Plan and 2018 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.”

Because the conversion price of the 6% Notes will depend upon the actual initial public offering price per share in this offering, the actual number of shares issuable upon such conversion will likely differ from the number of shares set forth above. In this regard, a $1.00 increase in the assumed initial public offering price of $         per share of Class A common stock, which is the midpoint of the price range set forth on the cover page of this prospectus, would decrease the number of shares of our Class B common stock issuable on conversion of the 6% Notes by             shares. A $1.00 decrease in the assumed initial public offering price would increase the number of shares of our Class B common stock issuable on conversion of the 6% Notes by             shares. See “Management’s Discussion and Analysis of Financial Condition and Results of Operation—Liquidity and Capital Resources—Credit Facilities—Bloom Energy Indebtedness” for more information.



 

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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 107,610,244 shares of Class B common stock, effective upon the closing of this offering;

 

    the automatic conversion of $215.9 million aggregate principal amount 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 March 31, 2018, and the subsequent automatic conversion of such shares of Series G convertible redeemable preferred stock into an aggregate of 8,382,757 shares of Class B 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 March 31, 2018, except for an aggregate of 150,000 shares of Class B 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 Class B common stock at an exercise price of $0.01 per share to certain purchasers of our 6% Notes, as described in “Description of Capital Stock—6.0% 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 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 Class A common stock from us 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, 2016 and 2017 are derived from our audited consolidated financial statements included elsewhere in this prospectus. We derived the summary consolidated statements of operations data for the three months ended March 31, 2017 and 2018 and the summary consolidated balance sheet data as of March 31, 2018 from our unaudited consolidated financial statements included elsewhere in this prospectus. You should read the following summary 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 and our results for the three months ended March 31, 2018 are not necessarily indicative of results to be expected for the full year. 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.



 

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Please see the section titled “Selected Consolidated Financial Data—Key Operating Metrics” for information regarding how we define our product accepted during the period, megawatts deployed, billings for product accepted in the period, billings for installation on product accepted, billings for annual maintenance services agreements, product costs of product accepted, period costs of manufacturing related expenses not included in product costs and installation costs on product accepted.

 

    Years Ended
December 31,
    Three Months
Ended March 31,
 
        2016             2017             2017             2018      
    (in thousands, except for per share data)  
                (unaudited)  

Consolidated Statements of Operations

       

Revenue

       

Product

  $ 76,478     $ 179,768     $ 27,665     $ 121,307  

Installation

    16,584       63,226       12,293       14,118  

Service

    67,622       76,904       18,591       19,907  

Electricity

    47,856       56,098       13,648       14,029  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    208,540       375,996       72,197       169,361  

Cost of revenue

       

Product

    103,283       210,773       38,855       80,355  

Installation

    17,725       59,929       13,445       10,438  

Service

    155,034       83,597       18,219       24,253  

Electricity

    35,987       39,741       10,876       10,649  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

    312,029       394,040       81,395       125,695  
 

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit (loss)

    (103,489     (18,044     (9,198     43,666  
 

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

       

Research and development

    46,848       51,146     11,223       14,731  

Sales and marketing

    29,101       32,415       7,845       8,262  

General and administrative

    61,545       55,674       12,879       14,988  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    137,494       139,235       31,947       37,981  
 

 

 

   

 

 

   

 

 

   

 

 

 

Profit (loss) from operations

    (240,983     (157,279     (41,145     5,685  

Interest expense

    (81,190     (108,623     (24,363     (23,037

Other income (expense), net

    (379     268       119       (629

Gain (loss) on revaluation of warrant liabilities and embedded derivatives

    (13,035     (14,995     215       (4,034
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss before income taxes

    (335,587     (280,629     (65,174     (22,015

Income tax provision

    729       636       214       333  
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

    (336,316     (281,265     (65,388     (22,348

Net loss per share attributable to noncontrolling interests and redeemable noncontrolling interests

    (56,658     (18,666     (5,856     (4,632
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

  $ (279,658   $ (262,599   $ (59,532   $ (17,716
 

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ (18.56   $ (17.08   $ (3.91   $ (1.14
 

 

 

   

 

 

   

 

 

   

 

 

 

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

    15,069       15,372     15,215       15,605  
 

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss per share attributable to common stockholders basic and diluted (unaudited)

    $ (1.87     $ (0.13
   

 

 

     

 

 

 

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

      131,754         130,805  


 

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Key operating metrics:

 

    Years Ended December 31,     Three Months Ended March 31,  
        2016             2017         2017     2018  

Product accepted during the period (in 100 kilowatt systems)

    687       622       119    

 

166

 

Megawatts deployed as of period end

    235       297       247       312  

 

    Years Ended December 31,     Three Months Ended March 31,  
          2016                 2017                 2017                   2018          
          (in thousands)  

Billings for product accepted in the period

  $ 522,543     $ 248,102     $ 48,105     $ 121,143  

Billings for installation on product accepted in the period

    114,680       96,452       23,027       11,896  

Billings for annual maintenance services agreements

    67,820       79,881       14,882       14,122  

Ratable value of contracts accepted in the period

    384,229       21,653       9,566       (17,140

 

    Three Months Ended  
    Mar. 31,
2016
    Jun. 30,
2016
    Sep. 30,
2016
    Dec. 31,
2016
    Mar. 31,
2017
    Jun. 30,
2017
    Sep. 30,
2017
    Dec. 31,
2017
    Mar. 31,
2018
 

Product costs of product accepted in the period (per kilowatt)

  $ 5,086     $ 4,809     $ 4,383     $ 3,826     $ 3,999     $ 3,121     $ 3,386     $ 2,944     $ 3,855  

Period costs of manufacturing related expenses not included in product costs (in thousands)

    4,302       4,586       6,869       6,143       7,397       8,713       7,152       9,174       10,785  

Installation costs on product accepted in the period (per kilowatt)

    1,280       1,481       1,056       1,170       1,974       1,306       1,263       829       526  

For a discussion of these key operating metrics, see “Summary Consolidated Financial and Other Data—Key Operating Metrics” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Operating Metrics”.

Our consolidated balance sheet as of March 31, 2018 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 107,610,244 shares of Class B common stock immediately prior to the closing of this offering, (ii) the automatic conversion of $215.9 million aggregate principal amount of our 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 8,382,757 shares of Class B common stock immediately prior to the completion of this offering, (iii) the issuance and exercise of warrants to purchase 469,333 shares of our Class B common stock at an exercise price of $0.01 per share to certain purchasers of our 6% Notes, as described in “Description of Capital Stock—6.0% 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 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 150,000 shares of Class B 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 Class A 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



 

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prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

     As of March 31, 2018  
     Actual     Pro Forma     Pro Forma As
Adjusted(1)
 
     (in thousands)  

Consolidated balance sheet data:

      

Cash and cash equivalents

   $ 88,227     $ 88,232     $                   

Working capital

     154,595       158,922    

Total assets

     1,184,634       1,184,639    

Long-term portion of debt

     925,342       713,729    

Total liabilities

     1,700,498       1,483,534    

Convertible redeemable preferred stock

     1,465,841       —    

Redeemable noncontrolling interest and noncontrolling interest

     207,935       207,935    

Stockholders’ deficit

     (2,189,640     (506,830  

 

(1)  Each $1.00 increase or decrease in the assumed initial public offering price of $         per share of Class A common stock, 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 Class A 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 Class A 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 Class A 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, unavailability of back-up service providers to operate and maintain the Energy Servers, 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.

Certain estimates of market opportunity and forecasts of market growth included in this prospectus may prove to be inaccurate.

This prospectus includes several estimates by us and third parties of the potential addressable market for electricity and for our products and services, both internationally and in the United States. Market opportunity estimates and growth forecasts, whether obtained from third-party sources or developed internally, are subject to significant uncertainty and are based on assumptions and estimates that may not prove to be accurate. In particular, estimates and forecasts relating to the size and expected growth of electricity demand in our target markets, the adoption of our products, our capacity to address this demand, and our pricing may prove to be inaccurate. In addition, third-party estimates of the addressable market for commercial, industrial and public services electricity reflect the opportunity available from all participants and potential participants in the market.

 

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Any inaccuracies or errors in third-party estimates of market opportunity may cause us to misallocate capital and other business resources, which could divert resources from more valuable alternative projects and harm our business.

The addressable market we estimate may not materialize for many years, if ever, and even if the markets in which we compete meet the size estimates and growth forecasts in this prospectus, our business could fail to grow at similar rates, if at all. Our growth is subject to many factors, including our success in implementing our business strategy, which is subject to many risks and uncertainties. Accordingly, the forecasts of market size or growth included in this prospectus should not be taken as indicative of our future growth.

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 March 31, 2018, we had an accumulated deficit of $2.3 billion. We expect to continue to expand our operations, including by investing in manufacturing, sales and marketing, research and development, staffing systems and infrastructure to support our growth. We anticipate that we will incur net losses on a GAAP basis for the foreseeable future. Our ability to achieve profitability in the future will depend on a number of factors, including:

 

    growing our sales volume;

 

    increasing sales to existing customers and attracting new customers;

 

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

 

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

 

    reducing the cost of producing our Energy Servers;

 

    improving the efficiency and predictability of our installation process;

 

    improving the effectiveness of our sales and marketing activities; 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 through various leasing arrangements. 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/or third-party investors (PPA entities).

We will need to grow committed financing capacity with existing partners, or attract additional partners to support our growth. Generally, at any point in time, the deployment of a portion of our backlog is contingent on securing available financing. Our ability to attract third-party financing depends on many factors that are outside of our control, including the investors’ ability to utilize tax credits and other government incentives, our perceived creditworthiness and the condition of credit markets generally. Our financing of customer purchases of our Energy Servers is subject to conditions such as the customer’s credit quality and the expected minimum internal rate of return on the customer engagement, and if these conditions are not satisfied, we may be unable to finance purchases of our Energy Servers, which would have an adverse effect on our revenue in a particular period. If we are unable to help our customers arrange financing for our Energy Servers, our business will be harmed.

 

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We do not currently have a committed financing partner willing to finance deployments with poor credit-quality customers. If we are unable to procure financing partners willing to finance such deployments, our ability to grow our business may be negatively impacted.

If our Energy Servers contain manufacturing defects, our business and financial results could be harmed.

Our Energy Servers are complex products, and they may contain undetected or latent errors or defects. In the past, we have experienced latent defects, only discovered once the Energy Server is deployed in the field. Changes in our supply chain or the failure of our suppliers to otherwise provide us with components or materials that meet our specifications could also introduce defects into our products. In addition, as we grow our manufacturing volume, the chance of manufacturing defects could increase. Any manufacturing defects or other failures of our Energy Servers to perform as expected could cause us to incur significant re-engineering costs, divert the attention of our engineering personnel from product development efforts and significantly and adversely affect customer satisfaction, market acceptance and our business reputation.

Furthermore, we may be unable to correct manufacturing defects or other failures of our Energy Servers in a manner satisfactory to our customers, which could adversely affect customer satisfaction, market acceptance and our business reputation.

The performance of our Energy Servers may be affected by factors outside of our control, which could result in harm to our business and financial results.

Field conditions, such as the quality of the natural gas supply and utility processes which vary by region and may be subject to seasonal fluctuations, have affected the performance of our Energy Servers and are not always possible to predict until the Energy Server is in operation. Although we believe we have designed new generations of Energy Servers to better withstand the variety of field conditions we have encountered, as we move into new geographies and deploy new service configurations, we may encounter new and unanticipated field conditions. Adverse impacts on performance may require us to incur significant re-engineering costs, divert the attention of our engineering personnel from product development efforts and significantly and adversely affect customer satisfaction, market acceptance and our business reputation. Furthermore, we may be unable to adequately address the impacts of factors outside of our control in a manner satisfactory to our customers, which could adversely affect customer satisfaction, market acceptance and our business reputation.

If our estimates of useful life for our Energy Servers are inaccurate or we do not meet service and performance warranties and guarantees, our business and financial results could be harmed.

We offer certain customers the opportunity to renew their operations and maintenance service agreements on an annual basis, for up to 20 years, at prices predetermined at the time of purchase of the Energy Server. Our pricing of these contracts and our reserves for warranty and replacement are based upon our estimates of the life of our Energy Servers and their components, including assumptions regarding improvements in useful life that may fail to materialize. We also provide performance warranties and guarantees covering the efficiency and output performance of our Energy Servers. We do not have a long history with a large number of field deployments, and our estimates may prove to be incorrect. Failure to meet these performance warranties and guarantee levels may require us to replace the Energy Servers at our expense or refund their 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 implemented a fleet decommissioning program for our early generation Energy Servers in our PPA I program, which resulted in a significant adjustment to revenue in the quarter ended December 31, 2015, as we would otherwise have failed to meet efficiency and output warranties. As of March 31, 2018, we had a total of 58.5 megawatts in total deployed early generation servers, including our first and second generation servers, out

 

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of our total installed base of 312 megawatts. We accrue for product warranty costs and recognize losses on service or performance warranties based on our estimates of costs that may be incurred and 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. We accrue for extended warranty costs that we expect to incur under the maintenance service agreements that our customers renew for a term of typically one year. In addition, we expect that our deployed early generation Energy Servers may continue to perform at a lower output and efficiency level, and as a result the maintenance costs may exceed the contracted prices that we expect to generate in respect of those servers if our customers continue to renew their maintenance service agreements in respect of those servers.

Our business currently depends on the availability of rebates, tax 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 some state and local governments provide incentives to end users and purchasers of our Energy Servers in the form of rebates, tax credits and other financial incentives, such as system performance payments and payments for renewable energy credits associated with renewable energy generation. We rely on these governmental rebates, tax credits and other financial incentives to significantly lower the effective price of the Energy Servers to our customers in the United States, including by lowering the cost of capital to our customers, as our financing partners and PPA 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. For example, the federal ITC benefit expired on December 31, 2016 and without the availability of the ITC benefit incentive, we lowered the price of our Energy Servers to ensure the economics to our customers remain the same as it was prior to losing the ITC benefit, adversely affecting our gross profit. While the ITC was reinstated by the U.S Congress on February 9, 2018 and made retroactive to January 1, 2017, it is possible in the future that this incentive could be repealed.

Our Energy Servers have qualified for tax exemptions, incentives, or other customer incentives in many states including the states of California, Connecticut, Massachusetts, New Jersey and New York. Some states have utility procurement programs and/or renewable portfolio standards for which our technology is eligible. Our Energy Servers are currently installed in eleven U.S. states, each of which may have its own enabling policy framework. There is no guarantee that these policies will continue to exist in their current form, or at all. Such state programs may face increased opposition on the U.S. federal, state and local levels in the future. Changes in federal or state programs could reduce demand for our Energy Servers, impair sales financing and adversely impact our business results.

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. In July 2016, the CPUC modified the SGIP to provide a smaller allocation of the incentives available to generating technologies such as our Energy Servers and a larger allocation to storage technologies. As modified, the SGIP will require all eligible power generation sources consuming natural gas to use a minimum of 10% biogas to receive SGIP funds beginning in 2017, with this minimum biogas requirement increasing to 25% in 2018, 50% in 2019 and 100% in 2020. In addition, the CPUC provided a further limitation on the available allocation of funds that any one participant may claim under the SGIP. The SGIP will expire on January 21, 2021 absent extension. Our billings for product accepted derived from customers benefiting from the SGIP represented approximately 36%, 12%, and 18% of total billings for product accepted for the years ended December 31, 2016 and 2017, and the three months ended March 31, 2018, respectively.

 

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

We expect that any Energy Server deployments through financed transactions (including our Bloom Electrons programs, our leasing programs, and any third-party PPA programs) will receive capital from financing parties who derive a significant portion of their economic returns through tax benefits (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 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, we compete with other energy companies eligible for these tax benefits to access such investors, and the availability of capital from tax equity investors is subject to fluctuations based on factors outside of our control such as macroeconomic trends and changes in applicable taxation regimes. Concerns regarding our limited operating history 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, the market for our Energy Servers and the continued availability of tax benefits applicable to 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 financing programs or use the tax benefits provided by the ITC and MACRS depreciation, which could make it more difficult for customers to finance the purchase of our Energy Servers or require us to reduce the price at which we are able to sell 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, 2016, approximately 89% of our revenue came from our top 20 customers, with two customers accounting for approximately 29% of our total revenue. In 2017, our top 20 customers accounted for approximately 91% of our total revenue and two customers accounted for approximately 53% of our total revenue. For the three months ended March 31, 2018, our top 20 customers accounted for 94% of our total revenue and two customers accounted for 70% 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, four customers accounted for approximately one-half of our backlog as of March 31, 2018. 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

 

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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, and we may be unable to recover some or all of our costs in connection with design, permitting, installation and site preparations incurred prior to cancellation. Cancellation rates can be between 10% and 20% in any given period, due to factors outside of our control including an inability to install an Energy Server at the customer’s chosen location because of permitting or other regulatory issues, unanticipated changes in the cost or availability of alternative sources of electricity available to the customer, or other reasons unique to each customer. Our operating expenses are based on anticipated sales levels, and many of our expenses are fixed. If we are unsuccessful in closing sales after expending significant resources or if we experience delays or cancellations, our business could be materially and adversely affected. Since we do not recognize revenue on the sales of our products until installation and acceptance, a small fluctuation in the timing of the completion of our sales transactions could cause operating results to vary materially from period to period.

We rely on net metering arrangements that are subject to change.

Because our Energy Servers are designed to operate at a constant output twenty-four hours a day, seven days a week and our customers’ demand for electricity typically fluctuates over the course of the day or week, there are often periods when our Energy Servers are producing more electricity than a customer may require, and such excess electricity must be exported to the local electric utility. Many, but not all, local electric utilities provide compensation to our customers for such electricity under “net metering” programs. Net metering programs are subject to changes in availability and terms. At times in the past, such changes have had the effect of significantly reducing or eliminating the benefits of such programs. Changes in the availability of, or benefits offered by, the net metering programs in place in the jurisdictions in which we operate could adversely affect the demand for our Energy Servers.

The economic benefits of our Energy Servers to our customers depends on the cost of electricity available from alternative sources including local electric utility companies, which cost structure is subject to change.

The economic benefit of our Energy Servers to our customers includes, among other things, the benefit of reducing such customer’s payments to the local utility company. The rates at which electricity is available from a customer’s local electric utility company is subject to change and any changes in such rates may affect the relative benefits of our Energy Servers. Further, the local electric utility may impose “departing load”, “standby” or other charges on our customers in connection with their acquisition of our Energy Servers, the amounts of which are outside of our control and which may have a material impact on the economic benefit of our Energy Servers to our customers. Changes in the rates offered by local electric utilities and/or in the applicability or amounts of charges and other fees imposed by such utilities on customers acquiring our Energy Servers could adversely affect the demand for our Energy Servers.

Additionally, the electricity produced by our Energy Servers is currently not cost competitive in many geographic markets, and we may be unable to reduce our costs to a level at which our Energy Servers would be competitive in such markets. As such, unless the cost of electricity in these markets rises or we are able to generate demand for our Energy Servers based on benefits other than electricity cost savings, our potential for growth may be limited.

 

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

Because we 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.

Although we generally are not regulated as a utility, federal, state and local government statutes and regulations concerning electricity heavily influence the market for our product and services. These statutes and regulations often relate to electricity pricing, net metering, incentives, taxation, and the rules surrounding the interconnection of customer-owned electricity generation for specific technologies. In the United States, governments frequently modify these statutes and regulations. Governments, often acting through state utility or public service commissions, change and adopt different requirements for utilities and rates for commercial customers on a regular basis. Changes, or in some cases a lack of change, in any of the laws, regulations, ordinances or other rules that apply to our installations and new technology could make it more costly for us or our customers to install and operate our Energy Servers on particular sites, and in turn could negatively affect our ability to deliver cost savings to customers for the purchase of electricity.

The construction, installation and operation of our Energy Servers at a particular site is also generally subject to oversight and regulation in accordance with national, state and local laws and ordinances relating to building codes, safety, environmental protection and related matters, and typically 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 utility company(ies) or the municipality has denied our request for connection or required us to reduce the size of certain projects. Any delays in our ability to connect with utilities, delays in the performance of installation-related services or poor performance of installation-related services by our general contractors or sub-contractors will have a material adverse effect on our results and could cause operating results to vary materially from period to period.

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.

 

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The failure of our suppliers to continue to deliver necessary raw materials or other components of our Energy Servers in a timely manner could prevent us from delivering our products within required time frames, and could cause installation delays, cancellations, penalty payments and damage to our reputation.

We rely on a limited number of third-party suppliers for some of the raw materials and components for our Energy Servers, including certain rare earth materials and other materials that may be of limited supply. If 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 some of our components and materials is limited and in some cases sole sourced. Some of our suppliers use proprietary processes to manufacture components. We may be unable to obtain comparable components from alternative suppliers without considerable delay, expense or at all, as replacing these suppliers could require us either to make significant investments to bring the capability in house or to invest in a new 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 and services operations, which would negatively impact our sales volumes and cash flows.

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

Our financial condition and results of operations and other key metrics have fluctuated significantly in the past and may continue to fluctuate in the future due to a variety of factors, many of which are beyond our control. For example, the amount of product revenue we recognize in a given period is materially dependent on the volume of installations of our Energy Servers in that period and the type of financing used by the customer.

In addition to the other risks described 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;

 

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    size of particular installations and number of sites involved in any particular quarter;

 

    the mix in the type of purchase or financing options used by customers in a period, and the rates of return required by financing parties in such period;

 

    whether we are able to structure our sales agreements in a manner that would allow for the product and installation revenue to be recognized up front at acceptance;

 

    delays or cancellations of Energy Server installations;

 

    fluctuations in our service costs, particularly due to unaccrued costs of servicing and maintaining Energy Servers;

 

    weaker than anticipated demand for our Energy Servers due to changes in government incentives and policies;

 

    fluctuations in our research and development expense, including periodic increases associated with the pre-production qualification of additional tools as we expand our production capacity;

 

    interruptions in our supply chain;

 

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

 

    the timing and level of additional purchases by existing customers;

 

    unanticipated expenses or installation delays associated with changes in governmental regulations, permitting requirements by local authorities at particular sites, utility requirements and environmental, health and safety requirements; and

 

    disruptions in our sales, production, service or other business activities resulting from disagreements with our labor force or our inability to attract and retain qualified personnel.

Fluctuations in our operating results and cash flow could, among other things, give rise to short-term liquidity issues. In addition, our revenue, key operating metrics and other operating results in future quarters may fall short of the expectations of investors and financial analysts, which could have an adverse effect on the price of our Class A common stock.

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

Currently, we are the only provider able to fully support and maintain our Energy Servers. If potential customers believe we do not have sufficient capital or liquidity to operate our business over the long-term or that we will be unable to maintain their Energy Servers and provide satisfactory support, customers may be less likely to purchase or lease our products, particularly in light of the significant financial commitment required. In addition, financing sources may be unwilling to provide financing on reasonable terms. Similarly, suppliers, financing partners and other third parties may be less likely to invest time and resources in developing business relationships with us if they have concerns about the success of our business.

Accordingly, in order to grow our business, we must maintain confidence 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;

 

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    competition from alternate sources of energy;

 

    warranty or unanticipated service issues we may experience;

 

    the environmental consciousness and perceived value of environmental programs to our customers;

 

    the size of our expansion plans in comparison to our existing capital base and the scope and history of operations;

 

    the availability and amount of tax incentives, credits, subsidies or other programs; and

 

    the other factors set forth in this section.

Several of these factors are largely outside our control, and any negative perceptions about our liquidity or long-term business prospects, even if unfounded, would likely harm our business.

A material decrease in the retail price of utility-generated electricity or an increase in the price of natural gas would affect demand for our Energy Servers.

We believe that a customer’s decision to purchase our Energy Servers is significantly influenced by the price, 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 some states and countries, the current cost of grid electricity, even together with available subsidies, does not render our product economically attractive. Furthermore, if the retail 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, an increase in the price of natural gas or curtailment of availability could make our Energy Servers less economically attractive to potential customers and reduce demand.

We currently face and will continue to face significant competition.

We compete for customers, financing partners and incentive dollars with other electric power providers. Many providers of electricity, such as traditional utilities and other companies offering distributed generation products, have longer operating histories, 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

 

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of factors outside our control, such as delays in government approvals, burdensome permitting conditions, and delays in the delivery of manufacturing equipment and subsystems that we manufacture or obtain from suppliers.

