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BE Bloom Energy

Filed: 5 May 21, 8:00pm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________________________________________
FORM 10-Q
(Mark One) 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 2021
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from ____________to ____________
 Commission File Number 001-38598 
________________________________________________________________________
be-20210331_g1.jpg
BLOOM ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
________________________________________________________________________
Delaware77-0565408
(Sate or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
4353 North First Street, San Jose, California95134
(Address of principal executive offices)(Zip Code)
(408) 543-1500
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class(1)
Trading SymbolName of each exchange on which registered
Class A Common Stock, $0.0001 par valueBENew York Stock Exchange
(1) Our Class B Common Stock is not registered but is convertible into shares of Class A Common Stock at the election of the holder.
________________________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  þ    No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes  þ    No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.  
Large accelerated filer þ     Accelerated filer   ¨      Non-accelerated filer   ¨      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 pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes      No  þ
1




The number of shares of the registrant’s common stock outstanding as of April 29, 2021 was as follows:
Class A Common Stock, $0.0001 par value 144,617,101 shares
Class B Common Stock, $0.0001 par value 27,772,758 shares
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Bloom Energy Corporation
Quarterly Report on Form 10-Q for the Three Months Ended March 31, 2021
Table of Contents
 Page
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements (unaudited)
Condensed Consolidated Balance Sheets
Condensed Consolidated Statements of Operations
Condensed Consolidated Statements of Comprehensive Loss
Condensed Consolidated Statements of Redeemable Noncontrolling Interest, Stockholders' Equity and Noncontrolling Interest
Condensed Consolidated Statements of Cash Flows
Notes to Condensed Consolidated Financial Statements
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
Item 4 - Controls and Procedures
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Item 1A - Risk Factors
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
Item 3 - Defaults Upon Senior Securities
Item 4 - Mine Safety Disclosures
Item 5 - Other Information
Item 6 - Exhibits
Signatures

Unless the context otherwise requires, the terms "we," "us," "our," and "Bloom Energy," each refer to Bloom Energy Corporation and all of its subsidiaries.


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Part I
ITEM 1 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Bloom Energy Corporation
Condensed Consolidated Balance Sheets
(in thousands, except share and per share data)
(unaudited)
March 31,December 31,
20212020
Assets
Current assets:
Cash and cash equivalents1
$180,719 $246,947 
Restricted cash1
54,865 52,470 
Accounts receivable1
108,328 99,513 
Inventories153,172 142,059 
Deferred cost of revenue55,064 41,469 
Customer financing receivable1
5,515 5,428 
Prepaid expenses and other current assets1
26,809 30,718 
Total current assets584,472 618,604 
Property, plant and equipment, net1
599,437 600,628 
Operating lease right-of-use assets55,165 35,621 
Customer financing receivable, non-current1
43,880 45,268 
Restricted cash, non-current1
130,080 117,293 
Deferred cost of revenue, non-current3,029 2,462 
Other long-term assets1
35,199 34,511 
Total assets$1,451,262 $1,454,387 
Liabilities, Redeemable Noncontrolling Interest, Stockholders’ Equity and Noncontrolling Interest
Current liabilities:
Accounts payable$72,960 $58,334 
Accrued warranty5,958 10,263 
Accrued expenses and other current liabilities1
82,133 112,004 
Deferred revenue and customer deposits1
69,240 114,286 
Operating lease liabilities7,219 7,899 
Financing obligations13,330 12,745 
Non-recourse debt1
118,468 120,846 
Total current liabilities369,308 436,377 
Deferred revenue and customer deposits, non-current1
84,472 87,463 
Operating lease liabilities, non-current61,714 41,849 
Financing obligations, non-current461,468 459,981 
Recourse debt, non-current290,090 168,008 
Non-recourse debt, non-current1
99,941 102,045 
Other long-term liabilities19,867 17,268 
Total liabilities1,386,860 1,312,991 
Commitments and contingencies (Note 13)00
Redeemable noncontrolling interest356 377 
Stockholders’ equity:
Common stock: $0.0001 par value; Class A shares - 600,000,000 shares authorized and 144,325,637 shares and 140,094,633 shares issued and outstanding and Class B shares - 600,000,000 shares authorized and 27,773,816 shares and 27,908,093 shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively.17 17 
Additional paid-in capital3,129,687 3,182,753 
Accumulated other comprehensive loss(126)(9)
Accumulated deficit(3,123,518)(3,103,937)
Total stockholders’ equity6,060 78,824 
Noncontrolling interest57,986 62,195 
Total liabilities, redeemable noncontrolling interest, stockholders' equity and noncontrolling interest$1,451,262 $1,454,387 
1We have variable interest entities, which represent a portion of the consolidated balances recorded within these financial statement line items in the condensed consolidated balance sheets (see Note 11 - Portfolio Financings).

The accompanying notes are an integral part of these condensed consolidated financial statements.
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Bloom Energy Corporation
Condensed Consolidated Statements of Operations
(in thousands, except share and per share data)
(unaudited)
 Three Months Ended
March 31,
 20212020
 
Revenue:
Product$137,930 $99,559 
Installation2,659 16,618 
Service36,417 25,147 
Electricity17,001 15,375 
Total revenue194,007 156,699 
Cost of revenue:
Product87,294 72,489 
Installation4,625 20,779 
Service36,118 30,970 
Electricity11,319 12,530 
Total cost of revenue139,356 136,768 
Gross profit54,651 19,931 
Operating expenses:
Research and development23,295 23,279 
Sales and marketing19,952 13,949 
General and administrative25,801 29,098 
Total operating expenses69,048 66,326 
Loss from operations(14,397)(46,395)
Interest income74 819 
Interest expense(14,731)(20,754)
Interest expense - related parties(1,366)
Other expense, net(85)(8)
Loss on extinguishment of debt(14,098)
(Loss) gain on revaluation of embedded derivatives(518)284 
Loss before income taxes(29,657)(81,518)
Income tax provision124 124 
Net loss(29,781)(81,642)
Less: Net loss attributable to noncontrolling interests and redeemable noncontrolling interests(4,892)(5,693)
Net loss attributable to Class A and Class B common stockholders$(24,889)$(75,949)
Net loss per share available to Class A and Class B common stockholders, basic and diluted$(0.15)$(0.61)
Weighted average shares used to compute net loss per share available to Class A and Class B common stockholders, basic and diluted170,745 123,763 
The accompanying notes are an integral part of these condensed consolidated financial statements.
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Bloom Energy Corporation
Condensed Consolidated Statements of Comprehensive Loss
(in thousands)
(unaudited)
Three Months Ended March 31,
 20212020
 
Net loss$(29,781)$(81,642)
Other comprehensive loss, net of taxes:
Change in derivative instruments designated and qualifying as cash flow hedges(4,653)(8,214)
Foreign currency translation adjustment(228)
Other comprehensive loss, net of taxes(4,881)(8,214)
Comprehensive loss(34,662)(89,856)
Less: Comprehensive loss attributable to noncontrolling interests and redeemable noncontrolling interests(350)(13,902)
Comprehensive loss attributable to Class A and Class B stockholders$(34,312)$(75,954)


The accompanying notes are an integral part of these condensed consolidated financial statements.

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Bloom Energy Corporation
Condensed Consolidated Statements of Redeemable Noncontrolling Interest, Stockholders' Equity and Noncontrolling Interest
(in thousands, except share data) (unaudited)

Three Months Ended March 31, 2021
Redeemable Noncontrolling InterestClass A and Class B Common StockAdditional Paid-In CapitalAccumulated Other Comprehensive LossAccumulated DeficitTotal Stockholders' EquityNoncontrolling Interest
SharesAmount
Balances at December 31, 2020$377 168,002,726 $17 $3,182,753 $(9)$(3,103,937)$78,824 $62,195 
Cumulative effect upon adoption of Accounting Standards Update 2020-06 (Note 2)— — — (126,799)— 5,308 (121,491)— 
Issuance of restricted stock awards— 1,140,502 — — — — — — 
ESPP purchase— 977,508 — 4,726 — — 4,726 — 
Exercise of stock options— 1,978,717 — 53,227 — — 53,227 — 
Stock-based compensation— — — 15,780 — — 15,780 — 
Change in effective portion of interest rate swap agreement— — — — — — — 4,653 
Distributions to noncontrolling interests(17)— — — — — — (3,863)
Foreign currency translation adjustment— — — — (117)— (117)(111)
Net loss(4)— — — — (24,889)(24,889)(4,888)
Balances at March 31, 2021$356 172,099,453 $17 $3,129,687 $(126)$(3,123,518)$6,060 $57,986 

Three Months Ended March 31, 2020
Redeemable Noncontrolling InterestClass A and Class B Common StockAdditional Paid-In CapitalAccumulated Other Comprehensive GainAccumulated DeficitTotal Stockholders' DeficitNoncontrolling Interest
SharesAmount
Balances at December 31, 2019$443 121,036,289 $12 $2,686,759 $19 $(2,946,384)$(259,594)$91,291 
Adjustment of embedded derivative for debt modification— — — (24,071)— — (24,071)— 
Issuance of restricted stock awards— 3,010,606 — — — — — — 
ESPP purchase— 992,846 — 4,177 — — 4,177 — 
Exercise of stock options— 110,949 — 667 — — 667 — 
Stock-based compensation— — — 21,676 — — 21,676 — 
Change in effective portion of interest rate swap agreement— — — — (5)— (5)(8,209)
Distributions to noncontrolling interests(1)— — — — —  (3,897)
Net loss(375)— — — — (75,949)(75,949)(5,318)
Balances at March 31, 2020$67 125,150,690 $12 $2,689,208 $14 $(3,022,333)$(333,099)$73,867 


The accompanying notes are an integral part of these condensed consolidated financial statements.
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Bloom Energy Corporation
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
 Three Months Ended
March 31,
 20212020
Cash flows from operating activities:
Net loss$(29,781)$(81,642)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization13,442 13,035 
Non-cash lease expense2,115 1,549 
Revaluation of derivative contracts290 241 
Stock-based compensation17,210 23,019 
Gain on long-term REC purchase contract(4)
Loss on extinguishment of debt14,098 
Amortization of debt issuance costs and premium, net971 4,755 
Changes in operating assets and liabilities:
Accounts receivable(8,815)2,136 
Inventories(10,820)2,083 
Deferred cost of revenue(13,952)(19,494)
Customer financing receivable1,302 1,240 
Prepaid expenses and other current assets3,908 3,060 
Other long-term assets(687)(2,924)
Accounts payable14,145 4,822 
Accrued warranty(4,305)681 
Accrued expenses and other current liabilities(24,941)489 
Operating lease liabilities(2,474)(1,717)
Deferred revenue and customer deposits(48,036)5,253 
Other long-term liabilities1,393 1,372 
Net cash used in operating activities(89,035)(27,948)
Cash flows from investing activities:
Purchase of property, plant and equipment(12,932)(12,360)
Net cash used in investing activities(12,932)(12,360)
Cash flows from financing activities:
Proceeds from issuance of debt to related parties30,000 
Repayment of debt(4,862)(9,128)
Repayment of debt - related parties(2,105)
Proceeds from financing obligations5,016 
Repayment of financing obligations(3,077)(2,503)
Distributions to noncontrolling interests and redeemable noncontrolling interests(3,880)(4,270)
Proceeds from issuance of common stock57,953 4,845 
Net cash provided by financing activities51,150 16,839 
Effect of exchange rate changes on cash, cash equivalent and restricted cash(229)
Net decrease in cash, cash equivalents, and restricted cash(51,046)(23,469)
Cash, cash equivalents, and restricted cash:
Beginning of period416,710 377,388 
End of period$365,664 $353,919 
Supplemental disclosure of cash flow information:
Cash paid during the period for interest$14,963 $17,790 
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases2,830 2,236 
Operating cash flows from financing leases39 
Financing cash flows from financing leases63 
Cash paid during the period for income taxes72 29 
Non-cash investing and financing activities:
Increase in Recourse debt, non-current upon adoption of ASU 2020-06, net (Note 2)$121,491 $
Liabilities recorded for property, plant and equipment1,172 466 
Operating lease liabilities arising from obtaining right-of-use assets upon adoption of new lease guidance39,775 
Recognition of operating lease right-of-use asset during the year-to-date period22,649 421 
Recognition of financing lease right-of-use asset during the year-to-date period1,457 251 
Accrued distributions to equity investors
Accrued interest for notes467 
Accrued debt issuance costs— 2,970 
Adjustment of embedded derivative related to debt extinguishment— 24,071 
The accompanying notes are an integral part of these condensed consolidated financial statements.
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Bloom Energy Corporation
Notes to Unaudited Condensed Consolidated Financial Statements
1. Nature of Business, Liquidity and Basis of Presentation
Nature of Business
We design, manufacture, sell and, in certain cases, install solid-oxide fuel cell systems ("Energy Servers") for on-site power generation. Our Energy Servers utilize an innovative fuel cell technology and provide efficient energy generation with reduced operating costs and lower greenhouse gas emissions as compared to conventional fossil fuel generation. By generating power where it is consumed, our energy producing systems offer increased electrical reliability and improved energy security while providing a path to energy independence.
We continue to monitor and adjust as appropriate our operations in response to the COVID-19 pandemic. During the three months ended March 31, 2021, we continued to experience supply chain disruptions due to COVID-19 as well as the Suez Canal blockage that affected logistics and container shortages. We put actions in place to mitigate the disruptions by booking alternate sea routes, creating virtual hubs and consolidating shipments coming from the same region. These mitigation efforts have increased the costs of our parts and materials.
Liquidity
We have generally incurred operating losses and negative cash flows from operations since our inception. With the series of new debt offerings, debt extensions and conversions to equity that we completed during 2020, we had $290.1 million of total outstanding recourse debt as of March 31, 2021, all of which is classified as long-term debt. Our recourse debt scheduled repayments will commence in June 2022.
Our future capital requirements will depend on many factors, including our rate of revenue growth, the timing and extent of spending on research and development efforts and other business initiatives, the rate of growth in the volume of system builds and the need for additional manufacturing space, the expansion of sales and marketing activities both in domestic and international markets, market acceptance of our product, our ability to secure financing for customer use of our Energy Servers, the timing of installations, and overall economic conditions including the impact of COVID-19 on our ongoing and future operations.
In the opinion of management, the combination of our existing cash and cash equivalents and operating cash flows is expected to be sufficient to meet our operational and capital cash flow requirements and other cash flow needs for the next 12 months from the date of issuance of this Quarterly Report on Form 10-Q.
Basis of Presentation
We have prepared the condensed consolidated financial statements included herein pursuant to the rules and regulations of the U.S. Securities and Exchange Commission ("SEC"), and as permitted by those rules, including all disclosures required by generally accepted accounting principles as applied in the United States (“U.S. GAAP”). All intercompany transactions and balances have been eliminated upon consolidation. Certain prior period amounts have been reclassified to conform to the current period presentation.
As disclosed in the 2020 Annual Report on Form 10-K, effective on December 31, 2020, we lost our emerging growth company ("EGC") status which accelerated the adoption of ASC 842 - Leases. As a result, we adjusted our previously reported consolidated financial statements effective January 1, 2020.
Principles of Consolidation
These condensed consolidated financial statements reflect our accounts and operations and those of our subsidiaries in which we have a controlling financial interest. We use a qualitative approach in assessing the consolidation requirement for each of our variable interest entities ("VIEs"), which we refer to as a tax equity partnership (each such VIE, also referred to as our power purchase agreement entities ("PPA Entities")). This approach focuses on determining whether we have the power to direct those activities of the PPA Entities that most significantly affect their economic performance and whether we have the obligation to absorb losses, or the right to receive benefits, that could potentially be significant to the PPA Entities. For all periods presented, we have determined that we are the primary beneficiary in all of our operational PPA Entities, as discussed
9


in Note 11 - Portfolio Financings. We evaluate our relationships with the PPA Entities on an ongoing basis to ensure that we continue to be the primary beneficiary. All intercompany transactions and balances have been eliminated upon consolidation.
The sale of an operating company with a portfolio of PPAs in which we do not have an equity interest is called a “Third-Party PPA.” We have determined that, although these entities are VIEs, we do not have the power to direct those activities of the Third-Party PPAs that most significantly affect their economic performance. We also do not have the obligation to absorb losses, or the right to receive benefits, that could potentially be significant to the Third-Party PPAs. Because we are not the primary beneficiary of these activities, we do not consolidate Third-Party PPAs.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and the accompanying notes. The most significant estimates include the determination of the stand-alone selling price, including material rights estimates, inventory valuation, specifically excess and obsolescence provisions for obsolete or unsellable inventory and, in relation to property, plant and equipment (specifically Energy Servers), assumptions relating to economic useful lives and impairment assessments.
Other accounting estimates include variable consideration relating to product performance guaranties, lease and non-lease components and related financing obligations such as incremental borrowing rates, estimated output, efficiency and residual value of the Energy Servers, product performance warranties and guaranties and extended maintenance, derivative valuations, estimates for recapture of the U.S. investment tax credit ("ITC") and similar federal tax benefits, estimates relating to contractual indemnities provisions, estimates for income taxes and deferred tax asset valuation allowances, and stock-based compensation costs. The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition, including sales, expenses, our allowance for doubtful accounts, stock-based compensation, the carrying value of our long-lived assets, inventory, financial assets, and valuation allowances for tax assets, will depend on future developments that are highly uncertain, including as a result of new information that may emerge concerning the COVID-19 pandemic and the actions taken to contain it or treat it, as well as the economic impact on local, regional, national and international customers, suppliers and markets. We have made estimates of the impact of COVID-19 within our condensed consolidated financial statements and there may be changes to those estimates in future periods as new information becomes available. Actual results could differ materially from these estimates under different assumptions and conditions.
Concentration of Risk
Geographic Risk - The majority of our revenue and long-lived assets are attributable to operations in the United States for all periods presented. Additionally, we sell our Energy Servers in Japan, India and the Republic of Korea (collectively, the "Asia Pacific region"). In the three months ended March 31, 2021 and 2020, total revenue in the Asia Pacific region was 43% and 37%, respectively, of our total revenue.
Credit Risk - At March 31, 2021 and December 31, 2020, one customer, SK Engineering and Construction Co., Ltd. ("SK E&C"), accounted for approximately 76% and 56% of accounts receivable. To date, we have not experienced any credit losses.
Customer Risk - During the three months ended March 31, 2021, revenue from two customers, SK E&C and EdgeWise Energy LLC, accounted for approximately 43% and 30%, respectively of our total revenue. During the three months ended March 31, 2020, revenue from two customers, SK E&C and Duke Energy, accounted for approximately 36% and 31%, respectively, of our total revenue.

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2. Summary of Significant Accounting Policies
There have been no changes in our accounting policies from those reported in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020. We have expanded our accounting policy relating to foreign currency transactions as follows:
Foreign Currency Transactions
The functional currencies of most of our foreign subsidiaries are the U.S. dollar since the subsidiaries are considered financially and operationally integrated with their domestic parent. For these subsidiaries, the foreign currency monetary assets and liabilities are remeasured into U.S. dollars at end-of-period exchange rates. Any currency transaction gains and losses are included as a component of other expense in our condensed consolidated statements of operations.
The functional currency of our joint venture in the Republic of Korea is the local currency, the South Korean won ("KRW"), since the joint venture is financially independent of its U.S. parent and the KRW is the currency in which the joint venture generates and expends cash. Assets and liabilities of this entity are translated at the rate of exchange at the balance sheet date. Revenues and expenses are translated at the weighted average rate of exchange during the period. For this entity, translation adjustments resulting from the process of translating the KRW financial statements into U.S dollars are included in other comprehensive loss. Translation adjustments attributable to noncontrolling interests are allocated to and reported as part of the noncontrolling interests in the condensed consolidated financial statements.
Recent Accounting Pronouncements
Other than the adoption of the accounting guidance mentioned below, there have been no other significant changes in our reported financial position or results of operations and cash flows resulting from the adoption of new accounting pronouncements.
Accounting Guidance Implemented in 2021
In August 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40) ("ASU 2020-06"). The new standard simplifies the accounting for convertible instruments by eliminating the conversion option separation model for convertible debt that can be settled in cash and by eliminating the measurement model for beneficial conversion features. The guidance is effective for fiscal years beginning after December 15, 2021, with early adoption permitted as early as fiscal years (including interim periods) beginning after December 15, 2020. Consequently, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost, as long as no other features require bifurcation and recognition as derivatives. There will no longer be a debt discount representing the difference between the carrying value, excluding issuance costs, and the principal of the convertible debt instrument and, as a result, there will no longer be interest expense from the amortization of the debt discount over the term of the convertible debt instrument. The amendments in this update also require the if-converted method to be applied for all convertible instruments when calculating diluted earnings per share.
We elected to early adopt ASU 2020-06 as of January 1, 2021 using the modified retrospective transition method, which resulted in a cumulative-effect adjustment to the opening balance of accumulated deficit on the date of adoption. Prior period condensed consolidated financial statements were not restated upon adoption.
Upon adoption of ASU 2020-06, the Company combined the previously separated equity component with the liability component of our 2.5% Green Convertible Senior Notes due August 2025. These components are now together classified as Recourse debt, thereby eliminating the subsequent amortization of the debt discount as interest expense. Similarly, the portion of issuance costs previously allocated to equity was reclassified to debt and will be amortized as interest expense. Accordingly, we recorded a decrease to Accumulated deficit of $5.3 million, a decrease to Additional paid-in capital of $126.8 million, and an increase to Recourse debt, non-current of approximately $121.5 million.
There is no deferred tax impact related to the adoption of ASU 2020-06 due to our full valuation allowance.
Accounting Guidance Not Yet Adopted
Cessation of LIBOR - In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) Facilitation of the Effects of Reference Rate Reform on Financial Reporting ("ASU 2020-04"), which provides optional expedients for a limited period of time for accounting for contracts, hedging relationships, and other transactions affected by the London
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Interbank Offered Rate ("LIBOR") or other reference rate expected to be discontinued. ASU 2020-04 is effective immediately and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. We are currently evaluating the impact of the adoption of ASU 2020-04 on our consolidated financial statements.

3. Revenue Recognition
Deferred Revenue and Customer Deposits
Deferred revenue and customer deposits as of March 31, 2021 and December 31, 2020 consists of the following (in thousands):
March 31,December 31,
 20212020
Deferred revenue$120,643 $135,578 
Customer deposits33,069 66,171 
Deferred revenue and customer deposits$153,712 $201,749 

Deferred revenue activity, including deferred incentive revenue activity, during the three months ended March 31, 2021 and 2020 consists of the following (in thousands):
Three Months Ended
March 31,
20212020
 
Beginning balance$135,578 $175,455 
Additions156,586 138,387 
Revenue recognized(171,521)(136,576)
Ending balance$120,643 $177,266 
We disaggregate revenue from contracts with customers into four revenue categories: (i) product, (ii) installation, (iii) services and (iv) electricity (in thousands):
Three Months Ended
March 31,
20212020
Revenue from contracts with customers: 
Product revenue $137,930 $99,559 
Installation revenue 2,659 16,618 
Services revenue 36,417 25,147 
Electricity revenue 595 72 
Total revenue from contract with customers177,601 141,396 
Revenue from contracts accounted for as leases:
Electricity revenue16,406 15,303 
Total revenue$194,007 $156,699 
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4. Financial Instruments
Cash, Cash Equivalents and Restricted Cash
The carrying values of cash, cash equivalents and restricted cash approximate fair values and are as follows (in thousands):
March 31,December 31,
 20212020
As Held:
Cash$215,297 $180,808 
Money market funds150,367 235,902 
$365,664 $416,710 
As Reported:
Cash and cash equivalents$180,719 $246,947 
Restricted cash184,945 169,763 
$365,664 $416,710 

Restricted cash consisted of the following (in thousands):
March 31,December 31,
 20212020
Current:  
Restricted cash$53,179 $26,706 
Restricted cash related to PPA Entities1
1,686 25,764 
Restricted cash, current54,865 52,470 
Non-current:
Restricted cash114,713 286 
Restricted cash related to PPA Entities1
15,367 117,007 
Restricted cash, non-current130,080 117,293 
$184,945 $169,763 
1 We have VIEs that represent a portion of the condensed consolidated balances recorded within the "restricted cash," and other financial statement line items in the condensed consolidated balance sheets (see Note 11 - Portfolio Financings). In addition, the restricted cash held in the PPA II and PPA IIIb entities as of March 31, 2021, includes $28.2 million and $1.0 million of current restricted cash, and $80.5 million and $13.3 million of non-current restricted cash, respectively. The restricted cash held in the PPA II and PPA IIIb entities as of December 31, 2020, includes $20.3 million and $0.7 million of current restricted cash, and $88.4 million and $13.3 million of non-current restricted cash, respectively. These entities are not considered VIEs.
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5. Fair Value
Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis
The tables below set forth, by level, our financial assets that are accounted for at fair value for the respective periods. The table does not include assets and liabilities that are measured at historical cost or any basis other than fair value (in thousands):
 Fair Value Measured at Reporting Date Using
March 31, 2021Level 1Level 2Level 3Total
Assets
Cash equivalents:
Money market funds$150,367 $$$150,367 
$150,367 $$$150,367 
Liabilities
Derivatives:
Natural gas fixed price forward contracts$$1,650 $$1,650 
Embedded EPP derivatives6,060 6,060 
Interest rate swap agreements11,301 11,301 
$$12,951 $6,060 $19,011 