 

    It may be difficult to expand our business internationally without additional manufacturing facilities located outside the United States. Adding manufacturing capacity in any international location will subject us to new laws and regulations including those pertaining to labor and employment, environmental and export import. In addition, it brings with it the risk of managing larger scale foreign operations.

 

    We may be unable to achieve the production throughput necessary to achieve our target annualized production run rate at our current and future manufacturing facilities.

 

    Manufacturing equipment may take longer and cost more to engineer and build than expected, and may not operate as required to meet our production plans.

 

    We may depend on third-party relationships in the development and operation of additional production capacity, which may subject us to the risk that such third parties do not fulfill their obligations to us under our arrangements with them.

 

    We may be unable to attract or retain qualified personnel.

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 supply agreements that could result in insufficient inventory and negatively affect our results of operations.

We have entered into long-term supply agreements with certain suppliers. Some of these supply agreements provide for fixed or inflation-adjusted pricing and substantial prepayment obligations. If our suppliers provide insufficient inventory at the level of quality required to meet customer demand, or if our suppliers are unable or unwilling to provide us with the contracted quantities, as we have limited or in some case no alternatives for supply, our results of operations could be materially and negatively impacted. 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. Additionally, many of our parts and materials are procured from foreign suppliers, which exposes us to risks including unforeseen increases in costs or interruptions in supply arising from changes in applicable international trade regulations, such as taxes, tariffs, or quotas. Any of the foregoing could materially harm our financial condition and results of operations.

We face supply chain competition, including competition from businesses in other industries, which could result in insufficient inventory and negatively affect our results of operations.

Certain of our suppliers also supply parts and materials to other businesses, including businesses engaged in the production of consumer electronics and other industries unrelated to fuel cells. As a relatively low-volume purchaser of certain of these parts and materials, we may be unable to procure a sufficient supply of the items in the event that our suppliers fail to produce sufficient quantities to satisfy the demands of all of their customers, which could materially harm our financial condition and results of operations.

 

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We, and some of our suppliers, obtain capital equipment used in our manufacturing process from sole suppliers and if this equipment is damaged or otherwise unavailable, our ability to deliver our Energy Servers on time will suffer.

Some of the capital equipment used to manufacture our products and some of the capital equipment used by our suppliers have been developed and made specifically for us, are not readily available from multiple vendors, and would be difficult to repair or replace if they did not function properly. If any of these suppliers were to experience financial difficulties or go out of business, or if there were any damage to or a breakdown of our manufacturing equipment and we could not obtain replacement equipment in a timely manner, our business would suffer. In addition, a supplier’s failure to supply this equipment in a timely manner, with adequate quality, and on terms acceptable to us, could disrupt our production schedule or increase our costs of production and service.

If we are not able to continue to reduce our cost structure in the future, our ability to become profitable may be impaired.

We must continue to reduce the manufacturing costs for our Energy Servers to expand our market. Additionally, certain of our existing service contracts were entered into based on projections regarding service costs reductions that assume continued advances in our manufacturing and services processes, which we may be unable to realize. While we have been successful in reducing our manufacturing and services costs to date, the cost of components and raw materials, for example, could increase in the future. Any such increases could slow our growth and cause our financial results and operational metrics to suffer. In addition, we may face increases in our other expenses, including increases in wages or other labor costs, as well as installation, marketing, sales or related costs. We may continue to make significant investments to drive growth in the future. In order to expand into electricity markets in which the price of electricity from the grid is lower while still maintaining our current margins, we will need to continue to reduce our costs. Increases in any of these costs, or our failure to achieve projected cost reductions, could adversely affect our results of operations and financial condition and harm our business and prospects. If we are unable to reduce our cost structure in the future, we may not be able to achieve profitability, which could have a material adverse effect on our business and 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.

 

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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 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 they may in the future believe are infringed by our products or services. Although we are not currently subject to any claims related to intellectual property, these companies holding patents or other intellectual property rights allegedly relating to our technologies could, in the future, make claims or bring suits alleging infringement, misappropriation, or other violations of such rights, or otherwise 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 a claim is successfully brought in the future and we or our products are determined to have infringed, misappropriated, or otherwise violated a third party’s intellectual property rights, we may be required to do one or more of the following:

 

    cease selling or using our products that incorporate the challenged intellectual property;

 

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    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 or means of production, which may not be possible or cost-effective.

Any of the foregoing could adversely affect our business, prospects, operating results and financial condition. In addition, any litigation or claims, whether or not valid, could harm our reputation, result in substantial costs, and divert resources and management attention.

We also license technology from third parties, and incorporate components supplied by third parties into our products. We may face claims that our use of such technology or components infringes or otherwise violates the rights of others, which would subject us to the risks described above. We may seek indemnification from our licensors or suppliers under our contracts with them, but our rights to indemnification or our suppliers’ resources may be unavailable or insufficient to cover our costs and losses.

If we are unable to attract and retain key employees and hire qualified management, technical, engineering, and sales personnel, our ability to compete and successfully grow our business could be harmed.

We believe that our success and our ability to reach our strategic objectives are highly dependent on the contributions of our key management, technical, engineering and sales personnel. The loss of the services of any of our key employees could disrupt our operations, delay the development and introduction of our products and services, and negatively impact our business, prospects and operating results. In particular, we are highly dependent on the services of Dr. Sridhar, our 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. If, in the future, contamination is discovered at properties formerly owned or operated by us or owned or operated by us, or properties to which hazardous substances were sent by us, it could 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.

 

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The costs of complying with environmental laws, regulations and customer requirements, and any claims concerning noncompliance, or liability with respect to contamination in the future could have a material adverse effect on our financial condition or operating results.

The installation and operation of our Energy Servers are subject to environmental laws and regulations in various jurisdictions, and there is uncertainty with respect to the interpretation of certain environmental laws and regulations to our Energy Servers, especially as these regulations evolve over time.

Bloom is committed to compliance with applicable environmental laws and regulations, including health and safety standards, and we continually review the operation of our Energy Servers for health, safety and compliance. Our Energy Servers, like other fuel cell technology-based products of which we are aware, produce small amounts of hazardous wastes and air pollutants, and we seek to ensure that they are handled in accordance with applicable regulatory standards.

Maintaining compliance with laws and regulations can be challenging given the changing patchwork of environmental laws and regulations that prevail at the federal, state, regional and local level. Most existing environmental laws and regulations preceded the introduction of our innovative fuel cell technology and were adopted to apply to technologies existing at the time, namely large, coal, oil or gas-fired power plants. Currently, there is generally little guidance from these agencies on how certain environmental laws and regulations may, or may not, be applied to our technology.

For example, natural gas, which is the primary fuel used in our Energy Servers, contains benzene, which is classified as a hazardous waste if it exceeds 1 milligram (mg) per liter. A small amount of benzene (equivalent to what is present in one gallon of gasoline in an automobile fuel tank which is exempt from federal regulation) found in the public pipeline natural gas is collected by gas cleaning units contained in our Energy Servers and is typically replaced once every 18 to 24 months by us from customers’ sites. From 2010 to late 2016, in the regular course of maintenance of the Energy Servers, we periodically replaced the units in our servers under a federal environmental exemption that permitted the handling of such units without manifesting the contents as containing a hazardous waste. Although we operated under the exemption upon the advice of outside legal counsel, and with the approval of two states that had adopted the federal exemption, the federal Environmental Protection Agency issued guidance for the first time in late 2016 that differed from the legal advice and state approvals we had obtained, even though we had operated under the exemption since 2010. We have complied with the new guidance. However, the EPA is seeking to collect approximately $1.0 million in fines from us for the prior period, which we are contesting.

Another example relates to the very small amounts of chromium in hexavalent form, or CR+6 which our Energy Servers emit. This occurs any time a steel super alloy is exposed to high temperatures. CR+6 is found in small concentrations in the air generally. However, exposure to high or significant concentrations over prolonged periods of time can be carcinogenic. While the small amount of chromium emitted by our Energy Servers is initially in the hexavalent form, it converts to a non-toxic trivalent form, or CR+3 rapidly after it leaves the Energy Server, and is largely converted and reaches background concentrations within 10 meters of the exhaust.

Our Energy Servers do not present any significant health hazard, based on our modeling, testing methodology and measurements. There are several supporting elements to this position including that the emissions from our Energy Servers are in very low concentrations, are emitted as nano-particles that convert to the non-hazardous form CR+3 rapidly, are quickly dispersed into the air, and are not emitted in close proximity to locations where people would be expected to have a prolonged exposure to them. In tests we have conducted, air measurements taken 10 meters from an Energy Server show that there was no detectable Cr+6 above the amounts in the ambient air.

Several states in which we currently operate, including California, require permits for emissions of hazardous air pollutants based on the quantity of emissions, most of which require permits only for quantities of emissions that are higher than those observed from our Energy Servers. Other states in which we operate, including New York, New Jersey and North Carolina, have specific exemptions for fuel cells. Some states in

 

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which we operate have Cr+6 limits which are an order of magnitude over our operating range. Within California, the Bay Area Air Quality Management District, or BAAQMD, requires a permit for emissions that are more than .00051 lbs/year and other California regulations require that levels of Cr+6 be below .00005 µg/m³, which is the level required by Proposition 65, and which requires notification of the presence of Cr+6 unless it can be shown to be at levels that do not pose a significant health risk We have determined that the standards applicable in California in this regard are more stringent than those in any other state or foreign location in which we have installed Energy Servers to date.

There are generally no relevant testing methodology guidelines for a technology such as ours. The standard test method for analyzing emissions cannot be readily applied to our Energy Servers because it would require inserting a probe into an emission stack. Our servers do not have stacks; therefore, we have to construct an artificial stack on top of our server in order to conduct a test. If we used the testing methodology, similar to what the air districts have used in other large scale industrial products, it would show that we would need to reduce the emissions of CR+6 from our Energy Servers to meet the most stringent requirements. However, we employed a modified test method that is designed to capture the actual operating conditions of our Energy Servers and its distinctly different design from legacy power plants and industrial equipment. Based on our modeling, measured results and analysis, we are in compliance with State of California air regulations.

We will work with the California Air Districts and seek to obtain their agreement that we are in compliance. Should the regulators disagree, we have engineered a technology solution that provides an alternate route to compliance. This technology solution is ready to deploy and will cost less than 0.1% of our product cost and will not be material.

While we seek to comply with air quality and emission standards in every region in which we operate, it is possible that certain customers in other regions may request that we provide the new technology solution for their Energy Servers to comply with the stricter standards imposed by California even though they are not applicable and even though we are under no contractual obligation to do so. We will comply with these requests. Failure or delay in attaining regulatory approval could result in our not being able to operate in a particular local jurisdiction.

These examples illustrate that our technology is moving faster than the regulatory process in many instances. It is possible that regulators could delay or prevent us from conducting our business in some way pending agreement on, and compliance with, shifting regulatory requirements. Such actions could delay the installation of Energy Servers, result in fines, require their modification or replacement, or trigger claims of performance warranties and defaults under customer contracts that could require us to repurchase their Energy Servers, any of which could adversely affect our business, financial performance and reputation. In addition, new laws or regulations or new interpretations of existing laws or regulations could require us to upgrade or retrofit existing equipment, which could result in materially increased capital and operating expenses.

Furthermore, we have not yet determined whether our Energy Servers will satisfy regulatory requirements in the other states in the U.S. and international locations in which we do not currently sell Energy Servers, but may pursue in the future.

As a fossil fuel-based technology, we may be subject to a heightened risk of regulation, potential the loss of certain incentives to changes in our customers’ energy procurement policies.

Although the current generation of Bloom Energy Servers running on natural gas produce nearly 60% less carbon emissions compared to the average of U.S. combustion power generation, the operation of our Energy Servers does produce carbon dioxide (CO2), which has been shown to be a contributing factor to global climate change. As such, we may be negatively impacted by CO2-related changes in applicable laws, regulations, ordinances or other rules, or the requirements of the incentive programs on which we currently rely. Changes, or in some cases a lack of change, in any of the laws, regulations, ordinances or other rules that apply to our installations and new technology could make it illegal or more costly for us or our customers to install and operate our Energy Servers on particular sites, negatively affecting our ability to deliver cost savings to

 

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customers, or we could be prohibited from completing new installations or continuing to operate existing projects. Certain municipalities have already banned the use of distributed generation products that utilize fossil fuel. Additionally, our customers’ and potential customers’ energy procurement policies may prohibit or limit their willingness to procure our Energy Servers. Our business prospects may be negatively impacted if we are prevented from completing new installations or our installations become more costly as a result of laws, regulations, ordinances or other rules applicable to our Energy Servers, or by our customers’ and potential customers’ energy procurement policies.

Existing regulations and changes to such regulations impacting the electric power industry may create technical, regulatory and economic barriers which could significantly reduce demand for our Energy Servers.

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 project with Delmarva Power & Light Company (Delmarva) is subject to laws and regulations relating to electricity generation, transmission and sale, such as Federal Energy Regulatory Commission (FERC) regulation under various federal energy regulatory laws, 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.

Possible new tariffs could have a material adverse effect on our business.

Our business is dependent on the availability of raw materials and components for our Energy Servers, particularly electrical components common in the semiconductor industry, specialty steel products and processing and raw materials for our Energy Servers. The United States has recently imposed tariffs on steel and aluminum imports which may increase the cost of raw materials for our Energy Servers and decrease the available supply. The United States is also considering tariffs on additional items, which could include items imported by us from China or other countries.

Although we currently maintain alternative sources for raw materials, our business is subject to the risk of price fluctuations and periodic delays in the delivery of certain raw materials, which tariffs may exacerbate. Disruptions in the supply of raw materials and components could temporarily impair our ability to manufacture our Energy Servers for our customers or require us to pay higher prices in order to obtain these raw materials or components from other sources, which could thereby affect our business and results of operations. While it is too early to predict how the recently enacted tariffs on imported steel will impact our business, the imposition of tariffs on items imported by us from China or other countries could increase our costs and could have a material adverse effect on our business and results of operations.

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

 

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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, in 2011, an amendment to the Delaware Renewable Energy Portfolio Statute was enacted to permit the Delaware public service utility, Delmarva, to meet its renewable energy standards using energy generated by fuel cells manufactured and operated in Delaware. This statute required Delmarva to charge a tariff to its ratepayors to pay for certain costs of providers of such energy generated by fuel cells. In 2012, plaintiffs FuelCell Energy Inc. and John A. Nichols filed suit against Delaware Governor Jack Markell and the Delaware Public Service Commission in the U.S. District Court for Delaware, claiming that the 2011 amendment to the statute discriminated against interstate fuel cell providers and subsidized us for building a manufacturing facility in Delaware to manufacture fuel cells. We were not named as a party to this lawsuit, and the litigation was ultimately settled. In addition, since our Energy Server is a new type of product in a nascent market, we have in the past needed and may in the future need to seek the amendment of existing regulations or, in some cases, the creation of new regulations, in order to operate our business in some jurisdictions. Such regulatory processes may require public hearings concerning our business, which could expose us to subsequent litigation.

Unfavorable outcomes or developments relating to proceedings to which we are a party or transactions involving our products, such as judgments for monetary damages, injunctions, or denial or revocation of permits, could have a material adverse effect on our business, 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, controlled and monitored by our centralized remote monitoring service and we rely on our internal computer networks for many of the systems we use to operate our business generally. Although we take protective measures and endeavor to modify them as circumstances warrant, the security of our infrastructure, including the network that connects our Energy Servers to our remote monitoring service, may be vulnerable to breaches, unauthorized access, misuse, computer viruses or other malicious code and cyber-attacks that could have a material adverse impact on our business and our Energy Servers in the field. A breach or failure of our networks or computer or data management systems due to intentional actions such as cyber-attacks, negligence or other reasons, could seriously disrupt our operations or could affect our ability to control or to assess the performance in the field of our Energy Servers and could result in disruption to our business and potentially legal liability. These events could result in significant costs or reputational consequences.

Our headquarters and other facilities are located in an active earthquake zone, and an earthquake or other types of natural disasters or resource shortages could disrupt and harm our results of operations.

We conduct a majority of our operations in the San Francisco Bay area in an active earthquake zone and certain of our facilities are located within known flood plains. The occurrence of a natural disaster, such as an earthquake, drought, flood, localized extended outages of critical utilities or transportation systems, or any critical resource shortages, could cause a significant interruption in our business, damage or destroy our facilities, manufacturing equipment, or inventory, and cause us to incur significant costs, any of which could harm our

 

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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.

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 Class A 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, 2017, 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

 

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and internal audit staff with appropriate public company experience and technical accounting knowledge. Moreover, if we are not able to comply with the requirements of Section 404A in a timely manner or if we or our independent registered public accounting firm identify deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, we could be subject to sanctions or investigations by the Securities and Exchange Commission (SEC) or other regulatory authorities, which would require additional financial and management resources. Any failure to maintain effective disclosure controls and procedures or internal control over financial reporting could have a material adverse effect on our business and operating results, and cause a decline in the price of our Class A common stock.

Our ability to use our deferred tax assets to offset future taxable income may be subject to limitations that could subject our business to higher tax liability.

We may be limited in the portion of net operating loss carryforwards that we can use in the future to offset taxable income for U.S. federal and state income tax purposes. At December 31, 2017, we had federal and state net operating loss carryforwards (NOLs) of $1.7 billion and $1.5 billion, respectively, which will expire, if unused, beginning in 2022 and 2018, 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, 2017, we had approximately $16.1 million of federal research credit, $6.6 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 March 31, 2018, we and our subsidiaries had approximately $950.5 million of total consolidated indebtedness, of which an aggregate of $593.7 million represented indebtedness that is recourse to us. Of this amount, $249.4 million represented debt under our 8% Notes, $215.9 million of which will convert automatically into Class B common stock immediately prior to completion of this offering, $4.5 million represented operating debt, $356.8 million represented debt of our PPA entities, $245.0 million represented debt under our 6% Notes which could remain outstanding following this offering and $94.8 million represented debt under our 10% Notes which also 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;

 

    subject us to increased sensitivity to interest rate increases;

 

    make us more vulnerable to economic downturns, adverse industry conditions or catastrophic external events;

 

    limit our ability to withstand competitive pressures;

 

    limit our ability to invest in new business subsidiaries that are not PPA-related

 

    reduce our flexibility in planning for or responding to changing business, industry and economic conditions; and/or

 

    place us at a competitive disadvantage to competitors that have relatively less debt than we have.

 

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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 a significant volume of our operations through, and receive equity allocations from, our PPA entities, which contribute to our cash flow. These PPA entities are separate and distinct legal entities, do not guarantee our debt obligations and will have no obligation, contingent or otherwise, to pay amounts due under our debt obligations or to make any funds available to pay those amounts, whether by dividend, distribution, loan or other payments. Distributions by such PPA entities to us are precluded under these arrangements if there is an event of default or if financial covenants such as maintenance of applicable debt service coverage ratios are not met, even if there is not otherwise an event of default. Furthermore, under the terms of our equity financing arrangements for PPA Company II and certain other PPA entities, substantially all of the cash flows generated from these PPA entities in excess of debt service obligations are distributed to tax equity investors until the investors achieve a targeted internal rate of return or until a fixed date in the future, which is expected to be after a period of five or more years (the flip date), after which time we will receive substantially all of the remaining income (loss), tax and tax allocation attributable to the long-term customer payments and other incentives.

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.

We may not be able to secure additional debt financing.

As of March 31, 2018, we and our subsidiaries had approximately $950.5 million of total consolidated indebtedness, including $25.1 million in short-term debt and $925.3 million in long-term debt. In addition, our 10% Notes (the “10% Notes”) contain restrictions on our ability to issue additional debt and both the 6% Notes and 10% Notes limit our ability to provide collateral for any additional debt. Given our current level of indebtedness, the restrictions on additional indebtedness contained in the 10% Notes and the fact that most of our assets serve as collateral to secure existing debt, it may be difficult for us to secure additional debt financing at an attractive cost, which may in turn impact our ability to expand our operations and product development activities and remain competitive in the market.

 

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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 do not have any further primary liability for the debts or other obligations of the PPA entities. However, we are required to guarantee the obligations of our wholly-owned subsidiary which invests alongside other investors in the PPA entities. These obligations typically include the capital contribution obligations of such subsidiary to the PPA entity as well as the representations and warranties made by and indemnification obligations of such subsidiary to other investors in the applicable PPA entity. As a result, we may be obligated to make payments on behalf of our wholly-owned subsidiary to other investors in the PPA entities in the event of a breach of these representations, warranties or covenants.

All of our PPA entities that operate Energy Servers for end customers have significant restrictions on their ability to incur increased operating costs, or could face events of default under debt or other investment agreements if end customers are not able to meet their payment obligations under power purchase agreements or Energy Servers are not deployed in accordance with the project’s schedule. If our PPA entities experience unexpected, increased costs, such as insurance costs, interest expense, or taxes or as a result of the acceleration of repayment of outstanding indebtedness, or if end customers are unable 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. Additionally, under PPA Company II’s credit agreement, PPA Company II is obligated to offer to repay all outstanding debt in the event that we obtain an investment grade credit rating unless we provide a guarantee of the debt obligations of the PPA Company II. Upon receipt of such offer, the lenders may elect to require PPA Company II to prepay all remaining amounts owed under PPA Company II’s project debt.

Restrictions imposed by the agreements governing of our and our PPA entities’ outstanding indebtedness contain covenants that significantly limit our actions.

The agreements governing our outstanding indebtedness contain, and 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;

 

    incur liens;

 

    make asset dispositions;

 

    make loans or investments;

 

    issue or sell share capital of our subsidiaries;

 

    issue guarantees;

 

    enter into transactions with affiliates; and

 

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

Our debt agreements and our PPA entities’ debt agreements require the maintenance of financial ratios or the satisfaction of financial tests. Our and our PPA entities’ ability to meet these financial ratios and tests may be affected by events beyond our control and, as a result, we cannot assure you that we will be able to meet these ratios and tests. Upon the occurrence of events such as a change in control of our company, significant asset sales or mergers or similar transactions, the liquidation or dissolution of our company or the cessation of our stock exchange listing, holders of our 6% Notes have the right to cause us to repurchase for cash any or all of such

 

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outstanding Notes at a repurchase price in cash equal to 100% of the principal amount thereof, plus accrued and unpaid interest thereon. We cannot provide assurance that we would have sufficient liquidity to repurchase the Notes. Furthermore, our financing and debt agreements, such as our 6% Notes and our 8% Notes, contain events of default. If an event of default were to occur, the trustee or the lenders could, among other things, terminate their commitments and declare outstanding amounts due and payable, and our cash may become restricted. We cannot provide assurance that we would have sufficient liquidity to repay or refinance our indebtedness if such amounts were accelerated upon an event of default. Borrowings under other debt instruments that contain cross-acceleration or cross-default provisions may, as a result, be accelerated and become due and payable. 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 may have conflicts of interest with our PPA entities.

In each PPA entity, we act as the managing member and are responsible for the day-to-day administration of the project. However, we are also a major service provider for each PPA entity in its capacity as the operator of the Energy Servers under an operations and maintenance agreement. Because we are both the administrator and the manager of the PPA entities, as well as a major service provider, we face a potential conflict of interest in that we may be obligated to enforce contractual rights that a PPA entity has against us in our capacity as a service provider. By way of example, the PPA entity may have a right to payment from us under a warranty provided under the applicable operations and maintenance agreement, and we may be financially motivated to avoid or delay this liability by failing to promptly enforce this right on behalf of the PPA entity. While we do not believe that we had any conflicts of interest with our PPA entities as of March 31, 2018, conflicts of interest may arise in the future which cannot be foreseen at this time. In the event that prospective future tax equity investors and debt financing partners perceive there to exist any such conflicts, it could harm our ability to procure financing for our PPA entities in the future, which could have a material adverse effect on our business.

We are an “emerging growth company” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our Class A common stock less attractive to investors and may make it more difficult to compare our performance with other public companies.

We are an “emerging growth company,” 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 Class A common stock less attractive because we will rely on these exemptions. If some

 

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investors find our Class A common stock less attractive as a result, there may be a less active trading market for our Class A common stock and our stock price may be more volatile.

As an “emerging growth company”, we have elected to use the extended transition period for complying with new or revised accounting standards under Section 102(b)(2) of the JOBS Act, that allows us to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies. As a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates.