 Fair Value Measured at Reporting Date Using
December 31, 2020Level 1Level 2Level 3Total
Assets
Cash equivalents:
Money market funds$235,902 $$$235,902 
$235,902 $$$235,902 
Liabilities
Derivatives:
Natural gas fixed price forward contracts$$$2,574 $2,574 
Embedded EPP derivatives5,541 5,541 
Interest rate swap agreements15,989 15,989 
$$15,989 $8,115 $24,104 
Money Market Funds - Money market funds are valued using quoted market prices for identical securities and are therefore classified as Level 1 financial assets.
Interest Rate Swap Agreements - Interest rate swap agreements are valued using quoted prices for similar contracts and are therefore classified as Level 2 financial assets. Interest rate swaps are designed as hedging instruments and are recognized at fair value on our condensed consolidated balance sheets. As of March 31, 2021, we expect $2.2 million of the loss on the interest rate swaps accumulated in other comprehensive loss to be reclassified into earnings in the next 12 months.
Natural Gas Fixed Price Forward Contracts - As of December 31, 2020, natural gas fixed price forward contracts were valued using a combination of factors including the counterparty's credit rating and estimates of future natural gas prices and therefore, as no observable inputs to support market activity were available, were classified as Level 3 liabilities. The leveling of each financial instrument is reassessed at the end of each period, and is based on pricing information received from third-party pricing sources. At March 31, 2021, we transferred $1.7 million of natural gas forward contracts from Level 3 to Level 2.
Transfers between these hierarchy levels were based on the availability of sufficient observable inputs to meet Level 2 versus Level 3 criteria.
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We recognized an unrealized gain of $0.2 million and an unrealized loss of $0.6 million, as a result of a change in the fair value of our natural gas fixed price forward contracts during the three months ended March 31, 2021 and 2020, respectively. We realized gains of $0.7 million and $1.0 million for the three months ended March 31, 2021 and 2020, respectively, on the settlement of these contracts in cost of revenue on our condensed consolidated statements of operations.
Embedded Escalation Protection Plan Derivative Liability in Sales Contracts - We estimate the fair value of the embedded Escalation Protection Plan ("EPP") derivatives in certain sales contracts using a Monte Carlo simulation model, which considers various potential electricity price curves over the sales contracts' terms. We use historical grid prices and available forecasts of future electricity prices to estimate future electricity prices. We have classified these derivatives as a Level 3 financial liability. For the three months ended March 31, 2021 and 2020, we recorded the fair value of the embedded EPP derivatives and recognized an unrealized loss of $0.5 million and an unrealized gain of $0.3 million, respectively, in (loss) gain on revaluation of embedded derivatives on our condensed consolidated statements of operations.
The changes in the Level 3 financial liabilities during the three months ended March 31, 2021 were as follows (in thousands):
Natural
Gas
Fixed Price
Forward
Contracts
Embedded EPP Derivative LiabilityTotal
Liabilities at December 31, 2019$6,968 $6,176 $13,144 
Settlement of natural gas fixed price forward contracts(4,503)(4,503)
Changes in fair value109 (635)(526)
Liabilities at December 31, 20202,574 5,541 8,115 
Settlement of natural gas fixed price forward contracts(731)(731)
Changes in fair value(193)519 326 
Transfer from Level 3 to Level 2 in fair value hierarchy(1,650)(1,650)
Liabilities at March 31, 2021$$6,060 $6,060 
0To estimate the liabilities related to the EPP contracts an option pricing method was implemented through a Monte Carlo simulation. The unobservable inputs were simulated based on the available values for avoided cost and cost of electricity as calculated for March 31, 2021, using an expected growth rate of 7% over the contracts' life and volatility of 20%. The estimated growth rate and volatility were estimated based on the historical tariff changes for the period 2008 to 2020. Avoided cost is the transmission and distribution cost expressed in dollars per kilowatt hours avoided in the given year of the contract, calculated using the billing rates of the effective utility tariff applied during the quarter to the host account for which usage is offset by the generator. If the billing rates within the utility tariff change during the measurement period, the average of the amount of charge for each rate is weighted by the number of effective months for each amount.
The inputs listed above would have had a direct impact on the fair values of the above derivatives if they were adjusted. Generally, an increase in natural gas prices and a decrease in electric grid prices would each result in an increase in the estimated fair value of our derivative liabilities.
Financial Assets and Liabilities Not Measured at Fair Value on a Recurring Basis
Customer Receivables and Debt Instruments - The fair value for customer financing receivables is based on a discounted cash flow model, whereby the fair value approximates the present value of the receivables (Level 3). The senior secured notes, term loans and convertible notes are based on rates currently offered for instruments with similar maturities and terms (Level 3). The following table presents the estimated fair values and carrying values of customer receivables and debt instruments (in thousands):
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 March 31, 2021December 31, 2020
 Net Carrying
Value
Fair ValueNet Carrying
Value
Fair Value
   
Customer receivables
Customer financing receivables$49,395 $41,039 $50,746 $42,679 
Debt instruments
Recourse:
10.25% Senior Secured Notes due March 202768,703 70,873 68,614 71,831 
2.5% Green Convertible Senior Notes due August 2025221,387 400,009 99,394 426,229 
Non-recourse:
7.5% Term Loan due September 202830,869 37,044 31,746 37,658 
6.07% Senior Secured Notes due March 203076,130 85,830 77,007 89,654 
LIBOR + 2.5% Term Loan due December 2021111,410 113,165 114,138 116,113 


6. Balance Sheet Components
Inventories
The components of inventory consist of the following (in thousands):
March 31,December 31,
 20212020
Raw materials$78,113 $79,090 
Work-in-progress33,333 29,063 
Finished goods41,726 33,906 
$153,172 $142,059 
The inventory reserves were $14.1 million and $14.0 million as of March 31, 2021 and December 31, 2020, respectively.
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of the following (in thousands):
March 31,December 31,
 20212020
   
Government incentives receivable$479 $479 
Prepaid hardware and software maintenance5,304 5,227 
Receivables from employees5,251 5,160 
Other prepaid expenses and other current assets15,775 19,852 
$26,809 $30,718 
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Property, Plant and Equipment, Net
Property, plant and equipment, net, consists of the following (in thousands):
March 31,December 31,
 20212020
   
Energy Servers$672,667 $669,422 
Computers, software and hardware20,206 20,432 
Machinery and equipment109,177 106,644 
Furniture and fixtures8,495 8,455 
Leasehold improvements38,019 37,497 
Building46,730 46,730 
Construction in progress27,325 21,118 
922,619 910,298 
Less: accumulated depreciation(323,182)(309,670)
$599,437 $600,628 
Depreciation expense related to property, plant and equipment, net, was $13.4 million and $13.0 million for the three months ended March 31, 2021 and 2020, respectively.
Property, plant and equipment under operating leases by the PPA Entities was $368.0 million and $368.0 million as of March 31, 2021 and December 31, 2020, respectively. The accumulated depreciation for these assets was $121.7 million and $115.9 million as of March 31, 2021 and December 31, 2020, respectively. Depreciation expense for these assets was $5.8 million and $6.2 million for the three months ended March 31, 2021 and 2020, respectively.
Depreciation expense is included in cost of product, installation, service and electricity revenue as well as research and development, sales and marketing and general and administration expenses in our condensed consolidated statements of operations.
Other Long-Term Assets
Other long-term assets consist of the following (in thousands):
March 31,December 31,
 20212020
   
Prepaid and other long-term assets$24,834 $24,116 
Deferred commissions6,744 6,732 
Equity-method investments1,880 1,954 
Long-term deposits1,741 1,709 
$35,199 $34,511 
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Accrued Warranty
Accrued warranty liabilities consist of the following (in thousands):
March 31,December 31,
 20212020
   
Product warranty$1,469 $1,549 
Product performance4,347 8,605 
Maintenance services contracts142 109 
$5,958 $10,263 
Changes in the product warranty and product performance liabilities were as follows (in thousands):
Balances at December 31, 2019$9,881 
Accrued warranty, net5,944 
Warranty expenditures during the year(5,671)
Balances at December 31, 202010,154 
Accrued warranty, net(3,224)
Warranty expenditures during the year-to-date period(1,114)
Balances at March 31, 2021$5,816 
Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following (in thousands):
March 31,December 31,
 20212020
   
Compensation and benefits$23,401 $28,343 
Current portion of derivative liabilities13,395 19,116 
Sales-related liabilities5,902 14,479 
Accrued installation8,717 16,468 
Sales tax liabilities2,302 2,732 
Interest payable719 2,224 
Other27,697 28,642 
$82,133 $112,004 
Other Long-Term Liabilities
Other long-term liabilities consist of the following (in thousands):
March 31,December 31,
 20212020
Delaware grant$9,212 $9,212 
Other10,655 8,056 
$19,867 $17,268 
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We have recorded a long-term liability for the potential future repayment of the incentive grant received from the Delaware Economic Development Authority of $9.2 million as of March 31, 2021 and December 31, 2020. See Note 13 - Commitments and Contingencies for a full description of the grant.

7. Outstanding Loans and Security Agreements
The following is a summary of our debt as of March 31, 2021 (in thousands, except percentage data):
 Unpaid
Principal
Balance
Net Carrying ValueUnused
Borrowing
Capacity
Interest
Rate
Maturity DatesEntityRecourse
 CurrentLong-
Term
Total
10.25% Senior Secured Notes due March 202770,000 0 68,703 68,703  10.25%March 2027CompanyYes
2.5% Green Convertible Senior Notes due August 2025230,000 0 221,387 221,387  2.5%August 2025CompanyYes
Total recourse debt300,000 0 290,090 290,090  
7.5% Term Loan due September 202833,393 2,985 27,884 30,869 — 7.5%September 
2028
PPA IIIaNo
6.07% Senior Secured Notes due March 203076,925 4,073 72,057 76,130 — 6.07%March 2030PPA IVNo
LIBOR + 2.5% Term Loan due December 2021111,873 111,410 111,410 — LIBOR plus
margin
December 2021PPA VNo
Letters of Credit due December 2021759 2.25%December 2021PPA VNo
Total non-recourse debt222,191 118,468 99,941 218,409 759 
Total debt$522,191 $118,468 $390,031 $508,499 $759 

The following is a summary of our debt as of December 31, 2020 (in thousands, except percentage data):
 Unpaid
Principal
Balance
Net Carrying ValueUnused
Borrowing
Capacity
Interest
Rate
Maturity DatesEntityRecourse
 CurrentLong-
Term
Total
10.25% Senior Secured Notes due March 2027$70,000 $$68,614 $68,614 $— 10.25%March 2027CompanyYes
2.5% Green Convertible Senior Notes due August 2025230,000 99,394 99,394 2.5%August 2025CompanyYes
Total recourse debt300,000 168,008 168,008 — 
7.5% Term Loan due September 202834,456 2,826 28,920 31,746 — 7.5%September 
2028
PPA IIIaNo
6.07% Senior Secured Notes due March 203077,837 3,882 73,125 77,007 — 6.07%March 2030PPA IVNo
LIBOR + 2.5% Term Loan due December 2021114,761 114,138 114,138 — LIBOR plus
margin
December 2021PPA VNo
Letters of Credit due December 2021968 2.25%December 2021PPA VNo
Total non-recourse debt227,054 120,846 102,045 222,891 968 
Total debt$527,054 $120,846 $270,053 $390,899 $968 

Recourse debt refers to debt that we have an obligation to pay. Non-recourse debt refers to debt that is recourse to only our subsidiaries. The differences between the unpaid principal balances and the net carrying values apply to deferred financing costs. We and all of our subsidiaries were in compliance with all financial covenants as of March 31, 2021 and December 31, 2020.
Recourse Debt Facilities
10.25% Senior Secured Notes due March 2027 - On May 1, 2020, we issued $70.0 million of 10.25% Senior Secured Notes in a private placement ("10.25% Senior Secured Notes"). The 10.25% Senior Secured Notes are governed by an
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indenture (the “Senior Secured Notes Indenture”) entered into among us, the guarantor party thereto and U.S. Bank National Association, in its capacity as trustee and collateral agent. The 10.25% Senior Secured Notes are secured by certain of our operations and maintenance agreements that previously were part of the security for the 6% Convertible Notes. We used the proceeds of this issuance to repay $70.0 million of our 10% Convertible Notes. The 10.25% Senior Secured Notes are supported by a $150.0 million indenture between us and U.S. Bank National Association, which contains an accordion feature for an additional $80.0 million of notes that can be issued on or prior to September 27, 2021.
Interest on the 10.25% Senior Secured Notes is payable quarterly, commencing June 30, 2020. The 10.25% Senior Secured Notes Indenture contains customary events of default and covenants relating to, among other things, the incurrence of new debt, affiliate transactions, liens and restricted payments. On or after March 27, 2022, we may redeem all of the 10.25% Senior Secured Notes at a price equal to 108% of the principal amount of the 10.25% Senior Secured Notes plus accrued and unpaid interest, with such optional redemption prices decreasing to 104% on and after March 27, 2023, 102% on and after March 27, 2024 and 100% on and after March 27, 2026. Before March 27, 2022, we may redeem the 10.25% Senior Secured Notes upon repayment of a make-whole premium. If we experience a change of control, we must offer to purchase for cash all or any part of each holder’s 10.25% Senior Secured Notes at a purchase price equal to 101% of the principal amount of the 10.25% Senior Secured Notes, plus accrued and unpaid interest. The outstanding unpaid principal of the 10.25% Senior Secured Notes of $70.0 million was classified as non-current as of March 31, 2021.
2.5% Green Convertible Senior Notes due August 2025 - In August 2020, we issued $230.0 million aggregate principal amount of our 2.5% Green Convertible Senior Notes due August 2025, unless earlier repurchased, redeemed or converted ("Green Notes"). The principal amount of the Green Notes are $230.0 million, less initial purchaser's discount of $6.9 million and other issuance costs of $3.0 million resulting in net proceeds of $220.1 million.
The Green Notes are senior, unsecured obligations accruing interest at a rate of 2.5% per annum, payable semi-annually in arrears on February 15 and August 15 of each year, beginning on February 15, 2021.
We may not redeem the Green Notes prior to August 21, 2023. We may elect to redeem, at face value, all or any portion of the Green Notes at any time on or after August 21, 2023 and on or before the twenty-sixth trading day immediately before the maturity date, provided certain conditions are met.
Before May 15, 2025, the noteholders have the right to convert their Green Notes only upon the occurrence of certain events, including a conversion upon satisfaction of a condition relating to the closing price of our common stock ("the Closing Price Condition"). If the Closing Price Condition is met on at least 20 of the last 30 consecutive trading days in any quarter, the noteholders may convert their Green Notes at any time during the immediately following quarter. The Closing Price Condition was met during the three months ended March 31, 2021 and accordingly, the noteholders may convert their Green Notes at any time during the quarter ending June 30, 2021. From and after May 15, 2025, the noteholders may convert their Green Notes at any time at their election until the close of business on the second trading day immediately before the maturity date. Should the noteholders elect to convert their Green Notes, we may elect to settle the conversion by paying or delivering, as applicable, cash, shares of our Class A common stock or a combination thereof.
The initial conversion rate is 61.6808 shares of Class A common stock per $1,000 principal amount of notes, which represents an initial conversion price of approximately $16.21 per share of Class A common stock. The conversion rate and conversion price are subject to customary adjustments upon the occurrence of certain events. In addition, if certain corporate events that constitute a “Make-Whole Fundamental Change” as defined occur, the conversion rate will, in certain circumstances, be increased for a specified period of time.
We adopted ASU 2020-06 as of January 1, 2021 using the modified retrospective transition method. Upon adoption, we combined the previously separated equity component of the Green Notes with the liability component, which is now together classified as debt, thereby eliminating the subsequent amortization of the debt discount as interest expense. Similarly, the portion of issuance costs previously allocated to equity was reclassified to debt and amortized as interest expense. Accordingly, we recorded a net decrease to Accumulated deficit of $5.3 million, a decrease to Additional paid-in capital of $126.8 million, and an increase to Recourse debt, non-current, of approximately $121.5 million.

As of March 31, 2021, the remaining lives of the Green Notes are approximately 4.4 years and accordingly, the Green Notes are classified as long-term debt. Interest expense for the three months ended March 31, 2021 was $1.2 million, including amortization of issuance costs of $0.5 million.
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Non-recourse Debt Facilities
7.5% Term Loan due September 2028 - In December 2012 and later amended in August 2013, PPA IIIa entered into a $46.8 million credit agreement to fund the purchase and installation of our Energy Servers. The loan bears a fixed interest rate of 7.5% payable quarterly. The loan requires quarterly principal payments which began in March 2014. The credit agreement requires us to maintain a debt service reserve for all funded systems, the balance of which was $3.8 million and $3.8 million as of March 31, 2021 and December 31, 2020, respectively, which was included as part of long-term restricted cash in the condensed consolidated balance sheets. The loan is secured by all assets of PPA IIIa.
6.07% Senior Secured Notes due March 2030 - The notes bear a fixed interest rate of 6.07% per annum payable quarterly, which began in December 2015 and ends in March 2030. The note purchase agreement requires us to maintain a debt service reserve, the balance of which was $8.7 million and $8.5 million as of March 31, 2021 and December 31, 2020, respectively, which was included as part of long-term restricted cash in the condensed consolidated balance sheets. The notes are secured by all the assets of the PPA IV.
LIBOR + 2.5% Term Loan due December 2021 - In June 2015, PPA V entered into a $131.2 million term loan due December 2021. The current portion of the LIBOR + 2.5% Term Loan as of March 31, 2021 and December 31, 2020 was $111.4 million and $114.1 million, respectively. There was no non-current portion of this loan as of March 31, 2021 and December 2020. In accordance with the credit agreement, PPA V was issued floating rate debt based on LIBOR plus a margin, paid quarterly. The applicable margins used for calculating interest expense are 2.25% for years 1-3 following the Term Conversion Date and 2.5% thereafter. For the lenders’ commitments to the loan and the commitments to a letter of credit ("LC") facility, the PPA V also pays commitment fees at 0.50% per annum over the outstanding commitments, paid quarterly. The loan is secured by all the assets of the PPA V and requires quarterly principal payments which began in March 2017. In connection with the floating-rate credit agreement, in July 2015, PPA V entered into pay-fixed, receive-float interest rate swap agreements to convert its floating-rate loan into a fixed-rate loan. The agreement also included commitments to a Letter of Credit facility with the aggregate principal amount of $6.4 million, later adjusted down to $6.2 million. The amount reserved under the letter of credit as of March 31, 2021 and December 31, 2020 was $5.4 million and $5.2 million, respectively, and the unused capacity was $0.8 million and $1.0 million, respectively.
Related Party Debt
Portions of the above described recourse and non-recourse debt were held by various related parties. See Note 12 - Related Party Transactions for a full description.
Repayment Schedule and Interest Expense
The following table presents details of our outstanding loan principal repayment schedule as of March 31, 2021 (in thousands):
Remainder of 2021$117,033 
202216,393 
202322,166 
202424,886 
2025258,022 
Thereafter83,691 
$522,191 
Interest expense of $14.7 million and $22.1 million for the three months ended March 31, 2021 and 2020, respectively, was recorded in interest expense on the condensed consolidated statements of operations, which includes interest expense - related parties of 0 and $1.4 million, for the three months ended March 31, 2021 and 2020, respectively.
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8. Derivative Financial Instruments
Interest Rate Swaps
We use various financial instruments to minimize the impact of variable market conditions on our results of operations. We use interest rate swaps to minimize the impact of fluctuations of interest rate changes on our outstanding debt where LIBOR is applied. We do not enter into derivative contracts for trading or speculative purposes.
The fair values of the derivatives designated as cash flow hedges as of March 31, 2021 and December 31, 2020 on our condensed consolidated balance sheets are as follows (in thousands):
March 31,December 31,
 20212020
Liabilities
Accrued expenses and other current liabilities$11,301 $15,989 
PPA V - In July 2015, PPA V entered into 9 interest rate swap agreements to convert a variable interest rate debt to a fixed rate and we designated and documented the interest rate swap arrangements as cash flow hedges. NaN of these swaps matured in 2016, 3 will mature on December 31, 2021 and the remaining 3 will mature on June 30, 2031. The effective change is recorded in accumulated other comprehensive loss and is recognized as interest expense on settlement. The notional amounts of the swaps are $180.7 million and $181.4 million as of March 31, 2021 and December 31, 2020, respectively.
We measure the swaps at fair value on a recurring basis. Fair value is determined by discounting future cash flows using LIBOR rates with appropriate adjustment for credit risk. We realized immaterial gains attributable to the change in valuation during the three months ended March 31, 2021 and 2020, and these gains are included in other expense, net, in the condensed consolidated statements of operations.
The changes in fair value of the derivative contracts designated as cash flow hedges and the amounts recognized in accumulated other comprehensive loss and in earnings are as follows (in thousands):
 Three months ended March 31,
20212020
Beginning balance$15,989 $9,238 
(Gain) loss recognized in other comprehensive loss(4,164)8,356 
Amounts reclassified from other comprehensive loss to earnings(489)(142)
Net (gain) loss recognized in other comprehensive loss(4,653)8,214 
Gain recognized in earnings(35)(37)
Ending balance$11,301 $17,415 
Embedded EPP Derivatives in Sales Contracts
We estimate the fair value of the embedded EPP derivatives in certain of the contracts with our customers using a Monte Carlo simulation model, which considers various potential electricity price forward curves over the sales contracts' terms. We use historical grid prices and available forecasts of future electricity prices to estimate future electricity prices. The grid pricing EPP guarantees that we provided in some of our sales arrangements represent an embedded derivative, with the initial value accounted for as a reduction in product revenue and any changes, reevaluated quarterly, in the fair market value of the derivative recorded in gain (loss) on revaluation of embedded derivatives. We recognized an unrealized loss of $0.5 million and a gain of $0.3 million attributable to the change in fair value for the three months ended March 31, 2021 and 2020, respectively. These gains and losses are included within loss on revaluation of embedded derivatives in the condensed consolidated statements of operations. The fair value of these derivatives $6.0 million and $5.9 million as of March 31, 2021 and 2020, respectively.


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9. Leases
Facilities, Office Buildings, and Vehicles
We lease most of our facilities, office buildings and vehicles under operating leases that expire at various dates through February 2036. We lease various manufacturing facilities in Sunnyvale, Fremont, and Mountain View, California. Our lease for our Sunnyvale manufacturing facilities was entered into in April 2005 and expired in December 2020. In January 2021, we extended this lease to December 2023. In June 2020 and in March 2021, we signed leases in Fremont that will expire in 2027 and 2036, respectively, to replace our manufacturing facilities in Sunnyvale and Mountain View. The existing plants together comprise approximately 534,894 square feet of space. We lease additional office space as field offices in the United States and around the world including in Dubai, India, the Republic of Korea, China and Taiwan.

Certain of these arrangements have free rent periods or escalating rent payment provisions. We recognize lease cost under such arrangements on a straight-line basis over the life of the leases. During the quarters ended March 31, 2021 and 2020, rent expense for all occupied facilities was $3.1 million and $2.1 million, respectively.

Our leases have remaining lease terms ranging from less than 1 year to 15 years, some of which include options to extend the leases. The lease term is the non-cancelable period of the lease and includes options to extend or terminate the lease when it is reasonably certain that an option will be exercised.

Operating and financing lease right-of-use assets and lease liabilities for facilities, office buildings and vehicles as of March 31, 2021 and December 31, 2020 were as follows (in thousands):
March 31,
2021
December 31, 2020
Assets:
Operating lease right-of-use assets, net 1, 2
$55,165 $35,621 
Financing lease right-of-use assets, net 3, 4
1,685 334
Total$56,850 $35,955 
Liabilities:
Current:
Operating lease liabilities$7,219 $7,899 
Financing lease liabilities 5
544 74 
Total current lease liabilities7,763 7,973 
Non-current:
Operating lease liabilities61,714 41,849 
Financing lease liabilities 6
1,184 267 
Total non-current lease liabilities62,898 42,116 
Total lease liabilities$70,661 $50,089 
1 These assets primarily include leases for facilities, office buildings, and vehicles.
2 Net of accumulated amortization.
3 These assets primarily include leases for vehicles.
4 Included in property, plant and equipment, net, in the condensed consolidated balance sheets, net of accumulated amortization.
5 Included in accrued expenses and other current liabilities in the condensed consolidated balance sheets.
6 Included in other long-term liabilities in the condensed consolidated balance sheets.


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The components of our facilities, office buildings and vehicles' lease costs for the three months ended March 31, 2021 and 2020 were as follows (in thousands):
Three Months Ended March 31,
20212020
Operating lease costs$3,018 $2,069 
Financing lease costs:
Amortization of financing lease right-of-use assets7084
Interest expense for financing lease liabilities1992
Total financing lease costs9076
Short-term lease costs168139
Total lease costs$4,093 $2,214 

Weighted average remaining lease terms and discount rates for our facilities, office buildings and vehicles as of March 31, 2021 and December 31, 2020 were as follows:
March 31,
2021
December 31, 2020
Remaining lease term (years):
Operating leases8.5 years6.7 years
Finance leases3.3 years4.2 years
Discount rate:
Operating leases9.2 %8.7 %
Finance leases8.2 %7.0 %

Future lease payments under lease agreements for our facilities, office buildings, and vehicles as of March 31, 2021, were as follows (in thousands):
Operating LeasesFinance Leases
Remainder of 2021$10,324 $538 
202211,397 481 
202312,184 476 
202410,762 363 
202510,995 104 
Thereafter50,098 18 
Total minimum lease payments105,760 1,980 
Less: amounts representing interest or imputed interest(36,826)(253)
Present value of lease liabilities$68,934 $1,727 


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Managed Services and Portfolio Financings Through PPA Entities
Certain of our customers enter into Managed Services or Portfolio Financings through a PPA Entity to finance their lease of Bloom Energy Servers. Prior to our adoption of ASC 842 as of January 1, 2020, such arrangements with customers that qualified as leases were classified as either sales-type leases or operating leases. For all pre-existing Managed Services arrangements or Portfolio Financings through PPA Entities, we have carried over the accounting classifications for those transactions and continue to account for such transactions as either sales-type leases or operating leases under ASC 842. Customer arrangements under Managed Services and Portfolio Financings through PPA Entities entered into after January 1, 2021 do not contain a lease under ASC 842 and are accounted for under ASC 606 as revenue arrangements.
Lease agreements under our Managed Services arrangements and Portfolio Financings through PPA Entities include non-cancellable lease terms, during which terms the majority of our investment in Energy Servers under lease are typically recovered. We mitigate remaining residual value risk of its Energy Servers through its provision of maintenance on the Energy Servers during the lease term and through insurance whose proceeds are payable in the event of theft, loss, damage, or destruction.

Managed Services Financings - Our Managed Services arrangements with financiers are accounted for as financing transactions. Payments received from the financier are recognized as financing obligations in our condensed consolidated balance sheets. These financing obligations are included in each agreements' contract value and are recognized as short-term or long-term liabilities based on the estimated payment dates. The lease agreements expire on various dates through 2034 and there was no recorded rent expense for the three months ended March 31, 2021 and 2020.
At March 31, 2021, future lease payments under the Managed Services financing obligations and the sublease payments from the customers under the related operating leases were as follows (in thousands):
Financing Obligations
Sublease Payments1
Remainder of 2021$30,901 $(30,901)
202242,067 (42,067)
202343,004 (43,004)
202440,901 (40,901)
202539,859 (39,859)
Thereafter88,742 (88,742)
Total lease payments285,474 $(285,474)
Less: imputed interest(167,747) 
Total lease obligations117,727  
Less: current obligations(13,330) 
Long-term lease obligations$104,397  
1 Sublease Payments primarily represents the fees received by the bank from our customer for the electricity generated by our Energy Servers leased under our Managed Services and other similar arrangements, which also pay down our financing obligation to the bank.
The long-term financing obligations, as reflected in our condensed consolidated balance sheets, were $461.5 million and $460.0 million as of March 31, 2021 and December 31, 2020, respectively. The difference between these obligations and the principal obligations in the table above will be offset against the carrying value of the related Energy Servers at the end of the lease and the remainder recognized as a gain at that point.
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Portfolio Financings through PPA Entities - Customer arrangements entered into prior to January 1, 2020 under Portfolio Financing arrangements through a PPA Entity that qualified as leases are accounted for as either sales-type leases or operating leases. Since January 1, 2020, we have not entered into any new PPAs with customers under such arrangements.
The components of our aggregate net investment in sales-type leases under our Portfolio Financings through PPA entities consisted of the following (in thousands):
March 31, 2021December 31, 2020
Lease payment receivables, net1
$48,505 $49,806 
Estimated residual value of leased assets (unguaranteed)890 890 
Net investment in sales-type leases49,395 50,696 
Less: current portion(5,515)(5,428)
Non-current portion of net investment in sales-type leases$43,880 $45,268 
1 Net of current estimated credit losses of approximately $0.1 million and $0.1 million as of March 31, 2021 and December 31, 2020, respectively.
As of March 31, 2021, the future scheduled customer payments from sales-type leases were as follows (in thousands):
Future minimum lease payments
Remainder of 2021$4,399 
20226,110 
20236,435 
20246,797 
20257,125 
Thereafter19,176 
Total undiscounted cash flows50,042 
Less: imputed interest(1,486)
Present value of lease payments1
$48,556 
1 Amount comprises a current and long-term portion of lease receivables of $5.5 million and $43.9 million, respectively, after giving effect to a $0.1 million current expected credit loss reserve on the long-term portion, which is reflected as a component of the net investment in sales-type leases presented in our condensed consolidated statement of financial position as customer financing receivables.
Future estimated operating lease payments we expect to receive from Portfolio Financing arrangements through PPA Entities as of March 31, 2021, were as follows (in thousands):
Operating Leases
Remainder of 2021$32,655 
202244,258 
202345,345 
202446,590 
202547,612 
Thereafter264,207 
Total lease payments$480,667 