Risks Related to this Offering and Ownership of our Class A Common Stock

There has been no prior public market for our Class A common stock, the stock price of our Class A 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 Class A common stock prior to this offering. The initial public offering price for our Class A common stock will be determined through negotiations among the underwriters and us, and may vary from the market price of our Class A 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 Class A common stock may not develop following this offering or, if it does develop, may not be sustainable. The market price of our Class A common stock may fluctuate significantly in response to numerous factors, many of which are beyond our control, including:

 

    overall performance of the equity markets;

 

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

 

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

 

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

 

    recruitment or departure of key personnel;

 

    the economy as a whole and market conditions in our industry;

 

    new laws, regulations or subsidies or credits or new interpretations of them applicable to our business;

 

    negative publicity related to problems in our manufacturing or the real or perceived quality of our products;

 

    rumors and market speculation involving us or other companies in our industry;

 

    announcements by us or our competitors of significant technical innovations, acquisitions, strategic partnerships, or capital commitments;

 

    lawsuits threatened or filed against us;

 

    other events or factors, including those resulting from war, incidents of terrorism, or responses to these events;

 

    the expiration of contractual lock-up or market standoff agreements; and

 

    sales or anticipated sales of shares of our Class A common stock by us or our stockholders.

In addition, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. Stock prices of many companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies. In the past, stockholders have instituted securities class action litigation following periods of market volatility. If we were to 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.

 

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Sales of substantial amounts of our Class A common stock in the public markets, or the perception that they might occur, could cause the market price of our Class A common stock to decline.

Sales of a substantial number of shares of our Class A 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 are 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 and Morgan Stanley & Co. LLC may, in their 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 March 31, 2018, we had options and RSUs outstanding that, if fully exercised or settled, would result in the issuance of 22,038,317 shares of Class B common stock. Subsequent to March 31, 2018, we also issued restricted stock units that may be settled for 44,406 shares of our Class B common stock. All of the shares of Class B common stock issuable upon the exercise of stock options or settlement of RSUs, and the shares reserved for future issuance 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 Class B common stock have rights, subject to some conditions, to require us to file registration statements for the public resale of the Class A 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.

The dual class structure of our common stock and the voting agreements among certain stockholders will have the effect of concentrating voting control with KR Sridhar, our Chief Executive Officer and Chairman, and also with those stockholders who held our capital stock prior to the completion of this offering, including our directors, executive officers, and 5% stockholders who collectively will hold an aggregate of     % of the voting power of our outstanding capital stock following the completion of this offering, which will limit or preclude your ability to influence corporate matters, including the election of directors and the approval of any change of control transaction, and may adversely affect the trading price of our Class A common stock.

Our Class B common stock has ten votes per share, and our Class A common stock, which is the stock we are offering in this offering, has one vote per share. Following this offering, and after giving effect to voting agreements between KR Sridhar, our Chief Executive Officer and Chairman, and certain holders of Class B common stock, our directors, executive officers, 5% holders of our common stock, and their respective affiliates collectively will hold an aggregate of     % of the voting power of our outstanding capital stock, including     % of the voting power of our outstanding capital stock that will be held individually by KR Sridhar. Because of the ten-to-one voting ratio between our Class B and Class A common stock, the holders of our Class B common stock collectively will continue to control a majority of the combined voting power of our common stock and therefore be able to control all matters submitted to our stockholders for approval until the earliest to occur of (i) immediately prior to the close of business on the fifth anniversary of the closing of this offering, (ii) immediately prior to the close of business on the date on which the outstanding shares of Class B common stock represent less than five percent (5%) of the aggregate number of shares of Class A common stock and Class B common stock then outstanding, (iii) the date and time, or the occurrence of an event, specified in a written conversion election delivered by KR Sridhar to our Secretary or Chairman of the Board to so convert all shares of Class B common stock or (iv) immediately following the date of the death of KR Sridhar. This concentrated control will limit or preclude Class A stockholders’ ability to influence corporate matters while the dual class structure remains in effect, including the election of directors, amendments of our organizational documents, and any merger,

 

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consolidation, sale of all or substantially all of our assets, or other major corporate transaction requiring stockholder approval. In addition, this may prevent or discourage unsolicited acquisition proposals or offers for our capital stock that Class A stockholders may feel are in their best interest as one of our stockholders.

Future transfers by holders of Class B common stock will generally result in those shares converting to Class A common stock, subject to limited exceptions, such as certain transfers effected for estate planning purposes. The conversion of Class B common stock to Class A common stock will have the effect, over time, of increasing the relative voting power of those remaining holders of Class B common stock who retain their shares in the long-term. See the section titled “Description of Capital Stock—Anti-Takeover Provisions” for additional information.

The dual class structure of our common stock may adversely affect the trading market for our Class A common stock.

S&P Dow Jones and FTSE Russell have recently announced changes to their eligibility criteria for inclusion of shares of public companies on certain indices, including the S&P 500, namely, to exclude companies with multiple classes of shares of common stock from being added to such indices. In addition, several shareholder advisory firms have announced their opposition to the use of multiple class structures. As a result, the dual class structure of our common stock may prevent the inclusion of our Class A common stock in such indices and may cause shareholder advisory firms to publish negative commentary about our corporate governance practices or otherwise seek to cause us to change our capital structure. Any such exclusion from indices could result in a less active trading market for our Class A common stock. Any actions or publications by shareholder advisory firms critical of our corporate governance practices or capital structure could also adversely affect the value of our Class A common stock.

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

The market price for our Class A common stock 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 Class A common stock would be negatively affected. If one or more of the analysts who cover us downgrade our Class A common stock or publish inaccurate or unfavorable research about our business, our Class A common stock price would likely decline. If one or more of these analysts cease coverage of us or fail to publish reports on us regularly, demand for our Class A common stock could decrease, which might cause our Class A common stock price and trading volume to decline.

Because the initial public offering price of our Class A common stock will be substantially higher than the pro forma as adjusted net tangible book value per share of our outstanding Class A 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 Class A 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 Class A 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 Class A common stock in this offering, you will experience immediate dilution of $         per share, the difference between the price per share you pay for our Class A common stock and its pro forma as adjusted net tangible book value per share as of March 31, 2018. In addition, as of March 31, 2018, options to purchase 17,317,677 shares of our Class B common stock with a weighted-average exercise price of approximately $17.74 per share were outstanding as well as 4,720,640 shares of our Class B common stock subject to RSUs. The exercise of any of these options and settlement of any of these RSUs would result in additional dilution. As a result of the dilution to investors purchasing shares in this offering, investors may receive less than the purchase price paid in this offering, if anything, in the event of our liquidation. See the section titled “Dilution” for additional information.

 

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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 investment-grade rated, interest-bearing instruments, such as money market funds, certificates of deposit, commercial paper, direct or guaranteed obligations of the U.S. government. 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 capital stock and do not intend to pay any cash dividends in the foreseeable future. We anticipate that we will retain all of our future earnings for use in the development of our business and for general corporate purposes. Any determination to pay dividends in the future will be at the discretion of our board of directors. Accordingly, investors must rely on sales of their Class A common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investments.

Provisions in our charter documents and under Delaware law could make an acquisition of our company more difficult, 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 Class A 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 for a dual class common stock structure in which holders of our Class B common stock may have the ability to control the outcome of matters requiring stockholder approval, even if they own significantly less than a majority of the outstanding shares of our common stock, including the election of directors and significant corporate transactions, such as a merger or other sale of our company or substantially all of its assets;

 

    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.

 

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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 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 sources of statistical data, estimates and forecasts contained in this prospectus include 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,” January 2017.

 

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

 

    American Society of Civil Engineers, “2017 Report Card for America’s Infrastructure,” 2017.

 

    Edison Electric Institute, “EEI Finance Department, Company Reports, S&P Global Market Intelligence,” August 2017.

 

    Technavio, “Global Microgrid Market 2016-2020,” September 2016.

 

    Technavio, “Global Data Center Power Market 2016-2020,” April 2017.

 

    Eaton, “Blackout Tracker: United States Annual Report 2016,” 2017.

 

    United States Energy Information Administration, “Annual Energy Outlook,” July 2017.

 

    Accenture Consulting, “Outsmarting Grid Security Threats,” 2017.

 

    International Energy Agency, “Key World Energy Statistics,” September 2016.

 

    Exxon Mobile, “2017 Outlook for Energy: A View to 2040,” 2017.

 

    Potential Gas Committee, “Potential Gas Committee Reports Record Future Supply of Natural Gas,” July 2017.

 

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USE OF PROCEEDS

We estimate that the net proceeds from the sale of shares of our Class A 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.

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 Class A 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.

The principal purposes of the offering are to invest in our business, create a public market for our securities in the United States and facilitate our access to the public equity markets.

We currently have no specific plans for the use of the net proceeds that we receive from this offering, although we may 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. Accordingly, we will have broad discretion in using these proceeds. Pending their use as described above, we plan to invest the net proceeds from this offering in investment-grade rated, interest-bearing instruments, such as money market funds, certificates of deposit, commercial paper, 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 March 31, 2018 on:

 

    an actual basis;

 

    a pro forma basis to give effect to (1) the redesignation of our outstanding common stock as Class B common stock in                      2018, (2) the automatic conversion of all outstanding shares of our preferred stock into 107,610,244 shares of Class B common stock immediately prior to the closing of this offering, (3) the effectiveness of our restated certificate of incorporation immediately prior to the completion of this offering, (4) the automatic conversion of $215.9 million aggregate principal amount of our 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 8,382,757 shares of Class B common stock immediately prior to the completion of this offering and (5) the issuance and exercise of warrants to purchase 469,333 shares of our Class B common stock at an exercise price of $0.01 per share to certain purchasers of our 6% Notes, as described in “Description of Capital Stock—6.0% 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

 

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    a pro forma as adjusted basis to give effect to (1) the pro forma adjustments set forth above, (2) the issuance of 150,000 shares of Class B 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 Class A 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 March 31, 2018  
     (Unaudited)  
     Actual     Pro Forma     Pro Forma,
As Adjusted(1)
 
     (in thousands, except share and per share data)  

Cash and cash equivalents

   $ 88,227     $ 88,232     $  
  

 

 

   

 

 

   

 

 

 

Indebtedness (long-term):

      

6% Convertible Senior Secured PIK Notes

   $ 245,039     $ 245,039     $  

8% Subordinated Convertible Secured Promissory Notes

     245,038       —      

Other indebtedness—recourse

     97,608       97,608    

Other indebtedness—non-recourse

     337,657       337,657    
  

 

 

   

 

 

   

 

 

 

Total indebtedness (long-term)

     925,342       680,304    
  

 

 

   

 

 

   

 

 

 

Warrant liabilities

     6,554       5,530    

Convertible redeemable preferred stock, $0.0001 par value: 120,692,417 shares authorized and 107,610,244 issued and outstanding, actual; no shares authorized, issued and outstanding, pro forma and pro forma as adjusted

     1,465,841       —      

Stockholders’ deficit:

      

Preferred stock, $0.0001 par value: no shares authorized, issued and outstanding, actual; 10,000,000 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, 15,637,475 shares issued and outstanding, actual; 170,000,000 shares authorized,             no shares issued and outstanding, pro forma and pro forma as adjusted

     2       —      

Class A common stock, $0.0001 par value: no shares authorized, issued and outstanding, actual; 600,000,000 shares authorized, no shares issued and outstanding, pro forma; 600,000,000 shares authorized,             shares issued and outstanding, pro forma as adjusted

     —         —      

Class B common stock, $0.0001 par value: no shares authorized, issued and outstanding, actual; 600,000,000 shares authorized, 132,099,809 shares issued and outstanding, pro forma; 600,000,000 shares authorized, 132,249,809 shares issued and outstanding, pro forma as adjusted

     —         13    

Additional paid-in capital

     158,604       1,841,403    

Accumulated other comprehensive loss

     117       117    

Accumulated deficit

     (2,348,363     (2,348,363  
  

 

 

   

 

 

   

 

 

 

Total stockholders’ deficit

     (2,189,640     (506,830  
  

 

 

   

 

 

   

 

 

 

Redeemable noncontrolling interest and noncontrolling interest

     207,935       207,935    
  

 

 

   

 

 

   

 

 

 

Total capitalization

   $ 416,032     $ 386,939     $               
  

 

 

   

 

 

   

 

 

 

 

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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 March 31, 2018, and excludes:

 

    17,317,677 shares of our Class B common stock issuable upon exercise of outstanding stock options as of March 31, 2018 with a weighted average exercise price of $17.74 per share under our 2002 Equity Incentive Plan and 2012 Equity Incentive Plan;

 

    4,720,640 shares of our Class B common stock issuable upon settlement of RSUs outstanding as of March 31, 2018 under our 2012 Equity Incentive Plan;

 

    44,406 shares of our Class B common stock issuable upon settlement of RSUs granted after March 31, 2018 under our 2012 Equity Incentive Plan;

 

    50,000 shares of our Class B common stock issuable upon the exercise of outstanding warrants to purchase common stock as of March 31, 2018, with an exercise price of $25.76 per share;

 

    1,141,184 shares of our Class B common stock issuable upon the exercise of outstanding warrants to purchase Series F convertible preferred stock and Series G convertible preferred stock as of March 31, 2018, with a weighted average exercise price of $21.18 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 216,000 shares of our Class B common stock issuable to one of our customers on the occurrence of future bookings from that customer and the achievement of certain installation milestones on those future bookings;

 

    200,000 shares of Class B 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 Class B common stock issuable upon the conversion of our outstanding 6% Notes as of March 31, 2018, based on an assumed initial public offering price of $         per share of Class A common stock, 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;

 

    1,297,591 shares of our Class B common stock issuable upon the conversion of our outstanding Constellation Note, which may be converted, at the option of the holder, prior to the completion of this offering, into shares of Series G convertible preferred stock or, following the completion of this offering, into shares of Class B common stock; and

 

                shares of common stock reserved for future issuance under our equity-based compensation plans, consisting of 8,528,008 shares of Class B common stock reserved for issuance under our 2012 Equity Incentive Plan as of March 31, 2018,             shares of Class A common stock reserved for issuance under our 2018 Equity Incentive Plan and shares of Class A common stock reserved for issuance under our 2018 Employee Stock Purchase Plan, and excluding shares that become available under the 2018 Equity Incentive Plan and 2018 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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Because the conversion price of the 6% Notes will depend upon the actual initial public offering price per share in this offering, the actual number of shares of Class B common stock issuable upon such conversion will likely differ from the number of shares set forth above. In this regard, a $1.00 increase in the assumed initial public offering price of $             per share of Class A common stock, which is the midpoint of the price range set forth on the cover page of this prospectus, would decrease the number of shares of our Class B common stock issuable on conversion of the 6% Notes by             shares. A $1.00 decrease in the assumed initial public offering price would increase the number of shares of our Class B common stock issuable on conversion of the 6% Notes by             shares. See “Management’s Discussion and Analysis of Financial Condition and Results of Operation—Liquidity and Capital Resources—Credit Facilities—Bloom Energy Indebtedness” for more information.

 

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DILUTION

If you invest in our Class A common stock, your interest will be diluted to the extent of the difference between the public offering price per share of our Class A common stock and the pro forma as adjusted net tangible book value per share of our Class A common stock after this offering.

Our pro forma net tangible book value as of March 31, 2018 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 March 31, 2018, after giving effect to (i) the automatic conversion of all outstanding shares of our preferred stock into 107,610,244 shares of Class B common stock immediately prior to the closing of this offering, (ii) the effectiveness of our restated certificate of incorporation immediately prior to the completion of this offering, (iii) the automatic conversion of $215.9 million aggregate principal amount of our 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 8,382,757 shares of Class B common stock immediately prior to the completion of this offering, (iv) the issuance of 150,000 shares of Class B 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 Class B common stock at an exercise price of $0.01 per share to certain purchasers of our 6% Notes, as described in “Description of Capital Stock—6.0% 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 Class A 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 March 31, 2018 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 Class A 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 March 31, 2018

   $                  

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.

 

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The following table illustrates, on a pro forma as adjusted basis described above, as of March 31, 2018 the differences between the number of shares of Class A 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 Class A 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.

 

     Shares Purchased     Total Consideration     Average
Price Per
Share
 
   Number      Percent     Amount      Percent    
     (dollars in millions, except per share amounts)  

Existing stockholders

     132,249,809        100.0   $ 1,670.83        100.0   $ 12.63  

New investors

            
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

        100.0        100.0  
  

 

 

    

 

 

   

 

 

    

 

 

   

If the underwriters exercise their option to purchase additional shares of Class A common stock 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 March 31, 2018, there were options outstanding to purchase a total of 17,317,677 shares of common stock at a weighted average exercise price of $17.74 per share, RSUs outstanding that may be settled for 4,720,640 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 1,291,184 shares of our Series F convertible preferred stock and Series G convertible preferred stock, with a weighted-average exercise price of $20.87 per share. We expect warrants to purchase 150,000 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 Class B 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 216,000 shares of our Class B common stock to one of our customers on the occurrence of future bookings from that customer and the achievement of certain installation milestones on those future bookings. To the extent outstanding options or warrants are exercised, or restricted stock units settle, or we issue additional shares of Class B 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 March 31, 2018, and excludes:

 

    17,317,677 shares of our Class B common stock issuable upon exercise of outstanding stock options as of March 31, 2018 with a weighted average exercise price of $17.74 per share under our 2002 Equity Incentive Plan and 2012 Equity Incentive Plan;

 

    4,720,640 shares of our Class B common stock issuable upon settlement of RSUs outstanding as of March 31, 2018 under our 2012 Equity Incentive Plan;

 

    44,406 shares of our Class B common stock issuable upon settlement of RSUs granted after March 31, 2018 under our 2012 Equity Incentive Plan;

 

    50,000 shares of our Class B common stock issuable upon the exercise of outstanding warrants to purchase common stock as of March 31, 2018, with an exercise price of $25.76 per share;

 

   

1,141,184 shares of our Class B common stock issuable upon the exercise of outstanding warrants to purchase Series F convertible preferred stock and Series G convertible preferred stock as of March 31, 2018, with a weighted average exercise price of $21.18 per share, which, if not exercised prior to the

 

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completion of this offering, shall convert in accordance with their terms into warrants to purchase common stock;

 

    up to 216,000 shares of our Class B common stock issuable to one of our customers on the occurrence of future bookings from that customer and the achievement of certain installation milestones on those future bookings;

 

    200,000 shares of Class B 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 Class B common stock issuable upon the conversion of our outstanding 6% Notes as of March 31, 2018, 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;

 

    1,297,591 shares of our Class B common stock issuable upon the conversion of our outstanding Constellation Note, which may be converted, at the option of the holder, prior to the completion of this offering, into shares of Series G convertible preferred stock or, following the completion of this offering, into shares of Class B common stock; and

 

                shares of common stock reserved for future issuance under our equity-based compensation plans, consisting of 8,528,008 shares of Class B common stock reserved for issuance under our 2012 Equity Incentive Plan as of March 31, 2018,             shares of Class A common stock reserved for issuance under our 2018 Equity Incentive Plan and shares of common stock reserved for issuance under our 2018 Employee Stock Purchase Plan, and excluding shares that become available under the 2018 Equity Incentive Plan and 2018 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.”

Because the conversion price of the 6% Notes will depend upon the actual initial public offering price per share in this offering, the actual number of shares of Class B common stock issuable upon such conversion will likely differ from the number of shares set forth above. In this regard, a $1.00 increase in the assumed initial public offering price of $             per share of Class A common stock, which is the midpoint of the price range set forth on the cover page of this prospectus, would decrease the number of shares of our common stock issuable on conversion of the 6% Notes by             shares of Class B common stock. A $1.00 decrease in the assumed initial public offering price would increase the number of shares of our Class B common stock issuable on conversion of the 6% Notes by             shares. See “Management’s Discussion and Analysis of Financial Condition and Results of Operation—Liquidity and Capital Resources—Credit Facilities—Bloom Energy Indebtedness” for more information.

 

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LETTER FROM OUR CHIEF FINANCIAL OFFICER

We think of Bloom Energy as a technology company that develops, manufactures, and sells a product that sits on our customers’ sites and delivers clean, reliable, and affordable energy personalized to the customer’s needs. Our product, the Bloom Energy Server, provides a distributed energy solution to our customers so that they can generate 24/7, always-on electric power on-site for their own consumption.

A typical customer contract includes our product, installation, and ongoing operations and maintenance or “service”. We measure performance in these three parts of our business:

 

    product;

 

    installation; and

 

    service.

Our product strategy is to innovate and enhance our product’s performance with each new generation, while continuously driving down the cost to manufacture our systems. Our product has consistently improved in performance and efficiency since we rolled out our first generation Energy Server in 2008. We are generally able to offer competitive pricing versus the grid in our target markets, allowing our customers to save money by deploying our Energy Servers. Based on historical trends and current regulatory and infrastructure requirements, we believe that the long-term trajectory of the cost of electricity is increasing in our target markets. In parallel, our technology improvements and cost reduction efforts should continue to reduce our cost and allow us to improve our profitability in existing markets and to expand into new markets. Furthermore, we expect that expanding into new markets should strengthen our profitability by increasing the operating leverage through economies of scale.

Our installation strategy is pretty simple—we want to break-even and continuously drive down our installation cost. Installation costs vary from site to site and are dependent on the customization required for a given customer’s set-up and size of installation. Our goal is to be margin neutral on installation across our portfolio, as we pass installation costs directly to our customers.

Our service strategy reflects our focus on investing the capital necessary to become a market pioneer and leader in distributed energy generation. In the early days of our commercial shipments, we recognized that we needed a statistically meaningful “field installed base” and real-time data from those installations to understand the performance of our Energy Servers in real-world conditions, and then use this learning to improve the reliability and robustness of our systems. This learning was also necessary to drive innovation and performance improvements throughout our entire value chain. For this reason, in the early years of shipping our product, we installed Energy Servers that had a lifespan below break-even, relative to service revenue versus service cost.

Therefore, we experienced losses, particularly during the period between 2013 and 2016, which represented the investment we were willing to make in order to execute our strategy to become the market leader in distributed energy generation. To date, 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, replacement was typically 12 to 18 months. Over the years we have made steady improvements in our fuel cell lives, and from 2017 onwards we expect to average over five years between replacements; and

 

    the cost to refurbish (which include our fuel cells) is coming down. Since 2014, we have driven this cost down by approximately 40%.

At today’s pricing, we believe we can break-even in our service business provided the time between stack replacements across all of our fleet is five years or better. Longer term, like many companies with an operation and maintenance business, our strategy is to make our service business a profitable part of our overall business, with predictable annual recurring revenue.

 

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We consider ourselves to be an innovative technology “product” company. Our business model to deliver our product is fairly straightforward. We book an order at the time of contract signing and at that time the order is recorded in our backlog. On a quarter-over-quarter basis, booked orders may tend to be lumpy. For example, a big-box retailer might place an order for Energy Servers for hundreds of stores at one time. However, we deploy our Energy Servers (installations, translating to revenue) in a more linear manner. Deployments might span nine to 12 months from the time the order is booked. Once we have the design completed and permits in hand, it typically takes us about three months to manufacture, install, and commission a system. This generally allows us well over six months to diligence, design, permit, and construct the site installation infrastructure necessary to deploy our systems. The product sales price and installation price is set for each system at the time of the contracted order. When an order comes out of our backlog at the time of system commissioning, we refer to it as an “acceptance.”

At Bloom Energy, we offer several customer purchase options through which we sell our Energy Servers. This is consistent with our philosophy of customizing our solution to meet our customer’s needs. In general, we sell our Energy Servers to customers through a direct sale, through a lease or managed services contract, 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 purchase options.

Historically, depending on the customer purchase option, the timing of revenue recognition varied significantly. Our product and installation revenue recognition varied from either recognized ratably over the contract term for some purchase options, or recognized upfront at the time of acceptance. We have increased the proportion of our product revenue that comes from acceptances that are recognized as revenue upfront, rather than on a ratable basis, and expect to continue to do so in the future. Therefore, starting in 2018, the vast majority of our revenue is recognized at the time of acceptance. Furthermore, we generally recognize service revenue ratably over each contract year.

Due to the variability that the customer purchase options can have on our revenue recognition in any given period, we believe that a useful way to understand the historical performance of our business, is to analyze our key operating metrics, including: volume (acceptances), billings (product, installation, and service), and unit level costs (product and installation). These operating metrics provide useful insight into the operational trajectory, cash generation, and cost profile of the business.

Generally, under any of our customer purchase options, we receive a certain amount of our sales price in advance, which helps us offset a portion of our 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 conversion cycle. In all customer purchase options, we generally receive 100% of the product and installation sales as cash in the form of these various milestone payments no later than within 30-days of the acceptance date. Separately, we also get paid for service contracts annually at the beginning of each service contract year. For direct sales contracts, the warranty period expires at the end of the first year, at which time our customers enter into an annual service contract with us. For managed services contracts, the service contract starts at the time of acceptance.

Earlier, I had mentioned how we view and measure the performance of our business. Now, I would like to focus on how we analyze and forecast our performance. Our P&L has three general components:

 

    product plus installation (revenue and cost);

 

    ratable (revenue and cost); and

 

    service plus electricity (revenue and cost).

The product plus installation component of the P&L has three key drivers, consisting of a volume metric (acceptances), a revenue metric (average selling price, or ASP), and a cost metric (total installed system cost, or

 

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TISC). To derive our product plus installation component, simply multiply the volume metric by the ASP to approximate revenue. Next, multiply the volume metric by the TISC to approximate the cost of goods sold. The difference between these two approximates gross profit.

The ratable component of the P&L represents the amount of revenue and cost that is recognized in the current period from prior period’s deferred revenue and cost that was treated as ratable. We think of this as an annuity revenue stream. Again, this relates to our historical acceptances that recognize product revenue on a ratable basis. Given that we expect very few acceptances in the future to be recognized on a ratable basis, our revenue and cost for the ratable component should stay relatively constant.

The service plus electricity component of the P&L has two subcomponents: service revenue and cost, and electricity revenue and cost. The service subcomponent represents the actual dollar amount of the annual ongoing operations and maintenance contracts that we have in place with our customers, adjusted for fair value accounting. We expect this revenue will grow with time as our installed base grows. Likewise, we expect that service cost, which represents the cost incurred to maintain our Energy Server fleet, will grow as our installed base grows. The revenue from the electricity subcomponent represents the actual dollar amount of the electricity sales from our minority investments in Bloom Electrons, and is based on predefined tolling rates. Electricity cost represents the amortized cost of the Energy Servers that generate the electricity revenue over the life of the contracts. Like our ratable component above, we expect no additional future investment in Bloom Electrons, and thus, we expect that our Bloom Electrons electricity revenue and related costs will stay relatively constant for many years into the future.

When you look at each component of the P&L, in general, the revenue and cost for both the ratable component and the service plus electricity component should be relatively constant, with service revenue growing with the growth in our install base. As such, to understand the overall performance and trajectory of the business, it is important to focus on the product plus installation component of the P&L, which can be calculated using our three key operational metrics: Acceptances, ASP, and TISC.

In summary, we have made great progress on our technology since we started shipping our Energy Servers in 2008. The continuous innovation in the technology within our Energy Servers, as well as the technology to build them, has allowed us to reduce our costs to the point that we can offer a competitive alternative to the grid for our customers in various markets. The significant investments that we made in our early fleet deployments have provided valuable feedback to our engineering teams, and have helped us develop our next generation technologies with real-world, real-time feedback from those customers’ operating environments.

In conclusion, not only have we innovated and improved our product and manufacturing technology, but also have executed innovations and improvements in the way our customers can procure our products with multiple customer purchase options. These customer purchase options have provided a means by which our customers can procure large volumes of our Energy Servers, in a programmatic manner, to help them achieve their energy generation goals. Whether our customer’s goals are for clean, reliable, resilient, sustainable, or predictable energy, our Energy Server is a product that we believe will empower current and future customers, transform the way they consume electricity, and allow them to meet their increasing power demands into the 21st century.

 

   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, 2016 and 2017 and the consolidated balance sheet data as of December 31, 2016 and 2017 are derived from our audited consolidated financial statements included elsewhere in this prospectus. We derived the selected consolidated statements of operations data for the three months ended March 31, 2017 and 2018 and the summary consolidated balance sheet data as of March 31, 2018 from our unaudited 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 and our results for the three months ended March 31, 2018 are not necessarily indicative of results to be expected for the full year. 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.

 

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Please see “—Key Operating Metrics” below for information regarding how we define our product accepted during the period, megawatts deployed, billings for product accepted in the period, billings for installation on product accepted, billings for annual maintenance services agreements, product costs of product accepted, period costs of manufacturing related expenses not included in product costs and installation costs on product accepted.

 

     Years Ended
December 31,
    Three Months Ended
March 31,
 
     2016     2017     2017     2018  
     (in thousands, except for per share data)  
                          

Consolidated Statements of Operations

        

Revenue

        

Product

   $ 76,478     $ 179,768     $ 27,665     $ 121,307  

Installation

     16,584       63,226       12,293       14,118  

Service

     67,622       76,904       18,591       19,907  

Electricity

     47,856       56,098       13,648       14,029  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     208,540       375,996       72,197       169,361  

Cost of revenue

        

Product

     103,283       210,773       38,855       80,355  

Installation

     17,725       59,929       13,445       10,438  

Service

     155,034       83,597       18,219       24,253  

Electricity

     35,987       39,741       10,876       10,649  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

     312,029       394,040       81,395       125,695  
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit (loss)

     (103,489     (18,044     (9,198     43,666  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

        

Research and development

     46,848       51,146       11,223       14,731  

Sales and marketing

     29,101       32,415       7,845       8,262  

General and administrative

     61,545       55,674       12,879       14,988  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     137,494       139,235       31,947       37,981  
  

 

 

   

 

 

   

 

 

   

 

 

 

Profit (loss) from operations

     (240,983     (157,279     (41,145     5,685  

Interest expense

     (81,190     (108,623     (24,363     (23,037

Other income (expense), net

     (379     268       119       (629

Gain (loss) on revaluation of warrant liabilities and embedded derivatives

     (13,035     (14,995     215       (4,034
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss before income taxes

     (335,587     (280,629     (65,174     (22,015

Income tax provision

     729       636       214       333  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (336,316     (281,265     (65,388     (22,348

Net loss attributable to noncontrolling interests and redeemable noncontrolling interests

     (56,658     (18,666     (5,856     (4,632
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

   $ (279,658   $ (262,599   $ (59,532   $ (17,716
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ (18.56   $ (17.08   $ (3.91   $ (1.14
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     15,069       15,372       15,215       15,605  
  

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss per share attributable to common stockholders basic and diluted (unaudited)

     $ (1.87     $ (0.13
    

 

 

     

 

 

 

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

       131,754         130,805  

 

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     As of December 31,     As of March 31,
2018
 
     2016     2017    
     (in thousands)        

Consolidated balance sheet data:

      

Cash and cash equivalents

   $ 156,577     $ 103,828     $ 88,227  

Working capital

     130,992       148,697       154,595  

Total assets

     1,204,047       1,220,987       1,184,634  

Long-term portion of debt

     773,346       921,205       925,342  

Total liabilities

     1,463,159       1,721,624       1,700,498  

Convertible redeemable preferred stock

     1,465,841       1,465,841       1,465,841  

Redeemable noncontrolling interest and noncontrolling interest

     234,988       213,526       207,935  

Stockholders’ deficit

     (1,959,941     (2,180,004     (2,189,640

Key operating metrics:

 

     Years Ended
December 31,
     Three Months
Ended March 31,
 
     2016      2017      2017      2018  

Product accepted during the period (in 100 kilowatt systems)

     687        622        119        166  

Megawatts deployed as of period end

     235        297        247        312  

 

     Years Ended
December 31,
     Three Months
Ended March 31,
 
     2016      2017      2017      2018  
     (in thousands)  

Billings for product accepted in the period

   $ 522,543      $ 248,102      $ 48,105      $ 121,143  

Billings for installation on product accepted in the period

     114,680        96,452        23,027        11,896  

Billings for annual maintenance services agreements

     67,820        79,881        14,882        14,122  

Ratable value of contracts accepted in the period

     384,229        21,653        9,566        (17,140

 

    Three Months Ended  
    Mar. 31,
2016
    Jun. 30,
2016
    Sep. 30,
2016
    Dec. 31,
2016
    Mar. 31,
2017
    Jun. 30,
2017
    Sep. 30,
2017
    Dec. 31,
2017
    Mar. 31,
2018
 

Product costs of product accepted in the period (per kilowatt)

  $ 5,086     $ 4,809     $ 4,383     $ 3,826     $ 3,999     $ 3,121     $ 3,386     $ 2,944     $ 3,855  

Period costs of manufacturing related expenses not included in product costs (in thousands)

    4,302       4,586       6,869       6,143       7,397       8,713       7,152       9,174       10,785  

Installation costs on product accepted in the period (per kilowatt)

    1,280       1,481       1,056       1,170       1,974       1,306       1,263       829       526  

 

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Product Accepted During the Period

Product accepted during the period is the number of customer acceptances of our Energy Servers in any period. Generally, we deem an acceptance to occur when a sold Energy Server has been installed at a customer site and running at full power. We use product accepted during the period to measure the volume of our deployment activity, and therefore, we can compare Energy Server acceptances across different time periods to gauge the operational volume and trajectory of our business. We measure each Energy Server manufactured, shipped and accepted in terms of 100 kilowatt equivalents. Product acceptances and product revenue are generally not correlated, as the timing of product revenue recognition is impacted by different customer purchase options as outlined here:

 

Customer Purchase Option

  

Typical Timing of Revenue Recognition

Direct Purchase

   Up front at acceptance

Traditional Lease

   Up front at acceptance

Managed Services

   Ratably over the life of contract starting at acceptance

PPA Financing through Bloom Electrons

   Ratably over the life of contract starting at acceptance

Product revenue is generally recognized when an acceptance is achieved. For those customers who purchase our Energy Servers through a direct sales or traditional lease arrangement, that revenue is recognized up front at acceptance as product revenue, while for customers who purchase our Energy Servers through our managed services program we recognize revenue ratably over the life of the contracts as product revenue and for customers who purchase our Energy Servers through a power purchase agreement (PPA) arrangement structured as an operating lease, we recognize revenue ratably over the life of the contracts as electricity revenue and not at acceptance. Our product revenue has fluctuated in the past and may fluctuate in the future, as it is in part dependent on the purchase option selected by the customer.

The number of product acceptances achieved in 2017 was 622 systems, a decrease of 9.5% as compared to 687 acceptances for 2016. The decline was driven by extreme weather-related seasonality on both the U.S. East Coast and West Coast, which impacted our ability to install Energy Servers at our customer sites. Our product revenue was $179.8 million in 2017, an increase of 135.1% as compared to $76.5 million in 2016. Product revenue increased for 2017 relative to 2016 even though product acceptances declined by 9.5% over that same time period as the mix in financing options with which our customers chose to deploy their systems reflected a smaller portion of managed services customer purchase options (where revenue is recognized ratably) versus direct sales (where revenue is recognized up front). The number of acceptances for 2017 where revenue was recognized ratably was approximately 21% of total acceptances, while the number of acceptances for 2016 where revenue was recognized ratably was approximately 84% of total acceptances. In 2016 and 2017, 172 and 0 respectively, of our acceptances achieved were for Energy Servers that were sold to existing customers under our PPA I decommissioning program. For more information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Components of Results of Operations—Revenue—Product Revenue—PPA I Decommissioning”.

For the three months ended March 31, 2018, the number of acceptances achieved was 166, an increase of 39.5% as compared to 119 acceptances for the three months ended March 31, 2017. Our product revenue for the three months ended March 31, 2018 was $121.3 million, an increase of 337.9% as compared to $27.7 million for the three months ended March 31, 2017. The increase in product revenue for the three months ended March 31, 2018 relative to the three months ended March 31, 2017 was greater than the 39.5% increase in associated acceptances over that same time period due to the $43.9 million one-time product revenue benefit due to the retroactive ITC renewal, as well as the mix in financing options with which our customers chose to deploy their systems, which reflected a smaller portion of managed services customer purchase options (where revenue is recognized ratably) versus direct sales (where revenue is recognized up front). There were no acceptances for the three months ended March 31, 2018 where revenue was recognized ratably, while the number of acceptances for the three months ended March 31, 2017 where revenue was recognized ratably was approximately 45% of total

 

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acceptances. In the three months ended March 31, 2017 and March 31, 2018, no acceptances were achieved for Energy Servers that were sold to existing customers under our PPA I decommissioning program.

Megawatts Deployed

Megawatts deployed represents the aggregate megawatt capacity of operating Energy Servers in the field on a given date that have achieved acceptance, net of systems removed from operation under the PPA I decommissioning program. 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). Actual power production from these Energy Servers may be less or more than the megawatt capacity assigned to a particular Energy Server. Megawatts deployed also represents the size of our installed base.

Megawatts deployed increased to 297 as of December 31, 2017, an increase of 26.4% as compared to 235 as of December 31, 2016. The increase represents the additional acceptances that were achieved in 2017, which increased the number of Energy Servers in the field, since the end of 2016. As of March 31, 2018, megawatts deployed increased to 312, an increase of 26.3% as compared to March 31, 2017, of 247. The increase represents the additional acceptances that were achieved in the last nine months of 2017 and the first three months of 2018, which increased the number of Energy Servers in the field.

Billings for Product Accepted in the Period

We sign contracts with our customers and financing partners that set the terms and conditions of the equipment and services which we deliver under those contracts. Generally, these contracts outline: (1) the type, volume and price of the product (Energy Servers) to be installed, (2) the equipment and services to be used in the installation process, (3) the pricing and terms for extended maintenance (service) agreements, and (4) the details of any other equipment or service to be provided. Based on the dates and milestones that are outlined in the contract, we generate invoices and bill our customers and financing partners for each of the above outlined components. We believe that analyzing the billing and the trending of the billing for these contract components is useful to understand our business.

The billings for product accepted represents the total contracted dollar amount of the product component of all Energy Servers that are accepted in a period. We use this metric to gauge the dollar amount of our acceptances in a period and to evaluate the change in dollar amount of acceptances between periods, which also provides us insight into the billing volume and trajectory of our product sales. Across all customer purchase options (direct sales, leases, PPA and managed services), our sales contracts specify the amounts billed with respect to the product (our Energy Servers), installation, and service contract components, which will not necessarily reflect the applicable revenue to be recognized at acceptance under the agreement due to certain customer financing options where revenue is recognized ratably over the life of the contract starting at acceptance. Regardless of the customer purchase option, we generally receive 100% of the customer payments in cash for the product and installation components of our sales contracts within 30 days of achieving acceptance, including replacement servers accepted by existing customers through our PPA I decommissioning program. Billings for product accepted in the period and the change in billings for product accepted in the period will, in general, correlate with the volume and change in the volume of product accepted.

The purchase of our Energy Servers and related installation costs have historically qualified for the Federal Investment Tax Credit (ITC). Through 2016, our customers and financing partners could take advantage of ITC. They could receive a tax credit of 30% or $3,000 per kilowatt of their equipment purchase price and the installation cost on their federal tax returns. This federal tax benefit expired at the end of 2016. Accordingly, in 2017, customers no longer received the ITC benefit on purchases of our Energy Servers. In order to offset the negative economic impact of that lost benefit to our customers and financing partners, in 2017, we lowered our selling price to customers. Because many customers or financing partners would monetize the tax credit upfront, the actual impact to our selling price was generally greater than 30%.

 

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As stated above, both the purchase of our Energy Servers and the installation cost of those Energy Servers qualified for the ITC in 2016. From a billings standpoint, we billed our customers for the portion of the price attributable to the ITC benefit for both the Energy Server (product) sale and the installation services as part of our product billings. Therefore, in 2017, as a result of the ITC benefit loss, the billings for product accepted was impacted to a greater extent than the billings for installation when compared to 2016. Subsequently, the ITC was reinstated by the U.S Congress on February 9, 2018 and made retroactive to January 1, 2017. The resulting benefit of the ITC renewal was recognized in the three months ending March 31, 2018.

Due to the loss of ITC in 2017, the benefit of ITC to billings for product accepted decreased $158.5 million from $159.8 million of benefit from ITC for the year ended December 31, 2016 to $1.3 million of benefit from ITC for the year ended December 31, 2017. Due to the reinstatement of ITC in 2018, the benefit of ITC to billings for product accepted increased $58.3 million, from $1.3 million of benefit from ITC for the three months ended March 31, 2017 to $59.6 million of benefit from ITC for the three months ended March 31, 2018. The $59.6 million benefit of ITC in the three months ended March 31, 2018 included $45.1 million benefit of the retroactive ITC for 2017 acceptances.

The billings for product accepted in 2017 was $248.1 million, a decrease of 52.5% compared to billings for product accepted of $522.5 million in 2016. This decrease was primarily due to the lower average selling prices to our customers in 2017, as a result of the ITC benefit to our customers ending in 2016, as well as the 9.5% decrease in product acceptances for 2017. In 2016, we had $132.2 million of billings for product accepted from existing customers through our PPA I decommissioning program. For 2017, we had no billings for product accepted from existing customers through our PPA I decommissioning program. For the three months ended March 31, 2018, billings for product accepted was $121.1 million, an increase of 151.8% compared to billings for product accepted of $48.1 million in the three months ended March 31, 2017. This increase was primarily due to the higher average selling prices to our customers in 2018 as a result of the ITC reinstatement, as well as the 39.5% increase in product acceptances for the same time period. Billings for product accepted from existing customers through our PPA I decommissioning program increased from zero in the three months ended March 31, 2017, to $5.6 million in the three months ended March 31, 2018.

Billings for Installation on Product Accepted

Billings for installation on product accepted represents the total contracted dollar amount billable with respect to the installation portion of all Energy Servers that are accepted in the period. We use this metric to gauge the dollar value of the installations of our product acceptances in a period and to evaluate the change in dollar value associated with the installation of our product acceptances between periods.

Billings for installation on product acceptances are generally driven by the complexity of the site and the size of the installation. Infrequently, Bloom may not perform the installation service for customers, and the installation may be completed by a third party as directed by the customer or by the customer themselves. For customers who have the installation performed by a third party or themselves, there will be little or no billings for installation on product accepted.

Billings for installation on product accepted in 2017 was $96.5 million, a decrease of 15.9% as compared to $114.7 million in 2016. This decrease was slightly larger than the 9.5% decrease in associated acceptances and was related to the normal mix in installation billings driven by site complexity and size. For the three months ended March 31, 2018, billings for installation on product accepted was $11.9 million, a decrease of 48.3% as compared to $23.0 million for the three months ended March 31, 2017. The billings for installation on product accepted decreased despite a 39.5% increase in associated acceptances due to one large customer in the three months ended March 31, 2018 where the installation was contracted with a third party, therefore, we did not have any installation billing.

When we analyze changes between 2016, 2017 and 2018, we also take into account the impact of the lower or higher average selling prices to the customers driven by the loss or reinstatement of the ITC benefit. To

 

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minimize the impact to the customers in 2017, we reduced the selling price to ensure the economics to the customer remained the same as it was prior to losing the ITC benefit. Because the benefit from the ITC can be monetized up front, given the time value of money, the impact on our average selling price is greater than the nominal value of the ITC benefit.

For the three months ended March 31, 2018, the combined total for billings for product and installation accepted was $133.0 million, an increase of 87.0% from the billings for product and installation accepted combined of $71.1 million for the three months ended March 31, 2017. The increase was significantly greater than the 39.5% increase in associated acceptances during the same periods due to the higher average selling price to customers as a result of the reinstatement of the ITC in 2018.

Billings for Annual Maintenance Services Agreements

The billings for annual maintenance service agreements represent the dollar amount billable in respect of one-year service contracts that have been initiated or renewed during the period. Our customers enter into maintenance agreements with us to receive ongoing service of their Energy Servers. Generally, the first year of maintenance is included in the price of the product as part of the warranty. However, customers engaging in our managed services enter into annual maintenance contracts starting at time of acceptance. While the maintenance service agreements are generally contracted annually, the billings for those contracts can be monthly, quarterly or annually. As our cumulative megawatts deployed grows each year, we expect that the billings for annual maintenance services agreements should grow as well.

Billings for annual maintenance service agreements in 2017 was $79.9 million, an increase of 17.8% as compared to $67.8 million in 2016. This increase was driven both by the billing for new maintenance contract renewals and new managed service contracts over that same period. Billings for annual maintenance agreements for managed services contracts are billed monthly and start at acceptance for those contracts.

The billings for annual maintenance agreements for the year ended December 31, 2017 represents the cumulative billings for all agreements in place at that time, and therefore includes all of the billings for maintenance agreements from managed services contracts accepted between December 31, 2016 and December 31, 2017.

For the three months ended March 31, 2018, billings for annual maintenance service agreements was $14.1 million, a decrease of 5.1% compared to $14.9 million for the three months ended March 31, 2017. This decrease was driven primarily by the timing in which our customers renewed their annual maintenance service agreements in the period.

Ratable Value of Contracts Accepted in the Period

Depending on the customer purchase option elected by our customers, the product, installation and electricity revenue for that contract will either be recognized up front at acceptance or ratably over the life of the contract.

The ratable value of contracts accepted in the period represents product, installation and electricity revenue for the period if all contracts were recognized up front at acceptance. It also includes the value of any product and install revenue that was allocated to service revenue under our BESP allocation methodology (described in further detail below). It excludes the ratable value of past acceptances and the value allocated to service that is recognized as revenue in the current period.

The ratable value of contracts accepted in the period presents a normalized view of the impact of the different revenue recognition methodologies between up front and ratable by providing the full contract value of those acceptances that are recognized ratably over the life of the contract.

 

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Our ratable value of contracts accepted in the period was $21.6 million in 2017, a decrease of $362.6 million as compared to $384.2 million in 2016 due to a change in customers’ preferences for the purchase option chosen, moving away from Bloom Electrons in 2016, which typically results in ratable revenue recognition, to direct purchase in 2017, which results in up front revenue recognition. The number of acceptances for 2017 where revenue was recognized ratably was approximately 21% of total acceptances, while the number of acceptances for 2016 where revenue was recognized ratably was approximately 84% of total acceptances.

Our ratable value of contracts accepted for the three months ended March 31, 2018 was a negative $17.1 million, representing a decrease of $26.7 million, as compared to $9.6 million for the three months ended March 31, 2017. The ratable value of contracts is negative in the three months ended March 31, 2018 as all acceptances were recognized up front during the period and therefore, the value only excludes the ratable value of past acceptances and the value allocated to services that was recognized as revenue in the period. The number of acceptances for the three months ended March 31, 2018 where revenue was recognized ratably was approximately 0% of total acceptances, while the number of acceptances for the three months ended March 31, 2017 where revenue was recognized ratably was approximately 45% of total acceptances.

Product Costs of Product Accepted (per kilowatt)

Our product costs of product accepted in the period represents the average unit product cost for the Energy Servers that are accepted in a period. We track this metric to provide a point in time estimate of our unit cost to manufacture our Energy Servers which we can use to analyze and compare product costs between periods. We use this metric to provide us insight into the trajectory of our product costs and, in particular, the effectiveness of our cost reduction activities.

We calculate it as the aggregate amount of product costs across all acceptances in a period, and we then divide that total by the number of acceptances in that period and then divide that result by 100 to get a “per kilowatt” unit measure.

Product cost includes material costs, direct labor, allocated manufacturing overhead, purchasing and manufacturing variances, freight charges and consumables used in the manufacturing of our Energy Servers.

During the nine quarters ended March 31, 2018, our product costs of products accepted declined from $5,086 per kilowatt to $3,855 per kilowatt, an overall reduction of 24.2%. The cost reduction was driven generally by our ongoing cost reduction efforts to reduce material costs, labor and overhead through improved automation of our manufacturing facilities, better facility utilization and ongoing material cost reduction programs with our vendors. A one-time impact of $567.40 per kilowatt was included in the product cost of revenue for the three months ended March 31, 2018 which was associated with supplier agreements that required us to forego previously negotiated discounts if ITC was renewed.

Period Costs of Manufacturing Related Expenses not Included in Product Costs

Period costs of manufacturing related expenses not included in product costs represent the manufacturing and related operating costs expensed in the period that are incurred to procure parts and manufacture Energy Servers that are not included as part of product costs as defined above. Any costs incurred to run our manufacturing operations that are not capitalized (i.e., absorbed) into inventory are expensed to our consolidated statement of operations in the period with which the costs are incurred. Typical costs included in this metric are unallocated overhead costs, and items used in the manufacturing process not allocated to product cost. In addition, this metric includes the costs incurred to support the Energy Server’s first year of warranty.

Period costs of manufacturing related expenses not included in product costs for the quarter ended March 31, 2018 was $10.8 million, an increase of 150.7% compared to $4.3 million for the quarter ended March 31, 2016, and an increase of 45.8% compared to $7.4 million for the quarter ended March 31, 2017. While

 

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actual manufacturing spending decreased in the quarter ended March 31, 2018 relative to the quarter ended March 31, 2017 and March 31, 2016, the period costs of manufacturing related expenses not included in product costs, which represents the unabsorbed manufacturing costs to produce our Energy Servers, increased due to lower production volumes in the period.