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10. Stock-Based Compensation and Employee Benefit Plans
Share-based grants are designed to reward employees for their long-term contributions to us and provide incentives for them to remain with us.
2002 Stock Plan
As of March 31, 2021, options to purchase 557,148 shares of Class B common stock were outstanding with a weighted average exercise price of $23.75 per share. The 2002 Stock Plan has been canceled; however, it continues to govern outstanding grants under the 2002 Stock Plan.
2012 Equity Incentive Plan
As of March 31, 2021, stock options to purchase 7,797,591 shares of Class B common stock were outstanding with a weighted average exercise price of $27.24 per share and no shares were available for future grant. As of March 31, 2021, we had outstanding RSUs that may be settled for 71,000 shares of Class B common stock under the plan. The 2012 Equity Incentive Plan has been canceled; however, it continues to govern outstanding grants under the 2012 Equity Incentive Plan.
2018 Equity Incentive Plan
As of March 31, 2021, stock options to purchase 4,691,844 shares of Class A common stock were outstanding with a weighted average exercise price of $9.43 per share and 7,794,217 shares of outstanding RSUs that may be settled for Class A common stock which were granted pursuant to the 2018 Equity Incentive Plan ("2018 Plan"). As of March 31, 2021, we had 25,855,075 shares reserved for issuance under the 2018 Plan.
2018 Employee Stock Purchase Plan
As of March 31, 2021, we had 3,512,465 shares reserved for future issuance under the 2018 Employee Stock Purchase Plan ("2018 ESPP"),
Stock-Based Compensation Expense
The following table summarizes the components of stock-based compensation expense in the condensed consolidated statements of operations (in thousands):
 Three Months Ended
March 31,
 20212020
Cost of revenue$2,999 $5,507 
Research and development4,908 6,096 
Sales and marketing4,085 3,890 
General and administrative5,218 7,526 
$17,210 $23,019 
During the three months ended March 31, 2021 and 2020, we capitalized $0.8 million and $1.2 million, of stock-based compensation cost, respectively, into inventory and property, plant and equipment.
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Stock Option and Stock Award Activity
The following table summarizes the stock option activity under our stock plans during the reporting period:
 Outstanding Options
 Number of
Shares
Weighted
Average
Exercise
Price
Remaining
Contractual
Life (Years)
Aggregate
Intrinsic
Value
   (in thousands)
Balances at December 31, 202015,354,271 $21.27 6.0$129,855 
Exercised(1,978,717)26.90 
Cancelled(328,971)10.64 
Balances at March 31, 202113,046,583 20.69 6.0106,497 
Vested and expected to vest at March 31, 202112,772,269 20.92 6.0101,777 
Exercisable at March 31, 20218,755,992 25.52 5.036,250 

Stock Options - During the three months ended March 31, 2021 and 2020, we recognized $4.0 million and $5.6 million of stock-based compensation costs for stock options, respectively. We did 0t grant options in the three months ended March 31, 2021 and 2020.
As of March 31, 2021 and 2020, we had unrecognized compensation costs related to unvested stock options of $16.8 million and $36.3 million, respectively. This cost is expected to be recognized over the remaining weighted-average period of 1.6 years and 2.4 years, respectively. Cash received from stock options exercised totaled $53.2 million and $0.7 million for the three months ended March 31, 2021 and 2020, respectively.
A summary of our stock awards activity and related information is as follows:
Number of
Awards
Outstanding
Weighted
Average Grant
Date Fair
Value
Unvested Balance at December 31, 20206,418,788 $13.71 
Granted2,897,260 29.59 
Vested(1,140,502)18.39 
Forfeited(310,328)11.37 
Unvested Balance at March 31, 20217,865,218 18.97 
Stock Awards - The estimated fair value of restricted stock units ("RSUs ") and performance stock units ("PSUs") is based on the fair value of our Class A common stock on the date of grant. For the three months ended March 31, 2021 and 2020, we recognized $10.7 million and $13.2 million of stock-based compensation costs for stock awards, respectively.
As of March 31, 2021 and 2020, we had $126.2 million and $37.6 million of unrecognized stock-based compensation cost related to unvested stock awards, expected to be recognized over a weighted average period of 2.4 years and 1.3 years, respectively.
During 2020 and 2021, we granted PSUs to certain executive officers and employees that only vest upon the achievement of certain specific financial or operational performance criteria. Stock-based compensation costs associated with these PSUs is recognized over the service period as we evaluate the probability of the achievement of the performance conditions.
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The following table presents the stock activity and the total number of shares available for grant under our stock plans as of March 31, 2021:
 Plan Shares Available
for Grant
  
Balances at December 31, 202020,233,754 
Added to plan7,675,984 
Granted(2,628,268)
Exercised
Cancelled639,299 
Expired(65,694)
Balances at March 31, 202125,855,075 
2018 Employee Stock Purchase Plan
During the three months ended March 31, 2021 and 2020, we recognized $1.1 million and $2.9 million of stock-based compensation costs for the 2018 ESPP, respectively. We issued 977,508 shares in the three months ended March 31, 2021. During the three months ended March 31, 2021, we added an additional 1,902,572 shares and there were 3,512,465 shares available for issuance as of March 31, 2021.
As of March 31, 2021 and 2020, we had $1.2 million and $5.5 million of unrecognized stock-based compensation costs, expected to be recognized over a weighted average period of 0.5 years and 0.8 years, respectively.
We used the following weighted-average assumptions in applying the Black-Scholes valuation model for determination of the 2018 ESPP share valuation:
Three Months Ended
March 31,
20212020
Risk-free interest rate0.06% - 0.13%1.51%
Expected term (years)0.5 - 2.00.5 - 2.0
Expected dividend yield00
Expected volatility95.0% - 109.0%61.0%
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11. Portfolio Financings
Overview

We have developed three financing options that enable customers' use of the Energy Servers through third-party ownership financing arrangements. For additional information on these financing options, see our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.
PPA Entities' Activities Summary
The table below shows the details of the three Investment Company VIEs that were active during the three months ended March 31, 2021 and their cumulative activities from inception to the periods indicated (dollars in thousands):
PPA IIIaPPA IVPPA V
Overview:
Maximum size of installation (in megawatts)102140
Installed size (in megawatts)101937
Term of power purchase agreements (in years)151515
First system installedFeb-13Sep-14Jun-15
Last system installedJun-14Mar-16Dec-16
Income (loss) and tax benefits allocation to Equity Investor99%90%99%
Cash allocation to Equity Investor99%90%90%
Income (loss), tax and cash allocations to Equity Investor after the flip date5%No flipNo flip
Equity Investor 1
US BankExelon CorporationExelon Corporation
Put option date 2
1st anniversary of flip pointN/AN/A
Company cash contributions$32,223 $11,669 $27,932 
Company non-cash contributions 3
$8,655 $$
Equity Investor cash contributions$36,967 $84,782 $227,344 
Debt financing$44,968 $99,000 $131,237 
Activity as of March 31, 2021:
Distributions to Equity Investor$4,864 $10,922 $26,601 
Debt repayment—principal$11,575 $22,075 $19,363 
Activity as of December 31, 2020:
Distributions to Equity Investor$4,847 $8,852 $24,809 
Debt repayment—principal$10,513 $21,163 $16,475 
1 Investor name represents ultimate parent of subsidiary financing the project.
2 Investor right on the certain date, upon giving us advance written notice, to sell the membership interests to us or resign or withdraw from the investment partnership.
3 Non-cash contributions consisted of warrants that were issued by us to respective lenders to each PPA Entity, as required by such entity’s credit agreements. The corresponding values are amortized using the effective interest method over the debt term.
The noncontrolling interests in PPA IIIa are redeemable as a result of the put option held by the Equity Investors as of March 31, 2021 and 2020. At March 31, 2021 and 2020, the carrying value of redeemable noncontrolling interests of $0.4 million and $0.4 million, respectively, exceeded the maximum redemption value.
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PPA Entities’ Aggregate Assets and Liabilities
Generally, the assets of an Operating Company owned by an Investment Company can be used to settle only the Operating Company obligations, and the Operating Company creditors do not have recourse to us. The following are the aggregate carrying values of our VIEs' assets and liabilities in our condensed consolidated balance sheets, after eliminations of intercompany transactions and balances, including each of the PPA Entities in the PPA IIIa transaction, the PPA IV transaction, and the PPA V transaction (in thousands):
 March 31,
2021
December 31, 2020
   
Assets
Current assets:
Cash and cash equivalents$856 $1,421 
Restricted cash1,686 4,698 
Accounts receivable4,359 4,420 
Customer financing receivable5,515 5,428 
Prepaid expenses and other current assets1,822 3,048 
Total current assets14,238 19,015 
Property and equipment, net246,216 252,020 
Customer financing receivable, non-current43,880 45,268 
Restricted cash, non-current15,367 15,320 
Other long-term assets38 37 
Total assets$319,739 $331,660 
Liabilities
Current liabilities:
Accrued expenses and other current liabilities$14,587 $19,510 
Deferred revenue and customer deposits662 662 
Non-recourse debt118,468 120,846 
Total current liabilities133,717 141,018 
Deferred revenue and customer deposits, non-current5,909 6,072 
Non-recourse debt, non-current99,942 102,045 
Total liabilities$239,568 $249,135 
As of January 1, 2020, the flip date, we are the majority owner shareholder in PPA IIIa receiving 95% of all cash distributions and profits and losses. In addition, we consolidated each PPA Entity as VIEs in the PPA IV transaction and PPA V transaction, as we remain the minority shareholder in each of these transactions but have determined that we are the primary beneficiary of these VIEs. These PPA Entities contain debt that is non-recourse to us and own Energy Server assets for which we do not have title.
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We believe that by presenting assets and liabilities separate from the PPA Entities, we provide a better view of the true operations of our core business. The table below provides detail into the assets and liabilities of Bloom Energy separate from the PPA Entities. The table provides our stand-alone assets and liabilities, those of the PPA Entities combined, and our consolidated balances as of March 31, 2021 and December 31, 2020 (in thousands):
 March 31, 2021December 31, 2020
 Bloom EnergyPPA EntitiesConsolidatedBloom EnergyPPA EntitiesConsolidated
Assets
Current assets$570,234 $14,238 $584,472 $599,589 $19,015 $618,604 
Long-term assets561,289 305,501 866,790 523,138 312,645 835,783 
Total assets$1,131,523 $319,739 $1,451,262 $1,122,727 $331,660 $1,454,387 
Liabilities
Current liabilities$235,591 $15,249 $250,840 $295,359 $20,172 $315,531 
Current portion of debt118,468 118,468 120,846 120,846 
Long-term liabilities621,612 5,909 627,521 600,489 6,072 606,561 
Long-term portion of debt290,089 99,942 390,031 168,008 102,045 270,053 
Total liabilities$1,147,292 $239,568 $1,386,860 $1,063,856 $249,135 $1,312,991 


12. Related Party Transactions
Our operations include the following related party transactions (in thousands):
 Three Months Ended
March 31,
 20212020
Total revenue from related parties$770 $1,049 
Interest expense to related parties1,366 
Bloom Energy Japan Limited
In May 2013, we entered into a joint venture with Softbank Corp., which is accounted for as an equity method investment. Under this arrangement, we sell Energy Servers and provide maintenance services to the joint venture. For the three months ended March 31, 2021 and 2020, we recognized related party total revenue of $0.8 million and $1.0 million, respectively. Accounts receivable from this joint venture was $0.4 million as of March 31, 2021.
SK Engineering & Construction Co., Ltd Joint Venture
In September 2019, we entered into a joint venture agreement with SK E&C to establish a light-assembly facility in the Republic of Korea for sales of certain portions of our Energy Server for the stationary utility and commercial and industrial market in the Republic of Korea. The joint venture is majority controlled and managed by us and is accounted for as a consolidated subsidiary. For the three months ended March 31, 2021 and 2020, we did not recognize related party revenue and we had 0 outstanding accounts receivable from this joint venture.
Debt to Related Parties
We had no debt or convertible notes from investors considered to be related parties as of March 31, 2021 and December 31, 2020.
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13. Commitments and Contingencies
Commitments
Purchase Commitments with Suppliers and Contract Manufacturers - In order to reduce manufacturing lead-times and to ensure an adequate supply of inventories, we have agreements with our component suppliers and contract manufacturers to allow long lead-time component inventory procurement based on a rolling production forecast. We are contractually obligated to purchase long lead-time component inventory procured by certain manufacturers in accordance with our forecasts. We can generally give notice of order cancellation at least 90 days prior to the delivery date. However, we issue purchase orders to our component suppliers and third-party manufacturers that may not be cancellable. As of March 31, 2021 and December 31, 2020, we had no material open purchase orders with our component suppliers and third-party manufacturers that are not cancellable.
Portfolio Financings Performance Guarantees - We guarantee the performance of Energy Servers at certain levels of output and efficiency to its customers over the contractual term. The PPA Entities monitor the need for any accruals arising from such guaranties, which are calculated as the difference between committed and actual power output or between natural gas consumption at warranted efficiency levels and actual consumption, multiplied by the contractual rates with the customer. Amounts payable under these guaranties are accrued in periods when the guaranties are not met and are recorded in cost of service revenue in the condensed consolidated statements of operations. We paid $0.1 million and $5.7 million for the three months ended March 31, 2021 and 2020, respectively.
Letters of Credit - In 2019, pursuant to the PPA II upgrade of Energy Servers, we agreed to indemnify our financing partner for losses that may be incurred in the event of certain regulatory, legal or legislative development and established a cash-collateralized LC facility for this purpose. As of March 31, 2021, the balance of this cash-collateralized LC was $108.7 million, of which $28.2 million and $80.5 million is recognized as short-term and long-term restricted cash, respectively.
Pledged Funds - In 2019, pursuant to the PPA IIIb upgrade of Energy Servers, we have restricted cash of $13.3 million, which has been pledged for a seven-year period to secure our operations and maintenance obligations with respect to the totality of our obligations to the financier. All or a portion of such funds would be released if we meet certain credit rating and/or market capitalization milestones prior to the end of the pledge period. If we do not meet the required criteria within the first five-year period, the funds would still be released to us over the following two years as long as the Energy Servers continue to perform in compliance with our warranty obligations.
Contingencies
Indemnification Agreements - We enter into standard indemnification agreements with our customers and certain other business partners in the ordinary course of business. Our exposure under these agreements is unknown because it involves future claims that may be made against us but have not yet been made. To date, we have not paid any claims or been required to defend any action related to our indemnification obligations. However, we may record charges in the future as a result of these indemnification obligations.
Delaware Economic Development Authority - In March 2012, we entered into an agreement with the Delaware Economic Development Authority to provide a grant of $16.5 million to us as an incentive to establish a new manufacturing facility in Delaware and to provide employment for full time workers at the facility over a certain period of time. The grant contains two types of milestones that we must complete to retain the entire amount of the grant proceeds. The first milestone was to provide employment for 900 full time workers in Delaware by the end of the first recapture period of September 30, 2017. The second milestone was to pay these full-time workers a cumulative total of $108.0 million in compensation by September 30, 2017. There are two additional recapture periods at which time we must continue to employ 900 full time workers and the cumulative total compensation paid by us is required to be at least $324.0 million by September 30, 2023. As of March 31, 2021, we had 462 full time workers in Delaware and paid $162.8 million in cumulative compensation. As of December 31, 2020, we had 424 full time workers in Delaware and paid $152.2 million in cumulative compensation. We have so far received $12.0 million of the grant, which is contingent upon meeting the milestones through September 30, 2023. In the event that we do not meet the milestones, we may have to repay the Delaware Economic Development Authority, up to $1.6 million on September 30, 2021 and up to an additional $2.5 million on September 30, 2023. We repaid $1.5 million of the grant in 2017, and no additional amounts have been repaid since then. As of March 31, 2021, we have recorded $1.3 million in current liabilities and $9.2 million in other long-term liabilities for potential future repayments of this grant.
Investment Tax Credits - Our Energy Servers are eligible for federal ITCs that accrued to qualified property under Internal Revenue Code Section 48 when placed into service. However, the ITC program has operational criteria that extend for five years. If the energy property is disposed of or otherwise ceases to be qualified investment credit property before the close
of the five-year recapture period is fulfilled, it could result in a partial reduction of the incentives. Energy Servers are purchased by the PPA Entities, other financial sponsors, or customers and, therefore, these parties bear the risk of repayment if the assets placed in service do not meet the ITC operational criteria in the future although in certain limited circumstances we do provide indemnification for such risk.
Legal Matters - We are involved in various legal proceedings that arise in the ordinary course of business. We review all legal matters at least quarterly and assess whether an accrual for loss contingencies needs to be recorded. We record an accrual for loss contingencies when management believes that it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Legal matters are subject to uncertainties and are inherently unpredictable, so the actual liability in any such matters may be materially different from our estimates. If an unfavorable resolution were to occur, there exists the possibility of a material adverse impact on our consolidated financial condition, results of operations or cash flows for the period in which the resolution occurs or on future periods.
In July 2018, two former executives of Advanced Equities, Inc., Keith Daubenspeck and Dwight Badger, filed a statement of claim with the American Arbitration Association in Santa Clara, CA, against us, Kleiner Perkins, Caufield & Byers, LLC (“KPCB”), New Enterprise Associates, LLC (“NEA”) and affiliated entities of both KPCB and NEA seeking to compel arbitration and alleging a breach of a confidential agreement executed between the parties on June 27, 2014 (the “Confidential Agreement”). On May 7, 2019, KPCB and NEA were dismissed with prejudice. On June 15, 2019, a second amended statement of claim was filed against us alleging securities fraud, fraudulent inducement, a breach of the Confidential Agreement, and violation of the California unfair competition law. On July 16, 2019, we filed our answering statement and affirmative defenses. On September 27, 2019, we filed a motion to dismiss the statement of claim. On March 24, 2020, the Tribunal denied our motion to dismiss in part, and ordered that claimant’s relief is limited to rescission of the Confidential Agreement or remedies consistent with rescission, and not expectation damages. On September 14, 2020, the Tribunal issued an interim order dismissing the claimant’s remaining claims and requesting further briefing on the issue of prevailing party. On November 10, 2020, the Tribunal issued an order declaring us the prevailing party and requesting a motion for award of attorney’s fees. On March 17, 2021, we received the final award for attorneys fees and costs. On March 26, 2021, we filed a petition in the Northern District of California to confirm the award.
In June 2019, Messrs. Daubenspeck and Badger filed a complaint against our Chief Executive Officer ("CEO") and our former Chief Financial Officer ("CFO") in the United States District Court for the Northern District of Illinois asserting nearly identical claims as those in the pending arbitration discussed above. The lawsuit was stayed pending the outcome of the arbitration. The stay was lifted on October 20, 2020. On March 19, 2021 we filed a motion to dismiss the case on several grounds. On May 3, 2021, plaintiffs filed a motion to stay the lawsuit pending the outcome of the petition to confirm the arbitration award in the Northern District of California. We believe the complaint to be without merit and that the issues were previously tried and dismissed in the arbitration. We are unable to estimate any range of reasonably possible losses.
In March 2019, the Lincolnshire Police Pension Fund filed a class action complaint in the Superior Court of the State of California, County of Santa Clara, against us, certain members of our senior management, certain of our directors and the underwriters in our July 25, 2018 IPO alleging violations under Sections 11 and 15 of the Securities Act of 1933, as amended (the "Securities Act"), for alleged misleading statements or omissions in our Registration Statement on Form S-1 filed with the SEC in connection with the IPO. Two related class action cases were subsequently filed in the Santa Clara County Superior Court against the same defendants containing the same allegations; Rodriquez vs Bloom Energy et al. was filed on April 22, 2019 and Evans vs Bloom Energy et al. was filed on May 7, 2019. These cases have been consolidated. Plaintiffs' consolidated amended complaint was filed with the court on September 12, 2019. On October 4, 2019, defendants moved to stay the lawsuit pending the federal district court action discussed below. On December 7, 2019, the Superior Court issued an order staying the action through resolution of the parallel federal litigation mentioned below. We believe the complaint to be without merit and we intend to defend this action vigorously. We are unable to estimate any range of reasonably possible losses.
In May 2019, Elissa Roberts filed a class action complaint in the federal district court for the Northern District of California against us, certain members of our senior management team, and certain of our directors alleging violations under Section 11 and 15 of the Securities Act for alleged misleading statements or omissions in our Registration Statement on Form S-1 filed with the SEC in connection with the IPO. On September 3, 2019, James Hunt was appointed as lead plaintiff and Levi & Korsinsky was appointed as plaintiff’s counsel. On November 4, 2019, plaintiffs filed an amended complaint adding the underwriters in the IPO, claims under Sections 10b and 20a of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and extending the class period to September 16, 2019. On April 21, 2020, plaintiffs filed a second amended complaint adding claims under the Securities Act. The second amended complaint also adds allegations pertaining to the restatement and, as to claims under the Exchange Act, extends the class period through February 12, 2020. On July 1, 2020, we filed a motion to dismiss the second amended complaint and are waiting for a ruling on that motion. We believe the complaint
to be without merit and we intend to defend this action vigorously. We are unable to predict the outcome of this litigation at this time and accordingly are not able to estimate any range of reasonably possible losses.
In September 2019, we received a books and records demand from purported stockholder Dennis Jacob (“Jacob Demand”). The Jacob Demand cites allegations from the September 17, 2019 report prepared by admitted short seller Hindenburg Research. In November 2019, we received a substantially similar books and records demand from the same law firm on behalf of purported stockholder Michael Bolouri (“Bolouri Demand” and, together with the Jacob Demand, the “Demands”). On January 13, 2020, Messrs. Jacob and Bolouri filed a complaint in the Delaware Court of Chancery to enforce the Demands in the matter styled Jacob, et al. v. Bloom Energy Corp., C.A. No. 2020-0023-JRS. On March 9, 2020, Messrs. Jacob and Bolouri filed an amended complaint in the Delaware Court of Chancery to add allegations regarding the restatement. The court held a one-day trial on December 7, 2020. On February 25, 2021, the Delaware Court of Chancery issued a decision rejecting the Bolouri Demand but granting in part the Jacob Demand allowing limited access to certain books and records pertaining to the allegations made in the Hindenburg Research Report. On March 29, 2021, the Court of Chancery entered a Final Order and Judgment regarding the required production of documents. On April 28, 2021, we produced documents responsive to the Final Order and Judgment to Mr. Jacob. We are unable to estimate any range of reasonably possible losses.
In March 2020, Francisco Sanchez filed a class action complaint in Santa Clara County Superior Court against us alleging certain wage and hour violations under the California Labor Code and Industrial Welfare Commission Wage Orders and that we engaged in unfair business practices under the California Business and Professions Code, and in July 2020 he amended his complaint to add claims under the California Labor Code Private Attorneys General Act. On November 30, 2020, we filed a motion to compel arbitration and the motion was to be heard on March 5, 2021. On February 24, 2021, Mr.Sanchez dismissed the individual and class action claims without prejudice, leaving one cause of action for enforcement of the Private Attorney Generals Act. In April 2021, an amended complaint reflecting these changes was filed with the Santa Clara Superior Court. Given that the case is still in its early stages, we are unable to estimate any range of reasonably possible losses.
14. Segment Information
Our chief operating decision makers ("CODMs"), the CEO and the CFO, review financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance. The CODMs allocate resources and make operational decisions based on direct involvement with our operations and product development efforts. We are managed under a functionally-based organizational structure with the head of each function reporting to the CEO. The CODMs assess performance, including incentive compensation, based upon consolidated operations performance and financial results on a consolidated basis. As such, we have a single operating unit structure and are a single reporting segment.
15. Income Taxes
For the three months ended March 31, 2021 and 2020, we recorded provisions for income taxes of $0.1 million and $0.1 million on pre-tax losses of $29.7 million and $81.5 million for effective tax rates of (0.4)% and (0.2)%, respectively.
The effective tax rate for the three months ended March 31, 2021 and 2020 is lower than the statutory federal tax rate primarily due to a full valuation allowance against U.S. deferred tax assets.
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16. Net Loss per Share Available to Common Stockholders
Net loss per share (basic) available to common stockholders is calculated by dividing net loss available to common stockholders by the weighted-average shares of common stock outstanding for the period. Net loss per share is the same for each class of common stock as they are entitled to the same liquidation and dividend rights. As a result, net loss per share (basic) and net loss per share (diluted) available to common stockholders are the same for both Class A and Class B common stock and are combined for presentation.
Net loss per share (diluted) is computed by using the if-converted method when calculating the potentially dilutive effect, if any, of our convertible notes. Net loss per share (diluted) available to common stockholders is then calculated by dividing the resulting adjusted net loss available to common stockholders by the combined weighted-average number of fully diluted common shares outstanding. There were no adjustments to net loss available to common stockholders (diluted). Equally, there were no adjustments to the weighted average number of outstanding shares of common stock (basic) in arriving at the weighted average number of outstanding shares (diluted), as such adjustments would have been antidilutive.
The following table sets forth the computation of our net loss per share available to common stockholders, basic and diluted (in thousands, except per share amounts):
Three Months Ended
March 31,
 20212020
   
Numerator:
Net loss available to Class A and Class B common stockholders$(24,889)$(75,949)
Denominator:
Weighted average shares of common stock, basic and diluted170,745 123,763 
Net loss per share available to Class A and Class B common stockholders, basic and diluted$(0.15)$(0.61)

The following common stock equivalents (in thousands) were excluded from the computation of our net loss per share available to common stockholders, diluted, for the three months presented as their inclusion would have been antidilutive:
 Three Months Ended
March 31,
 20212020
   
Convertible notes$14,187 $40,723 
Stock options and awards8,625 4,993 
$22,812 $45,716 


17. Subsequent Events
There have been no subsequent events that occurred during the period subsequent to the date of these condensed consolidated financial statements that would require adjustment to our disclosure in the condensed consolidated financial statements as presented.