Installation Costs on Product Accepted in the Period (per kilowatt)

Installation costs on product accepted in the period is the average unit installation cost for Energy Servers that are accepted in a given period. We incur and accumulate costs for design, permitting, construction and interconnect for the installation of our Energy Servers, which ultimately provides for the systems to meet acceptance criteria in the period and ultimately, be counted as an “acceptance.” Our installation costs are driven by the complexity of the site at which we are installing an Energy Server, as well as the size of the installation, which can cause variability in these costs quarter-to-quarter. We generally achieve economies of scale on installation costs at sites where we install more Energy Servers per site. We track this information to help ensure our installation costs are in line with our installation billings. Installation costs on product accepted in the period is calculated by aggregating the accrued and incurred installation costs for each site accepted in a period. We then divide that total by the number of acceptances in the period and then divide that result by 100 to get a “per kilowatt” unit of measure.

During the nine quarters ended March 31, 2018, installation costs on product accepted ranged from a low of $526 per kilowatt for the quarter ended March 31, 2018 to a high of $1,974 per kilowatt for the quarter ended March 31, 2017. For the quarter ended March 31, 2018, the lower installation cost of $526 per kilowatt was driven by the fact that 50.3% of the acceptances in that quarter were for a very large customer that had almost no installation cost. For the quarter-ended March 31, 2017, the higher installation cost of $1,974 per kilowatt was driven by a greater mix of more complicated sites, which included several for business continuity solutions, which requires a more difficult installation process.

 

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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 that was financed pursuant to a PPA in October 2010;

 

    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 completed in November 2013;

 

    The first international deployments: First site deployed in Japan to provide uninterruptible power completed in June 2013; first site 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, cumulative deployment of 200 megawatts by June 2016 and cumulative deployment of 300 megawatts by March 2018.

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.

Our solution is capable of addressing customer needs across a wide range of industry verticals. The industries we currently serve consist of banking and financial services, cloud services, technology and data

 

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centers, communications and media, consumer packaged goods and consumables, education, government, healthcare, hospitality, logistics, manufacturing, real estate, retail and utilities. Our Energy Servers are deployed at customer sites across 11 states in the United States, as well as in India and Japan. Our customer base included 25 of the Fortune 100 companies as of March 31, 2018. We believe that we are currently capturing only a small percentage of our largest customers’ total energy spend, which gives us an opportunity for growth within those customers, particularly as the price of grid power increases in the areas where our existing customers have additional sites. Since the timing of revenue we recognize depends, in part, on the option chosen by the customer to finance the purchase of the Energy Server, customers that may have accounted for a significant amount of product revenue in one period may not necessarily account for similar amounts of product revenue in future periods.

In 2016, total revenue from Delmarva and Intel Corporation represented 18% and 12% of our total revenue, respectively. In 2017, total revenue from The Southern Company and Delmarva represented 43% and 10% of our total revenue, respectively. In the three months ended March 31, 2017, total revenue from Macerich and The Southern Company, represented 19% and 16% of our total revenue, respectively. In the three months ended March 31, 2018, total revenue from The Southern Company and Korea Energy represented 53% and 17% of our total revenue, respectively. 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 March 31, 2018, we had installed 3,117 of such systems, which is equivalent to 312 total megawatts.

The purchase of our Energy Servers and related installation costs have historically qualified for the Federal Investment Tax Credit (ITC). Through 2016, our customers and financing partners could take advantage of ITC. They could receive a tax credit of 30% or $3,000 per kilowatt of their equipment purchase price and the installation cost on their federal tax returns. This federal tax benefit expired at the end of 2016. Accordingly, in 2017, customers no longer receive the ITC benefit on purchases of our Energy Servers. In order to offset the negative economic impact of that lost benefit to our customers and financing partners, in 2017, we lowered our selling price to customers. Because many customers or financing partners would monetize the tax credit upfront, the actual impact to our selling price is generally greater than 30%.

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 is 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 lives, 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

 

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program. Depending on the financing arrangement, either our customers or the financing provider may utilize investment tax credits and other government incentives. 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 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.

The portion of acceptances in the three months ended March 31, 2018 attributable to each payment option was as follows: direct purchase 100%, traditional lease 0%, managed services 0%, and Bloom Electrons 0%. The portion of revenue in the three months ended March 31, 2018 attributable to each payment option was as follows: direct purchase 83%, traditional lease 0%, managed services 4%, and Bloom Electrons 13%. The portion of acceptances in 2017 attributable to each payment option was as follows: direct purchase 72%, traditional lease 7%, managed services 21%, and Bloom Electrons 0%. The portion of revenue in 2017 attributable to each payment option was as follows: direct purchase 61%, traditional lease 7%, managed services 8%, and Bloom Electrons 24%. The portion of acceptances in 2016 attributable to each payment option was as follows: direct purchase 10%, traditional lease 6%, managed services 31%, and Bloom Electrons 53%. The portion of revenue in 2016 attributable to each payment option was as follows: direct purchase 40%, traditional lease 18%, managed services 4%, and Bloom Electrons 38%. In 2017, we observed a shift in our customers’ purchase option preferences to our direct purchase options. The portion of our backlog as of March 31, 2018 attributable to each payment option was as follows: direct purchase 98%, traditional lease 0%, managed services 2%, and Bloom Electrons 0%.

Purchase and Lease Programs

Initially, we only offered our Energy Servers on a purchase basis, in which the customer purchases the product directly from us. Included within our direct purchase option are sales we make to a third party who in turn, sells electricity through one of its PPA programs of which we have no equity interest. The sales of our Energy Servers to the third party entity have many of the same terms and conditions as a standard sale, as described above. We refer to these arrangements as Third-Party PPAs. 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 as defined in each contract. A one-year service warranty is provided with the initial sale. After the expiration of the initial one-year warranty, customers have the option to enter into annual operations and maintenance services agreements with us at a price determined at the time of purchase of the Energy Server, which may be renewed each year for up to 20 years. Pursuant to the service warranty, we warrant minimum efficiency and output levels.

 

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In the event that the Energy Servers fail to satisfy these warranty levels, we may be obligated to repurchase the applicable Energy Servers if we are unable to repair or replace during the applicable cure period. Across all service agreements, including purchase and lease programs, as of March 31, 2018, we have incurred no repurchase obligations pursuant to such warranties. In addition, in some cases, we guarantee minimum output and efficiency levels greater than the warranty levels and pay certain capped performance guarantee amounts if those levels are not achieved. These performance guarantees are negotiated on a case-by-case basis, but we typically provide an Output Guaranty of 95% measured annually and an Efficiency Guaranty of 52% measured cumulatively from the date the applicable Energy Server(s) are commissioned. In each case, underperformance obligates us to make a payment to the owner of the Energy Server(s). As of March 31, 2018, the fleet of Energy Servers deployed pursuant to purchase agreements performed at an average output of approximately 86% for calendar year 2018, and a lifetime average efficiency of approximately 53% through March 31, 2018. As of March 31, 2018, our obligation to make payments for underperformance on the direct purchase projects is capped at an aggregate total of approximately $35.9 million (including payments both for low output and for low efficiency). As of March 31, 2018, our aggregate remaining potential liability under this cap is approximately $23.0 million.

Third-Party PPAs

In addition to our traditional lease, managed services, and Bloom Electrons programs, we also sell Energy Servers under power purchase agreements where the owner of the Energy Servers generating the electricity delivered to the end customer is a third party in which we have no equity interests (“Third-Party PPAs”). Under these Third-Party PPAs, we identify end customers, lead the negotiations with such end customers regarding the offtake agreements, and then enter into an Energy Server sales and operations and maintenance agreement with the third-party PPA entity that will own the Energy Servers for the full term of the offtake agreement. In some cases, the applicable third-party owner assists with the identification of end customers, and the negotiation of the offtake agreements. The third-party PPA entity then enters into offtake agreements with the end customer, who purchases electricity from the third-party PPA entity. Unlike our Bloom Electrons program, we have no equity ownership in the entity that owns the Energy Servers, and thus the third-party owner receives all cash flows generated under the offtake agreement(s), all investment tax credits, all accelerated tax depreciation benefits, and any other cash flows generated by the operation of the Energy Servers. In the fourth quarter of 2016, we secured a commitment from a major utility company to finance up to 50 MW of Energy Server deployments under a Third-Party PPA; this commitment was subsequently expanded to an aggregate total of approximately 85 MW, of which we have deployed 48.0 MW as of March 31, 2018. Additionally, we have established a second Third-Party PPA with another major utility company; while this second program does not include a firm commitment as to total financing capacity, it permits the inclusion of sub-investment grade end customers.

Obligations to Third-Party Owners of Energy Servers

In each Third Party PPA, we and the applicable third-party owner enter into an O&M Agreement similar to the O&M Agreements entered into under the Bloom Electrons program, which O&M Agreement may be renewed on an annual basis at the option of the third party owner until the end of the term of the third-party owner’s offtake agreement(s) with its end customers for such project. These offtake agreements have a fifteen-year term, but in some cases the offtake agreement and related O&M Agreement may extend for up to twenty years.

Our obligations under the O&M Agreement include (i) designing, manufacturing, and installing the Energy Servers, and selling such Energy Servers to the third-party PPA entity, (ii) obtaining all necessary permits and other governmental approvals necessary for the installation and operation of the Energy Servers, and maintaining such permits and approvals throughout the term of the O&M Agreement, (iii) operating and maintaining the Energy Servers in compliance with all applicable laws, permits and regulations, (iv) satisfying the efficiency and output warranties set forth in such O&M Agreement and the offtake agreement(s) (Performance Warranties), and (v) complying with any specific requirements contained in the offtake agreement(s) with individual end-customer(s). The O&M Agreement obligates us to repurchase the Energy Servers in the event the Energy Servers

 

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fail to comply with the Performance Warranties or we otherwise breach the terms of the applicable O&M Agreement and we fail to remedy such failure or breach after a cure period, or in the event that an offtake agreement terminates as a result of any failure by us to comply with the applicable O&M Agreement. In some Third-Party PPAs, our obligation to repurchase Energy Servers extends to the entire fleet of Energy Servers installed pursuant to the applicable O&M Agreement in the event such failure affects more than a specified number of Energy Servers.

In some cases, we have also agreed to pay liquidated damages to the third-party owner in the event of delays in the manufacture and installation of Energy Servers, either in the form of a cash payment or a reduction in the purchase price for the applicable Energy Server(s). Both the upfront purchase price for the Energy Servers and the ongoing fees for our operations and maintenance are paid on a fixed dollar-per-kilowatt ($/kilowatt) basis.

The O&M Agreement for each third-party PPA project generally provides for the following performance and indemnity obligations:

Efficiency Obligations: We warrant to the applicable third-party owner that each Energy Server and/or the portfolio of Energy Servers sold to such entity will operate at an average efficiency level specified in the O&M Agreement, calculated over a period specified in the O&M Agreement following the commercial operations date of such Energy Server. In some cases, we are obligated to repair and replace Energy Servers that are unable to satisfy the Efficiency Warranty, or if a repair or replacement is not feasible, to repurchase such Energy Servers at the original purchase price, subject to adjustment for depreciation (“Efficiency Warranty”). In other cases, we are obligated to make a payment to compensate for the increased costs of procuring natural gas for the applicable Energy Server(s) resulting from the underperformance as against the warranted level, which payments are capped at a level specified in the applicable O&M Agreement (“Efficiency Guaranty”).

Output Obligations: In addition, we warrant that the Energy Servers will generate a minimum amount of electricity during specified periods of time.

Under O&M Agreements, our output obligations include: (i) the generation of a minimum amount of electricity, the failure of which obligates us to repair or replace the Energy Servers that are unable to satisfy such warranty, or if such repair or replacement is not feasible, to repurchase such Energy Servers at the original purchase price, subject to adjustment for depreciation (“Output Warranty”), and (ii) the generation of a minimum amount of electricity on a cumulative basis beginning on the commercial operations date of such Energy Server, the failure of which obligates us to make a payment to the applicable third-party owner based on the volume of the shortfall below the warranted level, subject to a liability cap specified in the applicable O&M Agreement (“Output Guaranty”). Satisfaction of the Output Warranty is measured on either a cumulative basis or in each calendar month or calendar quarter, as specified in the applicable O&M Agreement. In some Third-Party PPAs, these generation obligations are aggregated across the entire fleet of Energy Servers deployed pursuant to such project; in others, each Energy Server must satisfy the minimum generation obligations measured individually.

Indemnification of Performance Warranty Expenses under offtake agreements. In addition to the efficiency and output obligations, we also have agreed to indemnify certain third-party PPA entities for any expenses it incurs to any of the end-customers resulting from failures of the applicable Energy Servers to satisfy any of the efficiency, output or other performance warranties set forth in the applicable offtake agreement(s). In addition, in the event that an offtake agreement is terminated by a customer as to any Energy Servers as a result of our failure to perform any of our obligations under the O&M Agreement, we are obligated to repurchase such Energy Server from the applicable third-party PPA owner for a repurchase price equal to the original purchase price, subject to adjustment for depreciation.

Administration of Third-Party PPA Projects. Unlike the Bloom Electrons program, we perform no administrative services in the third-party PPA projects.

 

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Obligations to End Customers

While the counterparty to the offtake agreements under the third-party PPA program is the third-party owner, under the O&M Agreements we are obligated to perform each of the obligations of such third-party owner set forth in each offtake agreement with the end customer. As such, our obligations to the end customers under the Third-Party PPAs are in all material respects the same as our obligations to the end customers under the Bloom Electrons program.

Our third-party PPA programs have O&M agreements that provide for Efficiency Guarantees and Output Guarantees, subject to performance guarantee caps. The performance guarantees for our existing third-party PPA agreements are capped at $45.4 million. As of March 31, 2018, we have paid $0.2 million in performance guarantee payments under these third-party PPA programs leaving potential obligations under the performance guarantees of $45.2 million. In addition, the O&M agreements with these third-party PPA agreements have minimum warranty guarantees for efficiency and output. As of March 31, 2018, no warranty claims have been made under the O&M agreements for these third-party PPA agreements.

Over time we have also developed various lease programs with our financing partners to provide alternative financing options. These programs take the form of either (1) a traditional lease agreed directly with the financing partner or (2) managed services.

Traditional Lease

 

 

LOGO

Under the traditional lease arrangement, the customer enters into a lease directly with a financing partner, which pays us for the Energy Servers pursuant to a sales agreement (a Bank Agreement, described below). We recognize product and installation 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. The duration of our traditional leases ranges from 6 to 15 years.

Under a Bank Agreement, we are generally paid the full price of the Energy Servers as if sold as a purchase by the customer based on four milestones (on occasion negotiated with the customer, but in all cases equal to no less than 60% of the purchase price billed at the shipment milestone, described below). The four payment milestones are typically as follows: (i) 15% upon execution of the bank’s entry into the lease with a customer, (ii) 25% on the day that is 180 days prior to delivery of the Energy Servers, (iii) 40% upon shipment of the Energy Servers, and (iv) 20% upon acceptance of the Energy Servers. The bank receives title to the Energy

 

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Servers upon installation at the customer site and the customer has risk of loss while the Energy Server is in operation on the customer’s site.

The Bank Agreement provides for the installation of the Energy Servers and includes a one-year warranty, which includes the performance guarantees described below, with the warranty offered on an annually renewing basis at the discretion of the customer. The customer must provide gas for the Energy Servers to operate.

Warranty Commitments. We typically provide (i) an “Output Warranty” to operate at or above a specified baseload output of the Energy Servers on a site, and (ii) an “Efficiency Warranty” to operate at or above a specified level of fuel efficiency. Both are measured on a monthly basis. Upon the applicable financing partner or its customer making a warranty claim for a failure of any of our warranty commitments, we are then obligated to repair or replace the Energy Server, or if a repair or replacement is not feasible, to pay the customer an amount approximately equal to the net book value of the Energy Server, after which the Bank Agreement would be terminated. As of March 31, 2018, we have incurred no obligations to make payments pursuant to these warranty commitments.

Performance Guarantees. Our performance guarantees are negotiated on a case-by-case basis for projects deployed through the traditional lease program, but we typically provide an Output Guaranty of 95% measured annually and an Efficiency Guaranty of 52% measured cumulatively from the date the applicable Energy Server(s) are commissioned. In each case, underperformance obligates us to make a payment to the applicable customer. As of March 31, 2018, the fleet of Energy Servers deployed pursuant to the traditional lease programs are performing at a lifetime average output of approximately 87% and a lifetime average efficiency of approximately 55%. As of March 31, 2018, our obligation to make payments for underperformance against the performance guarantees for traditional lease projects is capped at an aggregate total of approximately $5.8 million (including payments both for low output and for low efficiency). As of March 31, 2018, our aggregate remaining potential liability under this cap is approximately $5.5 million.

Remarketing at Termination of Lease. At the end of any customer lease in the event the customer does not renew or purchase the Energy Servers, we may remarket any such Energy Servers to a third party, and any proceeds of such sale would be allocated between us and the applicable financing partner as agreed between them at the time of such sale.

Managed Services

 

 

LOGO

 

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Under our managed services program, 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. The duration of our managed services leases is currently 10 years. We begin to recognize revenue from the sale of the equipment to the financing partner once the Energy Server has been accepted by the customer. Under the master lease, we then make 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.

Our warranty commitments under the managed services option are substantially similar to those applicable to the traditional lease program described above. Our managed services deployments do not typically include any performance guarantees above the warranty commitments, but the customer’s payment to us includes a payment that is proportionate to the output generated by the Energy Server(s) and our pricing assumes service revenues at the 95% output level. Therefore, our service revenues are lower if output is less than 95% (and higher if output exceeds 95%). As of March 31, 2018, the fleet of Energy Servers deployed pursuant to the managed services program are performing at a lifetime average output of approximately 94%.

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 typically 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. Each PPA entity currently serves between one and nine customers. 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

 

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maintenance services agreement with us following the first year of service to extend the warranty services and performance guarantees. This service agreement has a term coincident with the term of the applicable PPA project and paid for on an annual basis by the PPA entity. The aggregate amount of extended warranty services payments we expect to receive over the duration of the PPA projects is $456.4 million as of March 31, 2018.

The mix of orders between our Bloom Electrons financing program and other purchase options is generally driven by customer preference. While we cannot predict with certainty in any given period how customers will choose to finance their purchase, we have observed that, more recently, customers tend to choose a financing option that more closely mirrors the customers’ monthly payment stream for electricity. Power purchase agreements, including our Bloom Electrons financing program, provide for payment streams as monthly payments similar to those for grid electricity payments.

Product revenue associated with the sale of the Energy Servers under the PPAs that qualify as sales-type leases is recognized at the present value of the minimum lease payments, which approximate fair value, assuming all other conditions for revenue recognition noted above have also been met. Customer purchases financed by PPA entities since 2014 have been accounted for as operating leases and the related revenue under those agreements have been recognized as electricity revenue as the electricity is produced and paid for by the customer. Under 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 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 based on the cash distribution allocations agreed between us and the tax equity investors. For further information, see Note 14, Power Purchase Agreement Programs, to our consolidated financial statements included in this prospectus. The PPA tax equity investors receive substantially all of the value attributable to the long-term recurring customer lease 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 March 31, 2018, none of our customers under our PPAs have defaulted on their payment obligations.

We currently operate five distinct PPA entities. Three of these PPA entities (PPA II, PPA IIIa and PPA IIIb) are flip structures and the remaining two (PPA IV and PPA V) are strategic long-term partnerships with the tax equity investor that do not flip during the term of the PPA arrangements. Of the three PPA entity flip structures, PPA II is based on the tax equity investor reaching an agreed upon internal rate of return (IRR) and PPA IIIa and PPA IIIb are based on the flip occurring at a fixed date in the future.

Since we elected to decommission PPA I and purchased the tax equity investor’s interest for $25.0 million in convertible debt, we will receive 100% of any remaining cash flows from PPA I. Prior to the decommissioning, we received cash flows from PPA I totaling $393.6 million related to the purchase of Energy Servers, distributions of incentive receipts, annual maintenance payments and monthly administrative services payments. Since the decommissioning through March 31, 2018, we have received $12.7 million from PPA I related to customer electricity billings. With respect to PPA II, we estimate that the tax equity investor will need to receive additional cash distributions of approximately $101.0 million to reach its target IRR at which point we will receive substantially all of the remaining value attributable to the long-term customer payments and other

 

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incentives. To achieve these cash distributions and the contractual internal rate of return to trigger the ownership flip, PPA II will need to generate additional aggregate revenue of approximately $393.3 million. Our PPA II contracts do not specify the date on which the flip is projected to occur; rather, the PPA II contracts set forth the conditions that will trigger the flip and define the parties’ respective rights and obligations before and after the occurrence of the flip. Based on the current contractual terms, we estimate that PPA II will flip on approximately June 30, 2028, assuming prior termination does not occur.

For PPA IIIa and PPA IIIb, the tax equity investors receive preferred distributions of 2% of their total cash investment through the flip date, a fixed date in the future, and are not dependent on additional earned amounts. In PPA IIIa and IIIb, the flip dates are January 1, 2020 and January 1, 2021, respectively, and the remaining preferred distributions to be paid through the flip dates are $1.5 million and $1.2 million, respectively. We will receive substantially all of the remaining income (loss), tax and tax allocations attributable to the long-term customer payments and other incentives after each flip date.

After the occurrence of the flip date for PPA II, PPA IIIa and PPA IIIb, we do not anticipate subsequent distributions to us from the PPA entities to be material enough to support our ongoing cash needs, and therefore we will still need to generate significant cash from product sales.

The Energy Servers purchased by the PPA entities are recorded as property, plant and equipment and included within our consolidated balance sheets. We then reduce these assets by the amounts received by the investors from U.S. Treasury grants and the associated incentive rebates. In turn, we recognize the incentive rebates and subsequent customer payments as electricity revenue over the customer lease term and amortize U.S. Treasury grants as a reduction to depreciation of the associated Energy Servers over the term of the PPA. Since our inception, government incentives have accounted for approximately 13% of the expected total cash flows for all PPA entities. As of March 31, 2018, our PPA entities had received a total of $282.2 million in government grants and rebates.

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.

All five PPA entities have utilized their entire available financing capacity and completed their purchases of Energy Servers as of March 31, 2018.

Through our Bloom Electrons financing program, a total of approximately $1.1 billion in financing has been funded through March 31, 2018, including approximately $609.2 million in equity investments and an additional $448.7 million in non-recourse debt to support an aggregate deployment of approximately 106.8 megawatts of Energy Servers as of March 31, 2018. Investors in our PPA entities include banks and other large companies such as Credit Suisse, Exelon Generation Company, Intel Corporation and U.S. Bancorp. In the future, in addition to or in lieu of arranging customer financing through PPA entities, we may use debt, equity or other financing strategies to fund our operations.

We view our obligations under Bloom Electrons in four categories: first, our obligations to the relevant PPA entity formed to own the Energy Servers and sell electricity generated by such Energy Servers to the end-

 

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customers; second, the Project Company’s obligations to the lenders of such Project Company, if any; third, our obligations to the PPA tax equity investors in the applicable project; and fourth, to the end-customers. We discuss these obligations in further detail below.

Obligations to PPA Entities

In each PPA project, we and the applicable PPA entity enter into two primary contracts: first, a contract for the purchase, sale, installation, operation and maintenance of the Energy Servers to be employed in such PPA project (the O&M Agreement), and second, a contract whereby we are engaged to perform administrative functions for the PPA project during the term of the PPA project (the Administrative Services Agreement, or ASA). The O&M Agreement and the ASA each have a term coincident with the term of the applicable PPA project. The aggregate amount of extended warranty services payments we expect to receive under the O&M Agreement over the remaining term of the PPA projects was $456.4 million as of March 31, 2018. The aggregate amount of ASA payments we expect to receive over the remaining term of the PPA projects is $34.5 million as of March 31, 2018.

Our obligations to the PPA entity pursuant to the O&M Agreement include: (i) designing, manufacturing, and installing the Energy Servers, and selling such Energy Servers to the PPA entity, (ii) obtaining all necessary permits and other governmental approvals necessary for the installation and operation of the Energy Servers, and maintaining such permits and approvals throughout the term of the O&M Agreement, (iii) operating and maintaining the Energy Servers in compliance with all applicable laws, permits and regulations, (iv) satisfying the efficiency and output obligations set forth in such O&M Agreement (Performance Warranties), and (v) complying with any specific requirements contained in the offtake agreements with individual end-customers. The O&M Agreement obligates us to repurchase the Energy Servers in the event the Energy Servers fail to comply with the Performance Warranties and we fail to remedy such failure after a cure period, or in the event that an offtake agreement terminates as a result of any failure by us to comply with the requirements contained therein. In some cases, we have also agreed to pay liquidated damages to the PPA entity in the event of delays in the manufacture and installation of Energy Servers. Both the upfront purchase price for the Energy Servers and the ongoing fees for our operations and maintenance are paid on a fixed dollar per kilowatt ($/kW) basis.

The O&M Agreements for each PPA entity generally provide for the following Performance Warranties and indemnity obligations:

Efficiency Warranty and Efficiency Guaranty. We warrant to the applicable PPA entity that the Energy Servers sold to such entity will operate at an average efficiency level specified in the O&M Agreement, calculated either cumulatively from the commercial operations date of each Energy Server or during each calendar month. We are obligated to repair or replace Energy Servers that are unable to satisfy the Efficiency Warranty, or if a repair or replacement is not feasible, to repurchase such Energy Servers at a price specified in the applicable O&M Agreement. In the case of PPA II, if the aggregate average efficiency falls below the specified threshold, we are also obligated to make a payment to the PPA entity equal to the increased expense resulting from such efficiency shortfall, subject to a cap on aggregate payments equivalent to the purchase price of all Energy Servers in the PPA II portfolio. During the period from September 2010 to March 31, 2018, no Energy Servers have been repurchased pursuant to any Efficiency Warranty and no payments have been made pursuant to the Efficiency Guarantees.

One-Month Output Warranty. In the case of PPA II, we also warrant that the PPA II portfolio of Energy Servers will generate a minimum amount of electricity in each calendar month, and we are obligated to repair or replace Energy Servers that fail to satisfy this warranty. If we determine that a repair or replacement is not feasible, we are obligated to repurchase such Energy Servers at the original purchase price. During the period from September 2010 to March 31, 2018, no Energy Servers have been repurchased and no payments have been made pursuant to a One-Month Output Warranty.

Quarterly Output Warranty. In the case of PPA IIIa, we also warrant that each of the applicable Energy Servers will generate a minimum amount of electricity in each calendar quarter, and we are obligated to

 

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repair or replace Energy Servers that fail to satisfy this warranty. If we determine that a repair or replacement is not feasible, we are obligated to repurchase such Energy Servers at the original purchase price, subject to adjustment for depreciation. In addition, we are obligated to make a payment to the PPA IIIa entity to make the PPA IIIa entity whole for lost revenues resulting from the shortfall below the warranted level, subject to a cap on payments equal to ten percent (10%) of the purchase price of the Energy Servers in the PPA IIIa portfolio. If we fail to make any such warranty payments if and when due, then the applicable PPA entity may elect to require us to repurchase Energy Servers that fail such warranty at the original purchase price, subject to adjustment for depreciation. During the period from September 2010 to March 31, 2018, no Energy Servers have been repurchased pursuant to the Quarterly Output Warranty, and we have made payments in the aggregate amount of $0.2 million pursuant to the Quarterly Output Warranty.

Quarterly Output Guaranty. In the cases of PPA IIIb, PPA IV and PPA V, we also guarantee to the applicable PPA entity that the applicable PPA portfolio of Energy Servers will generate a minimum amount of electricity in each calendar quarter. In the event the applicable portfolio fails to satisfy this Output Guaranty, we are obligated to make a payment to the applicable PPA entity to make the PPA entity whole for lost revenues resulting from the shortfall below the guaranteed level, and such liability is uncapped. If we fail to make any such Output Guaranty payments if and when due, then the applicable PPA entity may elect to require us to repurchase Energy Servers that fail such guaranty, at a price specified in the applicable O&M Agreement and pursue other damages. During the period from September 2010 to March 31, 2018, no Energy Servers have been repurchased pursuant to a Quarterly Output Guaranty, and we have made no payments pursuant to any Quarterly Output Guaranty.

Annual Output Guaranty. We also guarantee to the applicable PPA entity that the applicable PPA portfolio of Energy Servers will generate a minimum amount of electricity in each calendar year. In the event that such portfolio fails to satisfy this Output Guaranty, we are obligated to make a payment to the applicable PPA entity to make the PPA entity whole for lost revenues resulting from the shortfall below the warranted level, subject to a liability cap equal to a portion of the purchase price of the applicable portfolio. During the period from September 2010 to March 31, 2018, we have made payments in the aggregate amount of $23.5 million pursuant to these Output Guarantees. These payments were primarily as a result of performance issues in our early generation systems deployed in our first three PPA entities (PPA I, PPA II & PPA IIIa). Of the aggregate amount of $23.5 million paid, $0.9 million was paid in the three months ended March 31, 2018, $3.7 million was paid in 2017, $4.8 million was paid in 2016, and $14.1 million was paid prior to 2016.

Indemnification of Performance Warranty Expenses under Offtake Agreements. In the cases of PPA IIIa, PPA IIIb, PPA IV and PPA V, we also have agreed to indemnify the applicable PPA entity for any expenses it incurs to any of its customers resulting from failures of the applicable PPA portfolio of Energy Servers to satisfy any of the efficiency, output or other performance commitments in the applicable offtake agreements. In addition, in the event that an offtake agreement is terminated by a customer as to any Energy Servers as a result of a default by us under the O&M Agreement, we are obligated to repurchase such Energy Server from the applicable PPA entity for a repurchase price specified in the applicable O&M Agreement. During the period from September 2010 to March 31, 2018, we have incurred no obligations for payments pursuant to these provisions under any of our PPA arrangements.

Our obligations pursuant to the ASA include performing a variety of administrative and management services necessary to conduct the business of the PPA project. These duties include: (i) invoicing and collecting amounts due from the end-customers, (ii) engaging, supervising and monitoring any third-party service providers required for the operation of the project, (iii) paying, on behalf of the PPA entity and with the PPA entity’s available funds, any amounts owed, including debt service payments on the debt incurred by the PPA entity (Project Debt), if applicable, (iv) maintaining books and records and preparing financial statements, (v) representing the PPA entity in any administrative or other public proceedings, (vi) preparing annual budgets and other reports and deliverables owed by the PPA entity under the Project Debt agreements, if applicable, and (vii) generally performing all other administrative tasks required in relation to the PPA project. We receive an annual administration fee for its services, calculated on a fixed dollar per kilowatt ($/kW) basis.

 

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Obligations to Lenders

Each of the PPA projects (other than the PPA I project) has incurred debt in order to finance the acquisition of Energy Servers. The lenders for these projects are a combination of banks and/or institutional investors.

In each case, the Project Debt incurred by the applicable PPA entity is secured by all of the assets comprising the project (primarily comprised of the Energy Servers owned by the PPA entity and a collateral assignment of each of the contracts to which such PPA entity is a party, including the O&M Agreement entered into with us and the offtake agreements entered into with PPA entity’s customers), and is senior to all other debt obligations of the PPA entity. As further collateral, the lenders receive a security interest in 100% of the membership interest of the PPA entity. However, as is typical in structured finance transactions of this nature, although the Project Debt is secured by all of the PPA entity’s assets, the lenders have no recourse to us or to any of the other tax equity investors in the project.

The applicable PPA entity is obligated to make quarterly principal and interest payments according to an amortization schedule agreed between us, the tax equity investors and the lenders. The debt is either a “term loan”, where the final maturity date coincides with the expiration of the offtake agreements included in the project, or a “mini-perm loan,” where the final maturity date occurs at some point prior to such expiration; in the case of these “mini-perm loans”, we expect to be able to refinance these loans on or prior to their maturity date by procuring debt from other sources and using the proceeds of such new debt to repay the existing loans.

The Project Debt documentation also includes provisions that implement a customary “payment waterfall” that dictates the priority in which the PPA entity will use its available funds to satisfy its payment obligations to us, the lenders, the tax equity investors and other third parties. These provisions generally provide that all revenues from the sale of electricity under the applicable offtake agreements and any other cash proceeds received by the PPA entity are deposited into a “revenue account”, and those funds are then distributed in the following order: first, to pay for ongoing project expenses, including amounts due to us under the O&M Agreement and the ASA, taxes, insurance premiums, and any legal, accounting and other third party service provider costs; second, to pay any fees due to collateral agents and depositary agents, if any; third, to pay interest then due on the loans; fourth, to pay principal then due on the loans; fifth, to fund any reserve accounts to the extent not fully funded; and finally, any remaining cash (Distributable Cash) may be distributed to us and the tax equity investors in the project, subject to the satisfaction of any conditions to distributions agreed with the applicable lenders, such as a minimum debt service coverage ratios, absence of defaults, and similar requirements. Additional information regarding the Project Debt for each individual PPA Project is set forth in the Liquidity and Capital Resources section below. In addition, the “Distribution Conditions” are negotiated individually for each PPA Project, but in each case include (i) absence of defaults, and (ii) satisfaction of minimum debt service coverage ratios. In the event that there is Distributable Cash remaining after the payment of all higher-priority payment obligations but the applicable Distribution Conditions are not satisfied, the applicable funds are deposited into a “Distribution Suspense Account” and remain in such account until the Distribution Conditions are subsequently satisfied. In the event that any funds have been on deposit in the Distribution Suspense Account for four (4) consecutive calendar quarters, the applicable Project Company is obligated to use such “Trapped Cash” to prepay the Project Debt.

In connection with the PPA IIIb, PPA IV and PPA V projects, we procured a Fuel Cell Energy Production Insurance Policy on behalf of the applicable PPA entity and the lenders (Production Insurance). The Production Insurance policies are intended to mitigate the risk of our failure or inability to operate and maintain the applicable portfolio of Energy Servers in accordance with the requirements of the O&M Agreement, and provides for debt service payment on the Project Debt in the event that the PPA entity’s revenues are insufficient to make such payments due to a shortfall in the electricity generated by the Energy Servers. To date, no claims have been made under any of the Production Insurance policies.

 

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For additional information regarding Project Debt, see “Management’s Discussion and Analysis of Financial Condition and Results of Operation—Liquidity and Capital Resources—Credit Facilities—PPA Entities’ Indebtedness”.

Obligations to Investors

Each of our PPA projects has involved an investment by one or more tax equity investors, who contribute funds to the applicable PPA entity in exchange for equity interests entitling such investors to distributions of the cash and any tax credits and other tax benefits generated by the project. In each of the PPA projects, we (via a wholly-owned subsidiary) and one or more additional tax equity investors form a jointly-owned special purpose entity (each, a Holding Company), which entity in turn owns 100% of the membership interests of the applicable PPA entity. Our obligations to the other equity investors are set forth in the Holding Company limited liability company operating agreement (the Operating Agreement). We act as the managing member of each Holding Company, managing its day-to-day affairs subject to consent rights of the tax equity investors with respect to decisions agreed between us and such investors in the Operating Agreement.

As members of a Holding Company, we and the applicable tax equity investors are entitled to (i) allocations of items of income, loss, gain, deduction and credit (Tax Items) including, where applicable, the 30% investment tax credit under Section 48 of the Internal Revenue Code, and (ii) distributions of any cash held by such Holding Company in excess of amounts necessary for the ongoing operation of such Holding Company, including any Distributable Cash received from the applicable PPA entity. The members’ respective allocations of Tax Items and cash distributions are negotiated on a project-by-project basis between us and the tax equity investors in each PPA project. Distributions are made to investors (including us) on a quarterly basis in connection with PPA II, PPA IV and PPA V, and on a semi-annual basis in PPA IIIa and PPA IIIb.

In the event of a bankruptcy of a PPA entity, the assets of such PPA would be liquidated, likely at the direction of the bankruptcy trustee, if one was appointed, or according to the direction of the applicable lenders to such PPA entity. In the event of a bankruptcy or liquidation, assets would first be liquidated to repay the applicable project’s debt. If any cash remained following the repayment of debt, such cash would be distributed among us and the other equity investor(s) in the project in accordance with the applicable LLC agreement for the joint investment entity. As a general matter, cash is first applied to the payment of owed but unpaid preferred distributions to the equity investor(s) other than us, if any, with any remaining assets split between us and such equity investor(s) in accordance with the sharing percentages of distributions as set forth in the applicable LLC agreement.

The PPA projects do not permit for voluntary early termination of the arrangements by us or the applicable tax equity investors. The tax equity investors in the projects may not withdraw from the applicable PPA entity, except in connection with a permitted transfer or sale of such member’s assets in compliance with any restrictions on transfer set forth in the limited liability company agreement applicable to such project.

The following sets forth a project-by-project summary of obligations that are unique to individual projects:

PPA II. Diamond State Generation Partners, LLC (PPA Company II) is a wholly-owned subsidiary of Diamond State Generation Holdings, LLC (PPA II HoldCo), which is jointly-owned by us and a tax equity investor. As of March 31, 2018, we owned 100% of the Class A Membership Interests of PPA II HoldCo, and the tax equity investor owned 100% of the Class B Membership Interests of PPA II HoldCo. We (through our wholly-owned subsidiary Clean Technologies II, LLC), act as the managing member of PPA II HoldCo.

The economic benefits of the PPA II project are allocated between us and the tax equity investor as follows:

 

   

Other than Tax Items relating to the proceeds of any cash grant under Section 1603 of the American Recovery and Reinvestment Tax Act of 2009 (Cash Grant), Tax Items are allocated (i) 99% to the tax

 

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equity investor and 1% to us until the last date of the calendar month in which the tax equity investor has achieved an internal rate of return equal to the “Target IRR” specified in the PPA II HoldCo operating agreement (Flip Date), and (ii) following the Flip Date, 5% to the tax equity investor and 95% to us.

 

    All Tax Items relating to the Cash Grant are allocated 99% to the tax equity investor and 1% to us.

 

    All cash proceeds of the Cash Grant are distributed 99% to the tax equity investor and 1% to us.

 

    All other cash available for distribution is distributed (i) 99% to the tax equity investor and 1% to us until the Flip Date, and (ii) following the Flip Date, 5% to the tax equity investor and 95% to us.

Pursuant to the PPA II HoldCo LLC agreement, we have the option, exercisable at our sole discretion, to purchase all of the tax equity investor’s membership interests in PPA II HoldCo on the eleventh anniversary of the date of the initial equity investment of the PPA II project by the tax equity investor, which will occur in June, 2023. If we were to exercise this purchase option, we would thereafter be entitled to all subsequent cash, income (loss), tax and tax allocations generated by the PPA II Project (net of payments to the PPA II lenders under the PPA II Credit Agreement) and the purchase price for the tax equity investor’s membership interests would be equal to the greater of (i) the fair market value of such equity interests at such time, or (ii) the amount that would cause the tax equity investor to realize an internal rate of return stated in the PPA II HoldCo LLC agreement. The cash consideration required to generate the required internal rate of return for the tax equity investor pursuant to this purchase option will vary based on the distributions generated by the PPA II Project thru June, 2023, and may range between approximately $71.1 million and $109.9 million. We have agreed to indemnify the tax equity investor in PPA II HoldCo from any liability related to recapture of the Cash Grant, except to the extent such recapture results from (i) a breach of applicable representations and covenants of the tax equity investor, or (ii) a prohibited transfer of the tax equity investor’s membership interests in PPA II HoldCo.

The PPA II project includes an annual Output Guaranty of 95% and a cumulative Efficiency Guaranty of 50%. In each case, underperformance obligates us to make a payment to PPA Company II. As of March 31, 2018, the PPA II project is operating at an average output of approximately 86% for calendar year 2018, and a lifetime average efficiency of approximately 51%. Our obligation to make payments for underperformance of the PPA II project is capped at an aggregate total of approximately $13.9 million under the Output Guaranty and approximately $263.6 million under the Efficiency Guaranty. As of March 31, 2018, we have no remaining liability under the Output Guaranty, and our remaining potential liability under the Efficiency Guaranty cap is approximately $263.6 million.

Obligations Under the PPA II Tariff Agreement

PPA Company II is required to declare a “Forced Outage Event” if permitted under the PPA II tariff agreement in the event that (i) the Company has reached its cap on performance warranty payments under the O&M Agreement, such that PPA Company II is not eligible for further warranty payments under such O&M Agreement, (ii) the project’s lifetime efficiency falls below the level warranted in the O&M Agreement and the Company has not reimbursed PPA Company II for the resulting excess costs of procuring natural gas resulting from such shortfall, (iii) the Energy Servers have failed to generate electricity at an average above a minimum threshold specified in the PPA II Credit Agreement (i.e., 85% of the project’s nameplate capacity during any calendar month) or (iv) the Company has suffered a bankruptcy event or the Company ceases to carry on its business. As of March 31, 2018, no “Forced Outage Event” had been declared. The PPA II project’s average output for March 2018 equaled 85.8% of the project’s nameplate capacity.

In addition, in the event that PPA Company II claims that a “Forced Outage Event” has occurred under the PPA II tariff, PPA Company II is obligated to purchase and deliver replacement RECs in an amount equal to the number of megawatt hours for which it receives compensation under the ‘forced outage’ provisions of the tariff, but only if such replacement RECs are available in sufficient quantities and can be

 

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purchased for less than $45 per REC. A “Forced Outage Event” is defined under the PPA II tariff agreement as the inability of PPA II to obtain a replacement component part or a service necessary for the operation of the Energy Servers at their nameplate capacity. The PPA II tariff agreement provides for payments to PPA Company II in the event of a Forced Outage Event lasting in excess of 90 days. For the first 90 days following the occurrence of a Forced Outage Event, no payments are made under this provision of the tariff. Thereafter, PPA Company II is entitled to payments equal to 70% of the payments that would have been made under the tariff but for the occurrence of the Forced Outage Event—that is, the “Forced Outage Event” provision of the PPA II tariff agreement provides for payments to PPA Company II under the tariff equal to the amount that would be paid were PPA Company II’s Energy Servers operating at 70% of their nameplate capacity, irrespective of actual output. The PPA II tariff agreement also provides that the “Forced Outage Event” protections afforded thereunder shall automatically terminate in the event that we obtain an investment grade rating. In addition, in the event we obtain an investment grade rating, we are required to offer to repurchase the Notes from each individual noteholder unless we provide a guarantee of the debt obligations of the PPA Company II.

The tax equity investor in PPA II HoldCo has the option, exercisable on March 16, 2022, to sell 100% of its equity interests in the project to us for a sale price equal to the then-applicable fair market value of such equity interests. We guarantee the obligations of Clean Technologies II to make the payment of such purchase price in the event the tax equity investor exercises such option.

PPA IIIa. 2012 ESA Project Company, LLC (PPA Company IIIa) is a wholly-owned subsidiary of 2012 V PPA Holdco, LLC (PPA IIIa HoldCo), which is jointly-owned by us and a tax equity investor. As of March 31, 2018, we owned 100% of the Class B Membership Interests of PPA IIIa HoldCo, and the tax equity investor owned 100% of the Class A Membership Interests of PPA IIIa HoldCo. We (through our wholly-owned subsidiary Clean Technologies III, LLC), act as the managing member of PPA IIIa HoldCo.

The economic benefits of the PPA IIIa project are allocated between us and the tax equity investor as follows:

 

    Tax Items (including the ITC) are allocated (i) 99% to the tax equity investor and 1% to us.

 

    Cash available for distribution is distributed (i) until January 1, 2020, first, to the tax equity investor, a payment equal to 2% of the investor’s investment on an annual basis, and next, all remaining amounts are distributed to us; and (ii) from and after January 1, 2020, first, to the tax equity investor, a payment equal to 2% of the investor’s investment on an annual basis, and next, all remaining amounts are distributed 95.05% to us and 4.95% to the tax equity investor.

Pursuant to the PPA IIIa HoldCo LLC agreement, we have the option, exercisable at our sole discretion, to purchase all of the tax equity investor’s membership interests in PPA IIIa HoldCo, exercisable within six months following either January 1, 2020 or January 1, 2025. If we were to exercise this purchase option, we would thereafter be entitled to all subsequent cash, income (loss), tax and tax allocations generated by the PPA IIIa Project (net of payments to the PPA IIIa lenders under the PPA IIIa Credit Agreement) and the purchase price for the tax equity investor’s membership interests would be equal to the greater of (i) the fair market value of such equity interests at such time, or (ii) the sum of (x) any unpaid amounts owed to the tax equity investor pursuant to its entitlement to cash distributions equal to 2% of its investment (as described above), plus (y) approximately $2.1 million. The PPA IIIa project includes (i) an Output Guaranty of 95% measured annually, (ii) an Output Warranty of 80% measured quarterly, (iii) an Efficiency Warranty of 45% measured monthly, and (iv) an indemnity of any payments made by PPA Company IIIa regarding failure of the Energy Servers to perform in accordance with the applicable offtake agreements, which generally provide for an Efficiency Guaranty of 52% measured cumulatively over the life of the project. In the case of underperformance with respect to the Output Warranty and/or the Output Guaranty, we are obligated to make a payment to PPA Company IIIa; additionally, in the case of underperformance against the Output Warranty, we are obligated to repair or replace the applicable Energy Servers. In the case of underperformance with respect to the Efficiency Warranty, we are obligated to repair

 

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or replace the applicable Energy Servers, and we are obligated to reimburse PPA Company IIIa for any payments owed to the applicable PPA customer(s). As of March 31, 2018, the PPA IIIa project is operating at an average output of approximately 85% for calendar year 2018, an average output of approximately 85% for the three months ended March 31, 2018, and a lifetime average efficiency of approximately 52%. Our obligation to make payments for underperformance of the PPA IIIa project is capped at an aggregate total of approximately $5.0 million under the annual Output Guaranty, approximately $10.0 million under the quarterly Output Warranty, and approximately $675,000 under the Efficiency Guarantees in the applicable offtake agreements. As of March 31, 2018, our aggregate remaining potential liability under these caps is approximately $2.4 million under the annual Output Guaranty, approximately $9.8 million under the quarterly Output Warranty, and approximately $675,000 under the Efficiency Guarantees.

We have agreed to indemnify the tax equity investor in PPA IIIa HoldCo from any liability related to recapture of the ITC except to the extent such recapture results from (i) a transfer of the tax equity investor’s membership interest in the project, (ii) a change in the federal income tax classification of the tax equity investor or its owners, (iii) a change in federal income tax law or (iv) adverse findings regarding the tax classification of the project.

The tax equity investor has the option, exercisable for a six month period commencing January 1, 2021, to withdraw from PPA IIIa HoldCo by notice to us. Notwithstanding the allocations of cash available for distribution set forth above, in the event that the tax equity investor exercises this withdrawal option, such investor shall receive 99% of the cash available for distribution until it has received the fair market value of its Class A Membership Interests in PPA IIIa HoldCo at such time, but in any event no more than approximately $2.0 million.

PPA IIIb. 2013B ESA Project Company, LLC (PPA Company IIIb) is a wholly-owned subsidiary of 2013B ESA Holdco, LLC (PPA IIIb HoldCo), which is jointly-owned by us and a tax equity investor. As of March 31, 2018, we owned 100% of the Class B Membership Interests of PPA IIIb HoldCo, and the tax equity investor owned 100% of the Class A Membership Interests of PPA IIIb HoldCo. We (through our wholly-owned subsidiary Clean Technologies 2013B, LLC), act as the managing member of PPA IIIb HoldCo.

The economic benefits of the PPA IIIb project are allocated between us and the tax equity investor as follows:

 

    Tax Items (including the ITC) are allocated 99% to the tax equity investor and 1% to us.

 

    Cash available for distribution is distributed (i) until January 1, 2021, first, to the tax equity investor, a payment equal to 2% of the investor’s investment on an annual basis, and next, all remaining amounts are distributed to us; and (ii) from and after January 1, 2021, first, to the tax equity investor, a payment equal to 2% of the investor’s investment on an annual basis, and next, all remaining amounts are distributed 95.05% to us and 4.95% to the investor.