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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on current expectations, estimates, and projections about our industry, management’s beliefs, and certain assumptions made by management. For example, forward-looking statements include, but are not limited to, our expectations regarding our products, services, business strategies, and the sufficiency of our cash and our liquidity. Forward-looking statements can also be identified by words such as “future,” “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “will,” “would,” “could,” “can,” “may,” and similar terms. These statements are based on the beliefs and assumptions of our management based on information currently available to management at the time they are made. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” included in Part II, Item 1A of this Quarterly Report on Form 10-Q and in our other filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 filed on February 26, 2021. Such forward-looking statements speak only as of the date of this report. We disclaim any obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements. You should review these risk factors for a more complete understanding of the risks associated with an investment in our securities. The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q.
Overview
Description of Bloom Energy
We created the first large-scale, commercially viable solid oxide fuel-cell based power generation platform that provides clean and resilient power to businesses, essential services, and critical infrastructure. Our technology, invented in the United States, is the most advanced thermal electric generation technology on the market today. Our fuel-flexible Bloom Energy Servers can use biogas and hydrogen, in addition to natural gas, to create electricity at significantly higher efficiencies than traditional, combustion-based resources. In addition, our fuel cell technology can be used to create hydrogen, which is increasingly recognized as a critically important tool necessary for the full decarbonization of the energy economy. Our enterprise customers are among the largest multi-national corporations who are leaders in adopting new technologies. We also have strong relationships with some of the largest utility companies in the United States and the Republic of Korea.
We market and sell our Energy Servers primarily through our direct sales organization in the United States, and also have direct and indirect sales channels internationally. Recognizing that deploying our solutions requires a material financial commitment, we have developed a number of financing options to support sales of our Energy Servers to customers who lack the financial capability to purchase our Energy Servers directly, who prefer to finance the acquisition using third-party financing or who prefer to contract for our services on a pay-as-you-go model.
Our typical target commercial or industrial customer has historically been either an investment-grade entity or a customer with investment-grade attributes such as size, assets and revenue, liquidity, geographically diverse operations and general financial stability. We have recently expanded our product and financing options to the below-investment-grade customers and have also expanded internationally to target customers with deployments on a wholesale grid. Given that our customers are typically large institutions with multi-level decision making processes, we generally experience a lengthy sales process.
COVID-19 Pandemic
General
We continue to monitor and adjust as appropriate our operations in response to the COVID-19 pandemic. As a technology company that supplies resilient, reliable and clean energy, we have been able to conduct the majority of operations as an “essential business” in California and Delaware, where we manufacture and perform many of our R&D activities, as well as in other states and countries where we are installing or maintaining our Energy Servers, notwithstanding government “shelter in place” orders. Following CDC and local guidelines, during the first quarter of 2021 and at present, many of our employees continue to work from home unless they are directly supporting essential manufacturing production operations, installation
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work, service and maintenance activities and R&D. We have established protocols to minimize the risk of COVID-19 transmission within our facilities, including enhanced cleaning, and temperature screenings upon entry. In addition, all individuals entering our facilities are required to wear face coverings and our policy is to direct them not to enter if they have COVID-19-like symptoms. We follow CDC and local guidelines when notified of possible exposures. For more information regarding the risks posed to our company by the COVID-19 pandemic, refer to Part II, Item 1A, Risk Factors – Risks Related to Our Products and Manufacturing – Our business has been and will continue to be adversely affected by the COVID-19 pandemic.
Liquidity and Capital Resources
COVID-19 created disruptions throughout various aspects of our business as noted herein, but had a limited impact on our results of operation throughout 2020 and the three months ended March 31, 2021. This is in part due to the fact that throughout 2020, we were conservative with our working capital spend, maintaining as much flexibility as possible around the timing of taking and paying for inventory and manufacturing our product while managing potential changes or delays in installations. We also improved our liquidity in 2020 through the issuance of the $230.0 million aggregate principal amount of our 2.5% Green Convertible Senior Notes due 2025 (the "Green Notes") in August 2020, the conversion of our 10% Convertible Promissory Notes due December 2021 (the “10% Convertible Notes”) and our 10% Constellation Promissory Note to December 2021 (the “10% Constellation Note”), and the redemption of our 10% Senior Secured Notes due July 2024 (the “10% Notes”). We did increase our working capital spend in the first quarter of 2021. We entered into new leases to ensure we had sufficient manufacturing facilities to meet anticipated demand in 2022, including new product line expansion. In addition, we also increased our working capital spend and resources to expand into new geographies both domestically and internationally.
Although, we believe we have the sufficient capital for these activities over the next 12 months, we may enter the equity market for additional expansion capital. Please refer to Note 7 - Outstanding Loans and Security Agreements in Part I, Item 1, Financial Statements; and Part II, Item 1A, Risk Factors – Risks Related to Our Liquidity – Our substantial indebtedness, and restrictions imposed by the agreements governing our and our PPA Entities’ outstanding indebtedness, may limit our financial and operating activities and may adversely affect our ability to incur additional debt to fund future needs, and We may not be able to generate sufficient cash to meet our debt service obligations, for more information regarding the terms of and risks associated with our debt.
Sales

We have not seen any impact on our selling activity related to COVID-19 during the three months ended March 31, 2021.
Customer Financing

COVID-19 has resulted in a significant drop in the ability of many financiers (particularly financing institutions) to monetize tax credits. This is due to a drop in their taxable income stemming from losses due to the COVID-19 pandemic. We were able to obtain financing for our 2020 installations, but as of March 31, 2021, we were still in the process of securing financing for our 2021 installations. We are actively working with new sources of capital that could finance projects for our 2021 installations. We have experienced in the current environment an increase in the time needed to solidify new relationships. The travel restrictions and limited ability for financiers to conduct due diligence at our facilities has increased the timeline to reach closure with new financiers. In addition, our ability to obtain financing for our Energy Servers partly depends on the creditworthiness of our customers. Some of our customers’ credit ratings have recently fallen, which is impacting financing for their use of an Energy Server.