Pursuant to the PPA IIIb HoldCo LLC agreement, we have the option, exercisable at our sole discretion, to purchase all of the tax equity investor’s membership interests in PPA IIIb HoldCo, exercisable within six months following either January 1, 2021 or January 1, 2026. If we were to exercise this purchase option, we would thereafter be entitled to all subsequent cash, income (loss), tax and tax allocations generated by the PPA IIIb Project (net of payments to the PPA IIIb lenders under the PPA IIIb Credit Agreement) and the purchase price for the tax equity investor’s membership interests would be equal to the greater of (i) the fair market value of such equity interests at such time, or (ii) the sum of (x) any unpaid amounts owed to the tax equity investor pursuant to its entitlement to cash distributions equal to 2% of its investment (as described above), plus (y) approximately $0.7 million. The PPA IIIb project includes (i) an Output Guaranty of 95% measured annually, (ii) an Output Guaranty of 80% measured quarterly, (iii) an Efficiency Warranty of 45% measured monthly, and (iv) an indemnity of any payments made by PPA Company IIIb regarding failure of the Energy Servers to perform in accordance with the applicable offtake agreements, which generally provide for an Efficiency Guaranty of 52% measured cumulatively over the

 

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life of the project. In the case of underperformance with respect to either Output Guaranty, we are obligated to make a payment to PPA Company IIIb. In the case of underperformance with respect to the Efficiency Warranty, we are obligated to repair or replace the applicable Energy Servers, and we are obligated to reimburse PPA Company IIIb for any payments owed to the applicable PPA customer(s). As of March 31, 2018, the PPA IIIb project is operating at an average output of approximately 90% for the period ending March 31, 2018, an average output of approximately 90% for the three months ended March 31, 2018, and a lifetime average efficiency of approximately 53%. Our obligation to make payments for underperformance of the PPA IIIb project is capped at an aggregate total of approximately $2.7 million under the annual Output Guaranty, is uncapped under the quarterly Output Guaranty, and is capped at an aggregate total of approximately $1.0 million under the Efficiency Guarantees in the applicable offtake agreements. As of March 31, 2018, our aggregate remaining potential liability under these caps is approximately $2.6 million under the annual Output Guaranty and is approximately $1.0 million under the Efficiency Guarantees.

We have agreed to indemnify the tax equity investor in PPA IIIa HoldCo from any liability related to recapture of the ITC except to the extent such recapture results from (i) a transfer of the tax equity investor’s membership interest in the project, (ii) a change in the federal income tax classification of the tax equity investor or its owners, (iii) a change in federal income tax law or (iv) adverse findings regarding the tax classification of the project.

The tax equity investor has the option, exercisable for a 6-month period commencing January 1, 2022, to withdraw from PPA IIIa HoldCo by notice to us. Notwithstanding the allocations of cash available for distribution set forth above, in the event that the tax equity investor exercises this withdrawal option, the investor shall receive 99% of the cash available for distribution until it has received the fair market value of its Class A Membership Interests in PPA IIIa HoldCo at such time, but in any event no more than approximately $1.2 million.

PPA IV. 2014 ESA Project Company, LLC (PPA Company IV) is a wholly-owned subsidiary of 2014 ESA Holdco, LLC (PPA IV HoldCo), which is jointly-owned by us and a tax equity investor. As of March 31, 2018, we owned 100% of the Class B Membership Interests of PPA IV HoldCo, and the tax equity investor owned 100% of the Class A Membership Interests of PPA IV HoldCo. We (through our wholly-owned subsidiary Clean Technologies 2014, LLC), act as the managing member of PPA IV HoldCo.

The economic benefits of the PPA IV project are allocated between us and the tax equity investor as follows:

 

    Tax Items (including the ITC) are allocated 90% to the tax equity investor and 10% to us.

 

    Cash available for distribution is distributed 90% to the tax equity investor and 10% to us.

The PPA IV project includes (i) an Output Guaranty of 95% measured annually, (ii) an Output Guaranty of 80% measured quarterly, (iii) an Efficiency Warranty of 45% measured monthly, and (iv) an indemnity of any payments made by PPA Company IV regarding failure of the Energy Servers to perform in accordance with the applicable offtake agreements, which generally provide for an Efficiency Guaranty of 52% measured cumulatively over the life of the project. In the case of underperformance with respect to either Output Guaranty, we are obligated to make a payment to PPA Company IV. In the case of underperformance with respect to the Efficiency Warranty, we are obligated to repair or replace the applicable Energy Servers, and we are obligated to reimburse PPA Company IV for any payments owed to the applicable PPA customer(s). The offtake agreements generally provide for an Efficiency Guaranty of 52% measured cumulatively over the life of the project. As of March 31, 2018, the PPA IV project is operating at an average output of approximately 89% for calendar year 2018, and a lifetime average efficiency of approximately 55%. Our obligation to make payments for underperformance of the PPA IV project is capped at an aggregate total of approximately $7.2 million under the annual Output Guaranty, is uncapped under the quarterly Output Guaranty, and is capped at approximately $3.6 million under the Efficiency Guarantees in the applicable offtake agreements. As of March 31, 2018, our aggregate remaining potential liability under these caps is approximately $6.7 million under the annual Output Guaranty, and approximately $3.6 million under the Efficiency Guarantees.

 

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We have agreed to indemnify the tax equity investor in PPA IV HoldCo from any liability related to recapture of the ITC that results from a breach of our representations, warranties and covenants to the tax equity investor set forth in the transaction documents associated with the PPA IV project.

PPA V. 2015 ESA Project Company, LLC (PPA Company V) is a wholly-owned subsidiary of 2015 ESA HoldCo, LLC (PPA V HoldCo). PPA V HoldCo is jointly-owned by us and 2015 ESA Investco, LLC (PPA V InvestCo), which is itself a jointly-owned subsidiary of two tax equity investors. As of March 31, 2018, we owned 100% of the Class B Membership Interests of PPA V HoldCo, and PPA V InvestCo owned 100% of the Class A Membership Interests of PPA V HoldCo. We (through our wholly-owned subsidiary Clean Technologies 2015, LLC), act as the managing member of PPA V HoldCo.

The economic benefits of the PPA V project are allocated between us and PPA V InvestCo as follows:

 

    Tax Items (including the ITC) are allocated 90% to PPA V InvestCo and 10% to us.

 

    Cash available for distribution is distributed 90% to PPA V InvestCo and 10% to us.

The PPA V project includes (i) an Output Guaranty of 95% measured annually, (ii) an Output Guaranty of 80% measured quarterly, (iii) an Efficiency Warranty of 45% measured monthly, and (iv) an indemnity of any payments made by PPA Company V regarding failure of the Energy Servers to perform in accordance with the applicable offtake agreements, which generally provide for an Efficiency Guaranty of 52% measured cumulatively over the life of the project. In the case of underperformance with respect to either Output Guaranty, we are obligated to make a payment to PPA Company V. In the case of underperformance with respect to the Efficiency Warranty, we are obligated to repair or replace the applicable Energy Servers, and we are obligated to reimburse PPA Company V for any payments owed to the applicable PPA customer(s). The offtake agreements generally provide for an Efficiency Guaranty of 52% measured cumulatively over the life of the project. As of March 31, 2018, the PPA V project is operating at an average output of approximately 93% for calendar year 2018, and a lifetime average efficiency of approximately 57%. Our obligation to make payments for underperformance of the PPA V project is capped at an aggregate total of approximately $13.9 million under the annual Output Guaranty, is uncapped under the quarterly Output Guaranty, and is capped at approximately $6.8 million under the Efficiency Guarantees in the applicable offtake agreements. As of March 31, 2018, our aggregate remaining potential liability under these caps is approximately $13.9 million under the annual Output Guaranty, and approximately $6.8 million under the Efficiency Guarantees.

We have agreed to indemnify the tax equity investor in PPA V HoldCo from any liability related to recapture of the ITC that results from a breach of our representations, warranties and covenants to the tax equity investor set forth in the transaction documents associated with the PPA V project.

We have also agreed to make certain payments to our tax equity investors in the event that the average time period between receipt of the deposit payment for an Energy Server and the date on which such Energy Server achieves commercial operations exceeds specified periods. During 2016, we recorded $4.0 million within general and administrative expenses in the consolidated statements of operations for estimated delay penalties to our tax equity investors. During 2017, we revised our estimate and recorded a reduction of $0.8 million within general and administrative expenses in the consolidated statements of operations and issued a final net payment of $3.2 million for penalties to our tax equity investors. We do not expect any delay penalties as of March 31, 2018.

In addition, we have agreed to make certain partner related developer fee payments required to be made by us to the tax equity investor upon acceptance of Energy Servers sold through PPA Company V. See the section titled “—Components of Results of Operations—Partner Related Developer Fee Liabilities” for additional information.

 

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Obligations to End-Customers

Our obligations to the end-customers in the Bloom Electrons projects are set forth in the offtake agreement between the PPA entity and the end-customer. The offtake agreements share the following provisions:

Term; Early Termination: The offtake agreements provide for an initial term of 15 years, except that (i) the offtake agreements included in PPA I provide for an initial term of 10 years, and (ii) the offtake agreement for PPA II has a term of 21 years. The offtake agreements may be renewed by the mutual agreement of the end-customer and the applicable PPA entity for additional periods at the expiration of the initial term. In the event that the end customer desires to terminate the offtake agreement before the end of the contract term, or in the event that the offtake agreement is terminated by the applicable PPA entity due to customer default as defined in the offtake agreement, the end customer is required to pay a “termination value” payment as liquidated damages. This termination value payment is calculated to be sufficient to allow the PPA entity to repay any debt associated with the affected Energy Servers, make distributions to the equity investor(s) in the PPA project equal to their expected return on investment, pay for the removal of the Energy Servers from the project site, and cover any lost tax benefits incurred as a result of the termination (if any). In some cases, we may agree to reimburse the end-user for some or all of the termination value payments paid if we are able to successfully resell or redeploy the applicable Energy Servers following termination of the offtake agreement.

Energy Server Installation and Operation: The applicable PPA entity is responsible for the installation, operation and maintenance of the Energy Servers. In performing such services, the PPA entity is required to comply with all applicable laws and regulations, with the requirements of any permits obtained for the Energy Servers, with any requirements of the interconnection agreement entered into with the local electric utility regarding such Energy Servers, and with any requirements agreed with the applicable end-customer in the offtake agreement (such as site access procedures, black-out periods regarding routine maintenance, etc.).

Take-Or-Pay Purchase Obligation: The end-customer is required to purchase all of the electricity generated by the Energy Servers for the duration of the offtake agreement. We perform an initial credit evaluation of our customer’s ability to pay under our PPA arrangements. Subsequently, on an at least annual basis, we re-evaluate and confirm the credit worthiness of our customers. Under our existing PPA arrangements, there are four customers that represent more than 10% of the total assets of our PPA entities. The four customers include Delmarva, Home Depot, AT&T and Walmart. In the event that an end-customer is unwilling or unable to accept delivery of such electricity or fails to supply the necessary fuel to the Energy Servers (if applicable), the end-customer is required to make a payment to the PPA entity for the amount of electricity that would have been delivered had the Energy Servers continued to operate.

Fuel Supply Obligation: In PPA I, fuel supply obligations are either the obligation of the PPA entity or the end-customer, on a case-by-case basis. In PPA II, the PPA entity is responsible for providing all required fuel to the Energy Servers and is reimbursed pursuant to the Delmarva Tariff so long as the Energy Servers maintain a specified operational efficiency. In the PPA IIIa, PPA IIIb, PPA IV and PPA V projects, the end-customers are required to provide all necessary fuel for the operation of the Energy Servers.

Ownership of Energy Servers: The applicable PPA entity retains title to the Energy Servers at all times unless the end-customer elects to purchase the Energy Server(s).

Financial Incentives and Environmental Attributes: As the owner of the Energy Servers, the PPA entity retains ownership of any tax benefits associated with the installation and operation of the Energy Servers. Additional financial incentives available in connection with the offtake agreements (such as payments under state incentive programs or renewable portfolio standard programs) and any environmental benefits associated with the Energy Servers (such as carbon emissions reductions credits) are allocated to either the PPA entity or the end-customer on a case-by-case basis. In some circumstances, the PPA entity has also agreed to purchase and deliver to the end-customer renewable energy credits in connection with the offtake agreement.

 

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Efficiency Commitments: Where the end-customer is responsible for delivering fuel to the Energy Servers, the offtake agreement includes Energy Server efficiency commitments. Generally, these consist of (i) an “Efficiency Warranty”, where the PPA entity is obligated to repair or replace Energy Servers that fail to operate at or above a specified level of efficiency during any calendar month, and/or (ii) an “Efficiency Guaranty”, where the PPA entity is obligated to make payments to the end-customer to cover the cost of procuring excess fuel if the Energy Servers fail to operate at or above a specified level of efficiency on a cumulative basis during the term of the offtake agreement. Where an Efficiency Guaranty is provided, the PPA entity’s aggregate liability for payments is capped. In certain circumstances, we may negotiate modifications to the efficiency commitments with the end-customer, including different efficiency thresholds or providing for monetary payments under the Efficiency Warranty in lieu of or in addition to our obligation to repair or replace underperforming Energy Servers.

Output Commitments: Although our standard Bloom Electrons offering does not include a minimum output commitment to the end-user, exceptions may be negotiated on a case-by-case basis if we believe the opportunity justifies such exception. These output commitments are at an output level lesser than or equal to the level warranted by us to the PPA entity under the O&M Agreement, and provide either for a payment to the end-customer for the shortfall in electricity produced or for an end-customer termination right. In addition, where the end-user (as opposed to the PPA entity) is entitled to the benefits of an incentive program that requires a minimum output level, the PPA entity may agree to reimburse the end-customer for any decrease in incentive payments resulting from the Energy Servers’ failure to operate at such minimum output level.

Defaults; Remedies: Defaults under the offtake agreements are typically limited to (i) bankruptcy events, (ii) unexcused failure to perform material obligations, and (iii) breaches of representations and warranties. Additional defaults may be negotiated on a case-by-case basis with end-customers. The parties are generally afforded cure periods of at least 30 days to cure any such defaults. In the event of an uncured default by the PPA entity, the end-customer may terminate the offtake agreement either in whole or in part as to the Energy Server(s) affected by such default, and may seek other remedies afforded at law or in equity. In the event of an uncured default by the end-customer, the PPA entity may terminate the offtake agreement either in whole or in part as to the Energy Server(s) affected by such default, and may seek other remedies afforded at law or in equity; in addition, in the event an offtake agreement is terminated due to an end-customer default, the end-customer is obligated to make a termination value payment to the PPA entity.

For further information about our PPA entities, see Note 14, 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 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.

 

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Our product sales backlog was $742.5 million, equivalent to 1,082 systems, or 108.2 megawatts, as of March 31, 2018. The benefit of ITC in our backlog value as of March 31, 2018 is $171.4 million. Our product sales backlog was $446.7, equivalent to 774 systems, or 77.4 megawatts, as of March 31, 2017, which did not have the benefit of ITC for this period. We define product sales backlog as signed customer product sales orders received prior to the period end, but not yet accepted and less site cancellations. The timing of the deployment of our backlog depends on the factors described above. However, as a general matter, at any point in time, we expect at least 50% of our backlog to be deployed within the next 12 months.

Cost to Service Our Energy Servers

We offer customers of our purchase and lease programs 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 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. For example, we implemented a decommissioning program for our early generation Energy Servers in the PPA I program, and while we have no current plans to do so, we could undertake to decommission additional Energy Servers in the future. For more information, see “—Components of Results of Operations—Revenue—Product Revenue—PPA I Decommissioning”. 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. We accrue for extended warranty costs that we expect to incur under the maintenance service agreements that our customers renew for a term of typically one year. In addition, we expect that our deployed early generation Energy Servers may continue to perform at a lower output and efficiency level, and as a result the maintenance costs may exceed the contracted prices that we expect to generate in respect of those early generation servers if our customers continue to renew their maintenance service agreements in respect of those servers. We expect the performance of our newer generation Energy Servers to be significantly improved.

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. For example, although it has been recently reinstated, the ITC expired on December 31, 2016 and was not available in 2017. Other incentives may also expire or 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

 

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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.

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. Our contracted electricity rates need to be competitive with the amounts charged by the local utilities at each location. Generally, higher utility rate regions are contracted and installed first, followed by lower utility rate regions if the customer continues to expand use of the Energy Servers. These decreases in electricity rates could impact our revenue per kilowatt, but given our cost reduction efforts we do not believe that this trend will have an impact on our results of operations.

Components of 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 of our Energy Servers to direct purchase, traditional lease and managed services 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 as defined in each contract.

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 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 was approximately $208.5 million and $376.0 million in 2016 and 2017, respectively. While the number of systems recognized (accepted) decreased 9.5% from 687 to 622 systems, our revenue increased 80.3% due to the higher mix of financing sales vehicles in 2017 that require revenue to be recognized up-front when installed, instead of ratably over the life of those contracts.

 

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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 investors whereby we would seek to renegotiate our existing PPA arrangements and purchase the tax equity investors’ interests in PPA I. As of March 31, 2018, we have recognized $31.7 million in total revenue related to sales of new Energy Servers to replace Energy Servers sold through PPA I where the PPA I Energy Server had been decommissioned.

In January 2016, we issued an additional $25.0 million of our 6% Notes for the purchase of such tax equity investors’ interests. 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.

Additionally, for PPA I, our policy is that cash grants received under the American Recovery and Reinvestment Act of 2009 (ARRA) are treated as 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 recapture provisions under the grant program. The decommissioning program was completed as of December 31, 2016. In 2016, we recorded a $1.7 million reduction in our estimate of recapture refunds and paid a total of $8.3 million in recapture refunds.

Installation Revenue

All of our installation revenue is generated from the installation of our Energy Servers to direct purchase, traditional lease and managed services customers. We generally recognize installation revenue from contracts with customers for the sales of our Energy Servers once we achieve acceptance. The amount of installation 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.

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, traditional lease and managed services sales. Customers of our purchase and lease programs can renew their operating and maintenance services agreements on an annual basis for 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, 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

 

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Energy Servers at agreed-upon rates over the course of the PPA’s term. We generally recognize revenue from such PPA entities as the electricity is provided over the term of the agreement.

Cost of Revenue

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

Cost of Product Revenue

Cost of product revenue consists of costs of Energy Servers that we sell to direct, traditional lease and managed services customers, including costs of materials, personnel costs, 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 warranties and performance guarantees regarding the Energy Servers’ efficiency and output during the first year warranty period. Warranty costs for customers that purchase under managed services or the Bloom Electrons program are recognized as a cost of product revenue as they are incurred. We expect our cost of product revenue to increase in absolute dollars as we deliver and install more Energy Servers and our product revenue increases. 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 over 50% over the life of our second generation system and by over 35% over the life of our fifth generation system to date. 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 30% lower per kilowatt than our second generation.

Our cost of product revenue generally consists of three components: raw material and component costs, labor and overhead for stack assembly operations cost, and labor and overhead for the final system assembly operations cost. Generally raw material and component costs comprise 80% of the total cost, stack operations cost comprises 11% and system assembly operations cost comprises 9% of the total cost. Over the past five years, total product cost per kilowatt has declined by 54%. Of the raw material and component cost reduction in the past five years, the hotbox cost, which is the cost of the assembly that holds the stack of the fuel cells, has declined by 44%; mechanical costs of our Energy Servers by 43%; and electrical costs of our Energy Servers by 33%. Stack assembly operations cost has declined by 66%, of which fixed cost has declined by 64% and variable cost has declined by 70%. System assembly operations cost has declined by 68%, of which fixed cost has declined by 64% and variable cost has declined by 70%.

Cost of Installation Revenue

Cost of installation revenue consists of the costs to install the Energy Servers that we sell to direct, traditional lease and managed services customers, including costs of materials and service providers, personnel costs, and allocated costs.

The amount of installation cost 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. We expect our cost of installation revenue to increase in absolute dollars as we deliver and install more Energy Servers, though it will be subject to variability as a result of the foregoing.

 

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Cost of Service Revenue

Cost of service revenue consists of costs incurred under maintenance service contracts for all customers including direct sales, traditional lease, managed services and PPA customers. Such costs include personnel costs for our customer support organization, allocated costs, and extended maintenance-related product repair and replacement costs. 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, and we expect our cost of service revenue to fluctuate period by period depending on the timing of maintenance of Energy Servers.

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 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 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, and we expect our research and development expense to fluctuate as a percentage of total revenue.

Sales and Marketing

Sales and marketing expense consists primarily of personnel costs, including commissions. We expense commission costs as earned. Sales and marketing expense also includes costs for market development programs, promotional and other marketing costs, travel costs, office equipment and software, depreciation, professional services, and allocated facilities costs. We expect sales and marketing 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, and we expect our sales and marketing expense to fluctuate as a percentage of total revenue.

General and Administrative

General and administrative expense consists of personnel costs, fees for professional services and allocated facilities costs. General and administrative personnel include our executive, finance, human resources, information technology, facilities, business development, and legal organizations. We expect general and administrative expense to increase in absolute dollars due to additional legal fees and costs associated with accounting, insurance, investor relations, SEC and stock exchange compliance, and other costs associated with being a public company, and we expect our general and administrative expense to fluctuate as a percentage of total revenue.

 

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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 as a result of pay downs of the debt obligations over the course of the debt arrangements.

Other Income (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 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 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 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, 2017, we had federal and state net operating loss carryforwards of $1.7 billion and $1.5 billion, respectively, which will expire, if unused, beginning in 2022 and 2018, respectively.

We follow the accounting guidance in ASC 740-10, which requires a more-likely-than-not threshold for financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. We record a liability for the difference between the benefit recognized and measured pursuant to ASC 740-10 and the tax position taken or expected to be taken on our tax return. To the extent that the assessment of such tax positions change, the change in estimate is recorded in the period in which the determination is made. We establish reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. These reserves are established when we believe that certain positions might be challenged despite our belief that the tax return positions are fully supportable. The reserves are adjusted in light of changing facts and circumstances, such as the outcome of a tax audit. The provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate. We recognize interest accrued related to unrecognized tax benefits in other expense, net and penalties in operating expenses.

Partner Related Developer Fee Liabilities

The partner related developer fee liabilities represent payments required to be made by us to the tax equity investor upon installation of Energy Servers sold through PPA Company V. Since funding received by the PPA Company from the tax equity investor is used for the purchase and installation of Energy Servers, the payments

 

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made back to the tax equity investor upon acceptance of an installation essentially represent a return of capital and are accounted for as a reduction to noncontrolling interests on the consolidated balance sheets. There was $6.7 million in liabilities as of the year ended December 31, 2016. We have fulfilled all of our obligations under this arrangement, and therefore, there were no remaining liabilities recorded as of December 31, 2017. Such amounts were payable to the financing partner by the tenth day of the month following the installation of the Energy Servers at customer sites.

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 some of our PPA 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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Results of Operations

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

 

     Years Ended
December 31,
    Three Months Ended
March 31,
 

Consolidated Statements of Operations

   2016     2017     2017     2018  
     (in thousands, except for per share data)  

Revenue

        

Product

   $ 76,478     $ 179,768     $ 27,665     $ 121,307  

Installation

     16,584       63,226       12,293       14,118  

Service

     67,622       76,904       18,591       19,907  

Electricity

     47,856       56,098       13,648       14,029  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     208,540       375,996       72,197       169,361  

Cost of revenue

        

Product

     103,283       210,773       38,855       80,355  

Installation

     17,725       59,929       13,445       10,438  

Service

     155,034       83,597       18,219       24,253  

Electricity

     35,987       39,741       10,876       10,649  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

     312,029       394,040       81,395       125,695  
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit (loss)

     (103,489     (18,044     (9,198     43,666  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

        

Research and development

     46,848       51,146       11,223       14,731  

Sales and marketing

     29,101       32,415       7,845       8,262  

General and administrative

     61,545       55,674       12,879       14,988  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     137,494       139,235       31,947       37,981  
  

 

 

   

 

 

   

 

 

   

 

 

 

Profit (loss) from operations

     (240,983     (157,279     (41,145     5,685  

Interest expense

     (81,190     (108,623     (24,363     (23,037

Other income (expense), net

     (379     268       119       (629

Gain (loss) on revaluation of warrant liabilities and embedded derivatives

     (13,035     (14,995     215       (4,034
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss before income taxes

     (335,587     (280,629     (65,174     (22,015

Income tax provision

     729       636       214       333  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (336,316     (281,265     (65,388     (22,348

Net loss attributable to noncontrolling interests and redeemable noncontrolling interests

     (56,658     (18,666     (5,856     (4,632
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

   $ (279,658   $ (262,599   $ (59,532   $ (17,716
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Includes stock-based compensation as follows:

 

     Years Ended
December 31,
     Three Months
Ended March 31,
 
     2016      2017      2017      2018  
     (in thousands)  

Cost of revenue

   $ 6,005      $ 7,734      $ 1,758      $ 1,898  

Research and development

     4,686        5,560        1,329        1,638  

Sales and marketing

     5,600        4,684        1,241        952  

General and administrative

     11,866        12,501        2,317        3,468  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation

   $ 28,157      $ 30,479      $ 6,645      $ 7,956  
  

 

 

    

 

 

    

 

 

    

 

 

 

Comparison of the Three Months Ended March 31, 2017 and 2018

Total Revenue

 

     Three Months Ended
March 31,
     Change 2018 vs. 2017  
     2017      2018        Amount        %  
     (unaudited)                
     (dollars in thousands)  

Product

   $ 27,665      $ 121,307      $ 93,642        338.5

Installation

     12,293        14,118      1,825        14.8

Service

     18,591        19,907      1,316        7.1

Electricity

     13,648        14,029        381        2.8
  

 

 

    

 

 

    

 

 

    

Total revenue

   $ 72,197      $ 169,361      $ 97,164        134.6
  

 

 

    

 

 

    

 

 

    

Total revenue increased approximately $97.2 million, or 134.6%, for the three months ended March 31, 2018, as compared to the three months ended March 31, 2017. Total revenue included a one-time benefit of $45.5 million attributable to 2017 acceptances due to the retroactive ITC renewal. Product revenue increased approximately $93.6 million, or 338.5%, for the three months ended March 31, 2018, as compared to the three months ended March 31, 2017. Product revenue included a one-time benefit of $43.9 million attributable to 2017 acceptances due to the retroactive ITC renewal. Product acceptances increased from 119 systems in the three months ended March 31, 2017 to 166 systems in the three months ended March 31, 2018, an increase of 39.5%; product revenue increased 338.5% due to a significantly higher mix of orders through direct sales to customers, where revenue is recognized on acceptance, compared to the Bloom Electrons and managed services financing programs where revenue is recognized over the term of the agreement (generally 10 to 21 years) as electricity revenue or product revenue, respectively. The number of acceptances in the three months ended March 31, 2017 where product revenue was recognized at acceptance was 55.0% of the total acceptances of 119, while the number of acceptances in the three months ended March 31, 2018 where product revenue was recognized at acceptance was 100.0% of the total acceptances of 166. The mix of orders between our Bloom Electrons and managed services financing programs and direct purchases is generally driven by customer preference.

Product and install revenue increased approximately $95.5 million, or 238.9% from $39.9 million for the three months ended March 31, 2017, to $135.4 million for the three months ended March 31, 2018. Product and install revenue included a one-time benefit of $45.5 million attributable to 2017 acceptances due to the retroactive ITC renewal. The ratable portion of the product and install revenue increased approximately $1.7 million from $5.1 million for the three months ended March 31, 2017, to $6.8 million for the three months ended March 31, 2018. This increase was primarily due to the increase in ratable acceptances through 2017. The upfront portion of the product and install revenue increased approximately $93.8 million from $34.8 million for the three months ended March 31, 2017, to $128.6 million for the three months ended March 31, 2018. This increase in upfront product and install revenue was primarily due to the increase in upfront acceptances from

 

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65.5 in the three months ended March 31, 2017 to 166.0 in the three months ended March 31, 2018. The upfront product and install average selling price increased from $5,317 per kilowatt for the three months ended March 31, 2017 to $7,745 per kilowatt for the three months ended March 31, 2018 due to the reinstatement of ITC in 2018.

Due to the reinstatement of ITC in 2018, the average selling price to customers was higher resulting in an overall $60.0 million increase in total revenue in the three months ended March 31, 2018, as compared to three months ended March 31, 2017. The total revenue for the three months ended March 31, 2017 included $2.4 million of benefit from ITC, while the total revenue for the three months ended March 31, 2018 included $62.4 million of benefit from ITC, of which $45.5 million was retroactive for 2017 acceptances. Installation revenue increased approximately $1.8 million, or 14.8%, for the three months ended March 31, 2018, as compared to the three months ended March 31, 2017. The increase in installation revenue was lower than the 39.5% increase in associated acceptances, as approximately 50% of the acceptances in the three months ended March 31, 2018 were with a customer that contracted the related installation with a third party.

Service revenue increased approximately $1.3 million, or 7.1%, for the three months ended March 31, 2018, as compared to the three months ended March 31, 2017. 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 $0.4 million, or 2.8%, for the three months ended March 31, 2018, as compared to the three months ended March 31, 2017.

Total Cost of Revenue and Gross Profit (Loss)

 

     Three Months Ended
March 31,
     Change 2018 vs. 2017  
     2017      2018      Amount      %  
     (unaudited)                
     (dollars in thousands)  

Cost of revenue:

           

Product

   $ 38,855      $ 80,355      $ 41,500        106.8

Installation

     13,445        10,438        (3,007 )      (22.4 )% 

Service

     18,219        24,253        6,034        33.1

Electricity

     10,876        10,649        (227 )      (2.1 )% 
  

 

 

    

 

 

    

 

 

    

Total cost of revenue

     81,395        125,695        44,300        54.4
  

 

 

    

 

 

    

 

 

    

Gross profit (loss)

   $ (9,198    $ 43,666      $ 52,864        574.7
  

 

 

    

 

 

    

 

 

    

Total cost of revenue increased approximately $44.3 million, or 54.4 %, for the three months ended March 31, 2018, as compared to the three months ended March 31, 2017. This increase in cost of revenue was primarily attributable to higher product cost of revenue, which was driven by a higher mix of orders through direct sales to customers in which cost of revenue is recognized on acceptance, partially offset by our ongoing cost reduction efforts. However, this increase did not increase at the same rate as the increase in total revenue primarily due to the $45.5 million one-time revenue benefit due to the ITC renewal, while the related one-time costs were only $9.4 million. The number of acceptances in the three months ended March 31, 2017 where cost of revenue was recognized at acceptance was 55.0% of the total acceptances of 119, while the number of acceptances in the three months ended March 31, 2018 where cost of revenue was recognized at acceptance was 100.0% of the total acceptances of 166. Service cost also increased in the same period by $6.0 million primarily due to a higher number of power module replacements driven by the replacement cycle of our Energy Servers.

Product and install cost of revenue increased approximately $38.5 million, or 73.6% from $52.3 million for the three months ended March 31, 2017, to $90.8 million for the three months ended March 31, 2018. The ratable

 

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portion of the product and install cost of revenue increased approximately $1.9 million from $2.9 million for the three months ended March 31, 2017, to $4.8 million for the three months ended March 31, 2018. This increase was due to the increase in ratable acceptances through 2017. The product and install cost of revenue includes stock based compensation which also increased by $0.1 million from $1.6 million for the three months ended March 31, 2017, to $1.7 million for the three months ended March 31, 2018. The remaining upfront portion of the product and install cost of revenue excluding stock based compensation increased approximately $36.4 million from $47.8 million for the three months ended March 31, 2017, to $84.2 million for the three months ended March 31, 2018. This increase in upfront product and install cost of revenue was primarily due to the increase in upfront acceptances from 65.5 in the three months ended March 31, 2017 to 166.0 in the three months ended March 31, 2018. The upfront product and install average cost of revenue on a per kilowatt basis, also described as total install system cost (TISC) decreased from $7,305 per kilowatt for the three months ended March 31, 2017 to $5,074 per kilowatt for the three months ended March 31, 2018 due to the higher acceptance volume. We had a one-time cost of $9.4 million included in the product cost of revenue for the three months ended March 31, 2018 associated with supplier agreements that required us to forego previously negotiated discounts if ITC was renewed.

This increase in product and service cost of revenue was offset by $3.0 million of decreased installation costs associated with a customer that contracted the related installation with a third party; as a result, we received only an immaterial amount of installation costs. Service cost increased 33.1% period-over-period. The increase was primarily due to the growth in our installed megawatts deployed, which grew by 26.2% over the same period.

Gross profit improved $52.9 million, or 574.7%, in the three months ended March 31, 2018, as compared to the three months ended March 31, 2017. This improvement was generally a result of higher product margins, due to a $60.0 million increase in revenue, primarily due to the benefit of the ITC renewal. We recognized a one-time total revenue benefit of $45.5 million attributable to 2017 acceptances due to the retroactive ITC renewal.

Operating Expenses

 

     Three Months Ended
March 31,
     Change 2018 vs. 2017  
     2017      2018      Amount      %  
     (unaudited)                
     (dollars in thousands)  

Research and development

   $ 11,223      $ 14,731      $ 3,508        31.3

Sales and marketing

     7,845        8,262        417        5.3

General and administrative

     12,879        14,988        2,109        16.4
  

 

 

    

 

 

    

 

 

    

Total

   $ 31,947      $ 37,981      $ 6,034        18.9
  

 

 

    

 

 

    

 

 

    

Research and development expenses increased approximately $3.5 million, or 31.3%, in the three months ended March 31, 2018, as compared to the three months ended March 31, 2017. This increase was primarily due to compensation related expenses related to hiring and investments for next generation technology development.

Sales and marketing expenses increased approximately $0.4 million, or 5.3%, in the three months ended March 31, 2018, as compared to the three months ended March 31, 2017. This increase was primarily due to higher legal expenses of $0.9 million and higher compensation related expenses of $0.1 million, offset by lower consulting expenses of $0.6 million.

General and administrative expenses increased approximately $2.1 million, or 16.4%, in the three months ended March 31, 2018, as compared to the three months ended March 31, 2017. The increase in general and administrative expenses was primarily due to an increase in compensation related expenses.

 

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Other Income and Expenses

 

    Three Months Ended
March 31,
    Change 2018 vs. 2017  
    2017     2018     Amount     %  
    (unaudited)              
    (dollars in thousands)  

Interest expense

  $ (24,363   $ (23,037   $ 1,326       5.4

Other income (expense), net

    119       (629     (748     (628.6 )% 

Gain (loss) on revaluation of warrant liabilities and embedded derivatives

    215       (4,034     (4,249     (1,976.3 )% 
 

 

 

   

 

 

   

 

 

   

Total

  $ (24,029   $ (27,700   $ (3,671     (15.3 )% 
 

 

 

   

 

 

   

 

 

   

Total other expenses increased $3.7 million, or 15.3%, in the three months ended March 31, 2018, as compared to the three months ended March 31, 2017. This increase was due to a $4.3 million loss on our warrant liabilities and embedded derivatives partially offset by lower interest expense of $1.3 million in the three months ended March 31, 2018.

For the three months ended March 31, 2018, the loss on revaluation of warrant liabilities and embedded derivative increased by $4.2 million. This was due to an increase in our derivative valuation adjustment of $7.6 million, offset by a decrease in our warrant valuation of $3.4 million.

Provision for Income Taxes

 

     Three Months Ended
March 31,
     Change 2018 vs. 2017  
     2017      2018      Amount      %  
     (unaudited)                
     (dollars in thousands)  

Income tax provision

   $ 214      $ 333      $ 119        55.6

Income tax provision increased approximately $0.1 million, or 55.6%, in the three months ended March 31, 2018, as compared to the three months ended March 31, 2017 and was primarily due to fluctuations in tax on income earned by international entities due to the general growth of our business in international locations.

Comparison of the Years Ended December 31, 2016 and 2017

Total Revenue

 

     Years Ended
December 31,
     Change 2017 vs. 2016  
     2016      2017          Amount              %      
     (dollars in thousands)  

Product

   $ 76,478      $ 179,768      $ 103,290        135.1

Installation

     16,584        63,226        46,642        281.2

Service

     67,622        76,904        9,282        13.7

Electricity

     47,856        56,098        8,242        17.2
  

 

 

    

 

 

    

 

 

    

Total revenue

   $ 208,540      $ 375,996      $ 167,456        80.3
  

 

 

    

 

 

    

 

 

    

Total revenue increased approximately $167.5 million, or 80.3%, for the year ended December 31, 2017, as compared to the year ended December 31, 2016. Product revenue increased approximately $103.3 million, or 135.1%, for the year ended December 31, 2017, as compared to the year ended December 31, 2016. Despite a decrease in acceptances from 687 systems in the year ended December 31, 2016 to 622 systems in the year ended

 

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December 31, 2017, a decrease of 9.5%, product revenue increased 135.1% due to a significantly higher mix of orders through direct sales to customers, where revenue is recognized on acceptance, compared to the Bloom Electrons and managed services financing programs where revenue is recognized over the term of the agreement (generally 10 to 21 years) as electricity revenue or product revenue, respectively. The number of acceptances in 2016 where product and install revenue was recognized at acceptance was 109, or 15.9% of the total acceptances of 687, while the number of acceptances in 2017 where product revenue was recognized at acceptance was 489, or 78.6% of the total acceptances of 622. The mix of orders between our Bloom Electrons and managed services financing programs and direct purchases is generally driven by customer preference.

Product and install revenue increased approximately $149.9 million, or 161.1% from $93.1 million for the year ended December 31, 2016, to $243.0 million for the year ended December 31, 2017. The ratable portion of the product and install revenue increased approximately $15.9 million from $9.1 million in 2016 to $25.0 million in 2017. This increase was due to the increase in ratable acceptances through 2017. The upfront portion of the product and install revenue increased approximately $134.0 million from $84.0 million in 2016 to $218.0 million in 2017. This increase in upfront product and install revenue was primarily due to the increase in upfront acceptances from 109 in 2016 to 489 in 2017. The upfront product and install average selling price decreased from $7,705 per kilowatt in 2016 to $4,460 per kilowatt in 2017 due to the loss of ITC in 2017.

Due to the loss of ITC in 2017, the average selling price to customers was lower causing an overall $26.3 million decrease in total revenue in 2017, as compared to 2016. The total revenue for the year ended December 31, 2016 included $35.9 million of benefit from ITC, while the total revenue for the year ended December 31, 2017 included $9.6 million of benefit from ITC.

Installation revenue increased approximately $46.6 million, or 281.2%, for the year ended December 31, 2017, as compared to the year ended December 31, 2016. This was primarily due to the higher mix of orders through our direct purchase program where revenue is recognized on acceptance.

Service revenue increased approximately $9.3 million, or 13.7%, for the year ended December 31, 2017, as compared to the year ended December 31, 2016. This increase 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 $8.2 million, or 17.2%, for the year ended December 31, 2017, as compared to the year ended December 31, 2016. This increase was primarily due to the annualized impact of the 106.8 megawatts Bloom Electrons program fully deployed during 2016.

Total Cost of Revenue and Gross Profit (Loss)

 

     Years Ended
December 31,
     Change 2017 vs. 2016  
     2016      2017          Amount              %      
     (dollars in thousands)  

Cost of revenue:

           

Product

   $ 103,283      $ 210,773      $ 107,490        104.1

Installation

     17,725        59,929        42,204        238.1

Service

     155,034        83,597        (71,437      (46.1 )% 

Electricity

     35,987        39,741        3,754        10.4
  

 

 

    

 

 

    

 

 

    

Total cost of revenue

     312,029        394,040        82,011        26.3
  

 

 

    

 

 

    

 

 

    

Gross profit (loss)

   $ (103,489    $ (18,044    $ 85,445        82.6
  

 

 

    

 

 

    

 

 

    

Total cost of revenue increased approximately $82.0 million, or 26.3%, for the year ended December 31, 2017, as compared to the year ended December 31, 2016. This increase in cost of revenue was primarily

 

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attributable to higher product and installation cost of revenue, which was driven by a higher mix of orders through direct sales to customers in which cost of revenue is recognized on acceptance, partially offset by our ongoing cost reduction efforts. The number of acceptances in 2016 where cost of revenue was recognized at acceptance was 15.9% of the total acceptances of 687, while the number of acceptances in 2017 where cost of revenue was recognized at acceptance was 78.6% of the total acceptances of 622.

The product and install cost of revenue increased approximately $149.7 million, or 123.7% from $121.0 million for the year ended December 31, 2016, to $270.7 million for the year ended December 31, 2017. The ratable portion of the product and install cost of revenue increased approximately $11.4 million from $5.2 million in 2016 to $16.6 million in 2017. This increase was due to the increase in ratable acceptances through 2017. The product and install cost of revenue includes stock based compensation which also increased by $1.6 million from $5.4 million for the year ended December 31, 2016, to $7.0 million for the year ended December 31, 2017. The remaining upfront portion of the product and install cost of revenue excluding stock based compensation increased approximately $136.7 million from $110.4 million in 2016 to $247.1 million in 2017. This increase in upfront product and install cost of revenue was due to the increase in upfront acceptances from 109 in 2016 to 489 in 2017. The upfront product and install average cost of revenue on a per kilowatt basis, also described as total install system cost (TISC) decreased from $10,127 per kilowatt in 2016 to $5,056 per kilowatt in 2017 due to the increase in upfront acceptances.

This increase in product and installation cost of revenue was offset by $71.4 million of decreased service costs associated with ongoing operations and maintenance of deployed Energy Servers in the ordinary course of business due to a lower number of power module replacements as the life of our product continues to lengthen.

Gross loss improved $85.4 million, or 82.6%, in the year ended December 31, 2017, as compared to the year ended December 31, 2016. This improvement was generally a result of higher service margins, due to a $71.4 million reduction in service costs associated with ongoing operations and maintenance of deployed Energy Servers in the ordinary course of business due to a lower number of power module replacements as the life of our product continues to lengthen.

Operating Expenses

 

     Years Ended
December 31,
     Change 2017 vs. 2016  
     2016      2017          Amount              %      
     (dollars in thousands)  

Research and development

   $ 46,848      $ 51,146      $ 4,298        9.2

Sales and marketing

     29,101        32,415        3,314        11.4

General and administrative

     61,545        55,674        (5,871      (9.5 )% 
  

 

 

    

 

 

    

 

 

    

Total

   $ 137,494      $ 139,235      $ 1,741        1.3
  

 

 

    

 

 

    

 

 

    

Research and development expenses increased approximately $4.3 million, or 9.2%, in the year ended December 31, 2017, as compared to the year ended December 31, 2016. This increase was primarily due to compensation related expenses related to hiring and investments for next generation technology development.

Sales and marketing expenses increased approximately $3.3 million, or 11.4%, in the year ended December 31, 2017, as compared to the year ended December 31, 2016. Compensation related costs increased $1.6 million from the prior period due to increases in incentive compensation, stock-based compensation and bonus achievement, as well as sales development related expenses of $1.7 million.

General and administrative expenses decreased approximately $5.9 million, or 9.5%, in the year ended December 31, 2017, as compared to the year ended December 31, 2016. The decrease in general and administrative expenses was primarily due to a decrease in professional service expenses of $5.8 million related to decreased legal expenses.

 

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Other Income and Expenses

 

     Years Ended
December 31,
    Change 2017 vs. 2016  
     2016     2017         Amount             %      
     (dollars in thousands)  

Interest expense

   $ (81,190   $ (108,623   $ (27,433     (33.8 )% 

Other income (expense), net

     (379     268       647       170.7

Gain (loss) on revaluation of warrant liabilities and embedded derivatives

     (13,035     (14,995     (1,960     15.0
  

 

 

   

 

 

   

 

 

   

Total

   $ (94,604   $ (123,350   $ (28,746     (30.4 )% 
  

 

 

   

 

 

   

 

 

   

Total other expenses increased $28.7 million, or 30.4%, in the year ended December 31, 2017, as compared to the year ended December 31, 2016. This increase was due to interest expense increasing $27.4 million, or 33.8%, in the year ended December 31, 2017, as compared to the year ended December 31, 2016. The increase was due to the higher balances of financing obligations and outstanding debt in 2017, compared to the prior year.

For the year ended December 31, 2017, the loss on revaluation of warrant liabilities and embedded derivative increased by $2.0 million. This was primarily due to an increase in our derivative valuation adjustment of $13.4 million, offset by a decrease in our warrant valuation of $11.4 million.

Provision for Income Taxes

 

     Years Ended
December 31,
     Change 2017 vs. 2016  
     2016      2017          Amount              %      
     (dollars in thousands)  

Income tax provision

   $ 729      $ 636      $ (93      (12.8 )% 

Income tax provision decreased approximately $0.1 million, or 12.8%, in the year ended December 31, 2017, as compared to the year ended December 31, 2016 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 nine quarters ending March 31, 2018. 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,
2016
    Jun. 30,
2016
    Sep. 30,
2016
    Dec. 31,
2016
    Mar. 31,
2017
    Jun. 30,
2017
    Sep. 30,
2017
    Dec. 31,
2017
    Mar. 31,
2018
 

Consolidated statements of operations data:

                 

Revenue

                 

Product

  $ 10,300     $ 20,429     $ 18,456     $ 27,293     $ 27,665     $ 39,935     $ 45,255     $ 66,913     $ 121,307  

Installation

    2,211       4,069       3,573       6,731       12,293       14,354       14,978       21,601       14,118  

Service

    15,790       16,606       17,247       17,979       18,591       18,875       19,511       19,927       19,907  

Electricity

    10,532       11,434       12,623       13,267       13,648       13,619       14,021       14,810       14,029  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    38,833       52,538       51,899       65,270       72,197       86,783       93,765       123,251       169,361  

Cost of revenue

                 

Product

    20,985       27,023       26,333       28,942       38,855       47,545       53,923       70,450       80,355  

Installation

    2,594       4,446       3,735       6,950       13,445       14,855       14,696       16,933       10,438  

Service

    32,293       27,765       54,572       40,404       18,219       21,308       30,058       14,012       24,253  

Electricity

    8,583       6,817       10,861       9,726       10,876       8,881       10,178       9,806       10,649  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

    64,455       66,051       95,501       86,022       81,395       92,589       108,855       111,201       125,695  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit (loss)

    (25,622     (13,513     (43,602     (20,752     (9,198     (5,806     (15,090     12,050       43,666  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

                 

Research and development

    10,650       11,567       11,877       12,754       11,223       12,368       12,374       15,181       14,731  

Sales and marketing

    6,826       7,247       6,740       8,288       7,845       8,663       6,561       9,346       8,262  

General and administrative

    13,184       13,827       19,872       14,662       12,879       14,325       13,652       14,818       14,988  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    30,660       32,641       38,489       35,704       31,947       35,356       32,587       39,345       37,981  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Profit (loss) from operations

    (56,282     (46,154     (82,091     (56,456     (41,145     (41,162     (47,677     (27,295     5,685  

Interest expense

    (18,875     (18,650     (19,866     (23,799     (24,363     (25,554     (28,899     (29,807     (23,037

Other expense, net

    (66     (231     122       (204     119       14       (40     175       (629

Gain (loss) on revaluation of warrant liabilities and embedded derivatives

    5,380       (3,927     (5,351     (9,137     215       (668     572       (15,114     (4,034
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss before income taxes

    (69,843     (68,962     (107,186     (89,596     (65,174     (67,370     (76,044     (72,041     (22,015

Income tax provision

    204       221       228       76       214       228       314       (120     333  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

    (70,047     (69,183     (107,414     (89,672     (65,388     (67,598     (76,358     (71,921     (22,348

Net loss attributable to noncontrolling interest and redeemable noncontrolling interests

    (10,607     (17,353     (16,480     (12,218     (5,856     (4,123     (4,527     (4,160     (4,632
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

  $ (59,440   $ (51,830   $ (90,934   $ (77,454   $ (59,532   $ (63,475   $ (71,831   $ (67,761   $ (17,716
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Quarterly Revenue Trends

Product and installation revenue can vary quarter to quarter due to changes in the buying behavior of our customers as customers shift to or from managed services and 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. However, going forward, we expect most of our revenue to be recognized generally up front at acceptance. 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, beginning in the quarter ended December 31, 2016, large installations were accepted by customers under direct purchase arrangements, resulting in higher product revenue in those periods. In addition, for the quarter ended March 31, 2018, product revenue increased over the prior quarters due to the one-time benefit of $43.9 million attributable to 2017 acceptances due to the retroactive ITC renewal.

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. For the three months ended March 31, 2018, gross profit had the benefit of the one-time benefit of $45.5 million attributable to 2017 acceptances due to the retroactive ITC renewal, offset by an incremental $9.4 million in supplier costs associated with the ITC renewal for a net benefit of $36.1 million to gross profit.

 

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Quarterly Key Operating Metrics

 

    Three Months Ended  
    Mar. 31,     Jun. 30,     Sep. 30,     Dec. 31,     Mar. 31,     Jun. 30,     Sep. 30,     Dec. 31,     Mar. 31,  
    2016     2016     2016     2016     2017     2017     2017     2017     2018  

Product accepted during the period (in 100 kilowatt systems)

    136       162       185       204