Our recent experience has been that financing parties have capital to deploy and are interested in financing our Energy Servers. However, with the limited availability of tax credits, the difficulty for new potential financing parties to conduct due diligence in light of the pandemic and the drop in credit rating of some customers, it is taking longer to secure financing than in the past. If we are unable to secure financing for our 2021 installations, our revenue, cash flow and liquidity will be materially impacted.
Installations and Maintenance of Energy Servers
Our installation and maintenance operations have been impacted by the COVID-19 pandemic in 2020 and these impacts continued during the three months ended March 31, 2021. Our installation projects have experienced delays and may continue
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to experience delays relating to, among other things, shortages in available parts and labor for design, installation and other work; the inability or delay in our ability to access customer facilities due to shutdowns or other restrictions; the decreased productivity of our general contractors, their sub-contractors, medium-voltage electrical gear suppliers, and the wide range of engineering and construction related specialist suppliers on whom we rely for successful and timely installations; the stoppage of work by gas and electric utilities on which we are critically dependent for hook ups; and the unavailability of necessary civil and utility inspections as well as the review of our permit submissions and issuance of permits by multiple authorities that have jurisdiction over our activities. Our installations completed during the three months ended March 31, 2021 were minimally impacted by these factors, but given our mitigation strategies, we were able to complete our planned installations.
As to maintenance, if we are delayed in or unable to perform scheduled or unscheduled maintenance, our previously-installed Energy Servers will likely experience adverse performance impacts including reduced output and/or efficiency, which could result in warranty and/or guaranty claims by our customers. Further, due to the nature of our Energy Servers, if we are unable to replace worn parts in accordance with our standard maintenance schedule, we may be subject to increased costs in the future. During the three months ended March 31, 2021, we experienced no delays in servicing our Energy Servers due to COVID-19.
Supply Chain
During 2020, we have experienced COVID-19 related delays from certain vendors and suppliers, which, in turn, could cause delays in the manufacturing and installation of our Energy Servers and adversely impact our cash flows and results of operations including revenue. We have a global supply chain and obtain components from Asia, Europe and India. In many cases, the components we obtain are jointly developed with our suppliers and unique to us, which makes it difficult to obtain and qualify alternative suppliers should our suppliers be impacted by COVID-19. During the three months ended March 31, 2021, we continued to experience supply chain disruptions due to COVID-19 with respect to logistics and container shortages. We put actions in place to mitigate the disruptions by booking alternate sea routes, creating virtual hubs and consolidating shipments coming from the same region.
If spikes in COVID-19 occur in regions in which our supply chain operates, which is currently happening in India, we could experience a delay in materials, which could in turn impact production and installations and our cash flow and results of operations, including revenue.
Manufacturing
As an essential business in both the states of California and Delaware, we have continued to manufacture Energy Servers, but have adopted strict measures to help keep our employees safe. These measures have decreased productivity to a limited extent, but our deployments, maintenance and installations have not yet been constrained by our current pace of manufacturing. As described above, we have established protocols to minimize the risk of COVID-19 transmission within our manufacturing facilities and follow CDC and local guidelines. We also instituted testing of individuals who come into our facilities. Even with these precautions, it is possible an asymptomatic individual could enter our facilities and transmit the virus to others. We have had positive tests and in such cases, we have followed CDC and local guidelines.
If we become aware of cases of COVID-19 among our employees, we notify those with whom the person is known to have been in contact, send the exposed employees home for at least 10 days and require all such employees to test negative before returning to work. Certain roles within our facilities involve greater mobility throughout our facilities and potential exposure to more employees. In the event an employee contracts COVID-19, or if we otherwise believe that a significant number of employees have been exposed and sent home, particularly in our manufacturing facilities, our production could be significantly impacted. Furthermore, since our manufacturing process requires tasks performed at both our California facility and Delaware facility, significant exposure at either facility would have a substantial impact on our overall production, and could adversely affect our cash flow and results of operations including revenue.
To date, COVID-19 has not impacted our production given the safety protocols we have put in place augmented by our ability to increase our shifts and obtain a contingent work force for some of the manufacturing activities. If COVID-19 materially impacts our supply chain or if we experience a significant COVID-19 outbreak that affects our manufacturing workforce, our production could be adversely impacted which could adversely impact our cash flow and results of operation, including revenue.
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Purchase and Lease Options
Overview
Initially, we only offered our Energy Servers on a direct purchase basis, in which the customer purchases the product directly from us. We learned that while interested in our Energy Servers, some customers lacked the interest or financial capability to purchase our Energy Servers directly. Some of these customers were not in a position to optimize the use of federal tax benefits like the federal Investment Tax Credit ("ITC") or accelerated tax depreciation.
In order to expand our offerings to those unable or those who prefer to not directly purchase our Energy Servers and/or who prefer to contract for our services on a pay-as-you-go model, we subsequently developed three financing options that enabled customers' use of the Energy Servers without a direct purchase through third-party ownership financing arrangements.
Under the Traditional Lease option, a customer may lease one or more Energy Servers from a financial institution that purchases such Energy Servers. In most cases, the financial institution completes its purchase from us immediately after commissioning. We both (i) facilitate this financing arrangement between the financial institution and the customer and (ii) provide ongoing operations and maintenance services for the Energy Servers (such arrangement, a “Traditional Lease”).
Alternatively, a customer may enter into one of two major types of service contracts with us for the purchase of electricity generated by the Energy Servers. The first type of services contract has a fixed monthly payment component that is required regardless of the Energy Servers’ performance, and in some cases also includes a variable payment based on the Energy Server's performance (a “Managed Services Agreement”). Managed Services Agreements are then financed pursuant to a sale-leaseback with a financial institution (a “Managed Services Financing”). The second type of services contract requires the customer to pay for each kilowatt-hour produced by the Energy Servers (a “Power Purchase Agreement” or "PPA"). PPAs have been financed through tax equity partnerships, acquisition financings, and direct sales to investors (each, a “Portfolio Financing”).
Our capacity to offer our Energy Servers through any of these financed arrangements depends in large part on the ability of the financing party or parties involved to optimize the federal tax benefits associated with a fuel cell, like the ITC or accelerated tax depreciation. Interest rate fluctuations may also impact the attractiveness of any financing offerings for our customers, and currency exchange fluctuations may also impact the attractiveness of international offerings. Each of these financings is limited by the creditworthiness of the customer. Additionally, the Traditional Lease and Managed Services Financing options, as with all leases, are also limited by the customer’s willingness to commit to making fixed payments regardless of the performance of our obligations under the customer agreement.
In each of our purchase options, we typically perform the functions of a project developer, including identifying end customers and financiers, leading the negotiations of the customer agreements and financing agreements, securing all necessary permitting and interconnections approvals, and overseeing the design and construction of the project up to and including commissioning the Energy Servers.
Warranties and Guaranties
We typically provide warranties and guaranties regarding our Energy Servers’ performance (efficiency and output) to both the customer and in the case of Portfolio Financings, the investor. We refer to a “performance warranty” as a commitment where the failure of the Energy Servers to satisfy the stated performance level obligates us to repair or replace the Energy Servers as necessary to improve performance. If we fail to complete such repair or replacement, or if repair or replacement is impossible, we may be obligated to repurchase the Energy Servers from the customer or financier. We refer to a “performance guaranty” as a commitment where the failure of the Energy Servers to satisfy the stated performance level obligates us to make a payment to compensate the beneficiary of such guaranty for the resulting increased cost or decreased benefits resulting from the failure to meet the guaranteed level. Our obligation to make payments under the performance guaranty is always contractually capped.
In most cases, we include the first year of performance warranties and guaranties in the sale price of the Energy Server. Typically, performance warranties and guaranties made for the benefit of the Customer are in the Managed Services Agreement or PPA, as the case may be. In a Portfolio Financing, the performance warranties and guaranties made for the benefit of the investors are in an operations and maintenance agreement ("O&M Agreement"). In a Traditional Lease or direct purchase option, the performance warranties and guaranties are in an extended maintenance service agreement.
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Direct Purchase
There are customers who purchase our Energy Servers directly pursuant to a fuel cell system supply and installation agreement. With a direct purchase, the first year of warranties and guaranties are typically included in the sale price of the Energy Server. In connection with the purchase of Energy Servers, the customers enter into an O&M Agreement that provide for certain performance warranties and guaranties. The O&M Agreement may either be (i) for a one-year period, subject to annual renewal at the customer’s option, under which our customers have historically almost always renewed the O&M Agreement for an additional year each year, or (ii) for a fixed term, typically 15 years.
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, 2021, our obligation to make payments for underperformance on the direct purchase projects was capped at an aggregate total of approximately $93.7 million (including payments both for low output and for low efficiency). As of March 31, 2021, our aggregate remaining potential liability under this cap was approximately $73.1 million.
Overview of Financing and Lease Options
The substantial majority of bookings made in recent periods have been Managed Services Agreements and PPAs. Each of our financing and lease options is described in further detail below.
Managed Services Financing
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Under our Managed Services Financing option, we enter into a Managed Services Agreement with a customer for a certain term. In exchange for the use of the Energy Server and its generated electricity, the customer makes a monthly payment. The monthly payment always includes a fixed monthly capacity-based payment, and in some cases also includes a performance-based payment based on the performance of the Energy Server. The fixed capacity-based payments made by the customer under the Managed Services Agreement are applied toward our obligation to pay down our periodic rent liability under a sale-leaseback transaction with an investor. The performance payment is transferred to us as compensation for operations and maintenance services and recognized as electricity revenue within the condensed consolidated statements of operations.
Under a Managed Services Financing, once we enter into a Managed Services Agreement with the customer, a financier is identified, we sell the Energy Server to such financier, as lessor, and the financier, as lessor, leases it back to us, as lessee, pursuant to a sale-leaseback transaction. The proceeds from the sale are recognized as a financing obligation within the condensed consolidated balance sheets. Any ongoing operations and maintenance service payments are scheduled in the Managed Services Agreement in the form of the performance-based payment described above. The financier typically pays the purchase price for an Energy Server contemplated by the Managed Services Agreement on or shortly after acceptance.
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The fixed capacity payments made by the customer under the Managed Services Agreement are applied towards our obligation to pay periodic rent under the sale-leaseback transaction. We assign all our rights to such fixed payments made by the customer to the financier, as lessor.
The duration of the master lease in a Managed Services Financing is currently between five and ten years.
Our Managed Services Agreements typically provide only for performance warranties of both the efficiency and output of the Energy Server, all of which are written in favor of the customer. These types of projects typically do not include guaranties above the warranty commitments, but in projects where the customer agreement includes a service payment for our operations and maintenance, that payment is typically proportionate to the output generated by the Energy Server(s) and our pricing assumes service revenues at the 95% output level. This means that our service revenues may be lower than expected if output is less than 95% and higher if output exceeds 95%. As of March 31, 2021, we had incurred no liabilities due to failure to repair or replace our Energy Servers pursuant to these performance warranties and the fleet of our Energy Servers deployed pursuant to the Managed Services Financings was performing at a lifetime average output of approximately 86%.
Portfolio Financings
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*Under a Portfolio Financing, pursuant to which we sell an operating company to an investor or tax-equity partnership, we have no equity in the purchaser, also referred to as Third-Party PPA.
A PPA is an agreement pursuant to which the owner of an Energy Server sells electricity to an end customer on a dollar-per-kilowatt-hour basis pursuant to a power purchase agreement. We have financed PPAs through two types of Portfolio Financings.
In one type of transaction, we finance a portfolio of PPAs pursuant to a tax equity partnership in which we hold a managing member interest (such partnership, a “PPA Entity”). We sell the portfolio of Energy Servers to a single member limited liability project company (an “Operating Company”). The Operating Company sells the electricity generated by the Energy Servers contemplated by the PPAs to the ultimate end customers. As these transactions include an equity investment by
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us in the PPA Entity for which we are the primary beneficiary and therefore consolidate the entities, we recognize revenue as the electricity is produced. Our future plans to raise capital no longer contemplate these types of transactions.
We also finance PPAs through a second type of Portfolio Financing pursuant to which we sell an entire Operating Company to an investor or tax equity partnership in which we do not have an equity interest (a “Third-Party PPA”). We recognize revenue on the sale of each Energy Server purchased by the Operating Company on acceptance. For further discussion, see Note 11 - Portfolio Financings in Part I, Item 1, Financial Statements.
When we finance a portfolio of Energy Servers and PPAs through a Portfolio Financing, we enter into a sale, engineering and procurement and construction agreement (“EPC Agreement”) and an O&M Agreement, in each case with the Operating Company that both is counter-party to the portfolio of PPAs and that will eventually own the Energy Servers. As counter-party to the portfolio of PPAs, the Operating Company, as owner of the Energy Servers, receives all customer payments generated under the PPAs, any ITC, all accelerated tax depreciation benefits, and any other available state or local benefits arising out of the ownership or operation of the Energy Servers, to the extent not already allocated to the end customer under the PPA.
The sales of our Energy Servers to the Operating Company in connection with a Portfolio Financing have many of the same terms and conditions as a direct sale. Payment of the purchase price is generally broken down into multiple installments, which may include payments prior to shipment, upon shipment or delivery of the Energy Server, and upon acceptance of the Energy Server. Acceptance typically occurs when the Energy Server is installed and running at full power as defined in the applicable EPC Agreement. A one-year service warranty is provided with the initial sale. After the expiration of the initial standard one-year warranty, the Operating Company has the option to extend our operations and maintenance services under the O&M Agreement on an annual basis at a price determined at the time of purchase of our Energy Server, which may be renewed annually for each Energy Server for up to 30 years. After the standard one-year warranty period, the Operating Company has almost always exercised the option to renew our operations and maintenance services under the O&M Agreement.
We typically provide performance warranties and guaranties related to output and efficiency or a combination of the two to the Operating Company under the O&M Agreement. We also backstop all of the Operating Company’s obligations under the portfolio of PPAs, including both the repair or replacement obligations pursuant to the performance warranties and any payment liabilities under the guaranties.
As of March 31, 2021, we had incurred no liabilities to investors in Portfolio Financings due to failure to repair or replace Energy Servers pursuant to these performance warranties. Our obligation to make payments for underperformance against the performance guaranties was capped at an aggregate total of approximately $114.3 million (including payments both for low output and for low efficiency) and our aggregate remaining potential liability under this cap was approximately $105.5 million.
Obligations to Operating Companies
In addition to our obligations to the end customers, our Portfolio Financings involve many obligations to the Operating Company that purchases our Energy Servers. These obligations are set forth in the applicable EPC Agreement and O&M Agreement, and may include some or all of the following obligations:
designing, manufacturing, and installing the Energy Servers, and selling such Energy Servers to the Operating Company;
obtaining all necessary permits and other governmental approvals necessary for the installation and operation of the Energy Servers, and maintaining such permits and approvals throughout the term of the EPC Agreements and O&M Agreements;
operating and maintaining the Energy Servers in compliance with all applicable laws, permits and regulations;
satisfying the performance warranties and guaranties set forth in the applicable O&M Agreements;
satisfying the performance warranties and guaranties in each of the applicable PPAs on behalf of the Operating Company; and
complying with any other specific requirements contained in the PPAs with individual end-customers.
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The EPC Agreement obligates us to repurchase the Energy Server in the event of certain IP Infringement claims. 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 guaranties in the O&M Agreement and we do not cure such failure in the applicable time period, or that a PPA terminates as a result of any failure by us to perform the obligations in the O&M Agreement. In some of our Portfolio Financings, our obligation to repurchase Energy Servers under the O&M extends to the entire fleet of Energy Servers sold in the event a systemic failure affects more than a specified number of Energy Servers.
In some Portfolio Financings, we have also agreed to pay liquidated damages to the applicable Operating Company in the event of delays in the manufacture and installation of our Energy Servers, either in the form of a cash payment or a reduction in the purchase price for the applicable Energy Servers.
Both the upfront purchase price for our Energy Servers and the ongoing fees for our operations and maintenance are paid on a fixed dollar-per-kilowatt basis.
Administration of Operating Companies.
In each of our Portfolio Financings in which we hold an interest in the tax equity partnership, we perform certain administrative services as managing member on behalf of the applicable Operating Company, including invoicing the end customers for amounts owed under the PPAs, administering the cash receipts of the Operating Company in accordance with the requirements of the financing arrangements, interfacing with applicable regulatory agencies, and other similar obligations. We are compensated for these services on a fixed dollar-per-kilowatt basis.
The Operating Company in each of our PPA Entities (with the exception of one PPA Entity) has incurred debt in order to finance the acquisition of Energy Servers. The lenders for these projects are a combination of banks and/or institutional investors. In each case, the debt is secured by all of the assets of the applicable Operating Company, such assets being primarily comprised of the Energy Servers and a collateral assignment of each of the contracts to which the Operating Company is a party, including the O&M Agreement and the PPAs. As further collateral, the lenders receive a security interest in 100% of the membership interest of the Operating Company. The lenders have no recourse to us or to any of the other equity investors (the "Equity Investors") in the Operating Company for liabilities arising out of the portfolio.
We have determined that we are the primary beneficiary in the PPA Entities, subject to reassessments performed as a result of upgrade transactions. Accordingly, we consolidate 100% of the assets, liabilities and operating results of these entities, including the Energy Servers and lease income, in our condensed consolidated financial statements. We recognize the Equity Investors’ share of the net assets of the investment entities as noncontrolling interests in subsidiaries in our condensed consolidated balance sheet. We recognize the amounts that are contractually payable to these investors in each period as distributions to noncontrolling interests in our condensed consolidated statements of convertible redeemable preferred stock, redeemable noncontrolling interest, stockholders' deficit and noncontrolling interest. Our condensed consolidated statements of cash flows reflect cash received from these investors as proceeds from investments by noncontrolling interests in subsidiaries. Our condensed consolidated statements of cash flows also reflect cash paid to these investors as distributions paid to noncontrolling interests in subsidiaries. We reflect any unpaid distributions to these investors as distributions payable to noncontrolling interests in subsidiaries on our condensed consolidated balance sheets. However, the Operating Companies are separate and distinct legal entities, and Bloom Energy Corporation may not receive cash or other distributions from the Operating Companies except in certain limited circumstances and upon the satisfaction of certain conditions, such as compliance with applicable debt service coverage ratios and the achievement of a targeted internal rate of return to the Equity Investors, or otherwise.
For further information about our Portfolio Financings, see Note 11 - Portfolio Financings in Part I, Item 1, Financial Statements.
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Traditional Lease
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Under the Traditional Lease option, the customer enters into a lease directly with a financier (the "Lease"), which pays us for our Energy Servers purchased pursuant to a direct sales agreement. We recognize product and installation revenue upon acceptance. After the standard one-year warranty period, our customers have almost always exercised the option to enter into service agreement for operations and maintenance work 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 term of a lease in a Traditional Lease option ranges from five to ten years.
The direct sales agreement provides for sale and the installation of our Energy Servers and includes a standard one-year warranty, to the financier as purchaser. The services agreement with the customer provides certain performance warranties and guaranties, with the services term offered on an annually renewing basis at the discretion of, and to, the customer. The customer must provide fuel for the Bloom Energy Servers to operate.
The direct sales agreement in a Traditional Lease arrangement typically provides for performance warranties and guaranties of both the efficiency and output of our Energy Servers, all of which are written in favor of the customer. As of March 31, 2021, we had incurred no liabilities due to failure to repair or replace our Energy Servers pursuant to these performance warranties. Our obligation to make payments for underperformance against the performance guaranties for projects financed pursuant to a Traditional Lease was capped contractually under the sales agreement between us and each customer at an aggregate total of approximately $6.0 million (including payments both for low output and for low efficiency) and our aggregate remaining potential liability under this cap was approximately $2.9 million.
Remarketing at Termination of Lease
In the event the customer does not renew or purchase our Energy Servers to the end of its Lease, we may remarket any such Energy Servers to a third party. Any proceeds of such sale would be allocated between us and the applicable financing partner as agreed between them at the time of such sale.
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Delivery and Installation
The timing of delivery and installations of our products have a significant impact on the timing of the recognition of product and installation revenue. Many factors can cause a lag between the time that a customer signs a purchase order and our recognition of product revenue. These factors include the number of Energy Servers installed per site, local permitting and utility requirements, environmental, health and safety requirements, weather, and customer facility construction schedules. Many of these factors are unpredictable and their resolution is often outside of our or our customers’ control. Customers may also ask us to delay an installation for reasons unrelated to the foregoing, including delays in their obtaining financing. Further, due to unexpected delays, deployments may require unanticipated expenses to expedite delivery of materials or labor to ensure the installation meets the timing objectives. These unexpected delays and expenses can be exacerbated in periods in which we deliver and install a larger number of smaller projects. In addition, if even relatively short delays occur, there may be a significant shortfall between the revenue we expect to generate in a particular period and the revenue that we are able to recognize. For our installations, revenue and cost of revenue can fluctuate significantly on a periodic basis depending on the timing of acceptance and the type of financing used by the customer.
International Channel Partners
India. In India, sales activities are currently conducted by Bloom Energy (India) Pvt. Ltd., our wholly-owned indirect subsidiary; however, we continue to evaluate the Indian market to determine whether the use of channel partners would be a beneficial go-to-market strategy to grow our India market sales.
Japan. In Japan, sales are conducted pursuant to a Japanese joint venture established between us and subsidiaries of SoftBank Corp, called Bloom Energy Japan Limited ("Bloom Energy Japan"). Under this arrangement, we sell Energy Servers to Bloom Energy Japan and we recognize revenue once the Energy Servers leave the port in the United States. Bloom Energy Japan enters into the contract with the end customer and performs all installation work as well as some of the operations and maintenance work.
The Republic of Korea. In 2018, Bloom Energy Japan consummated a sale of Energy Servers in the Republic of Korea to Korea South-East Power Company. Following this sale, we entered into a Preferred Distributor Agreement with SK Engineering & Construction Co., Ltd. ("SK E&C") to enable us to sell directly into the Republic of Korea.
Under our agreement with SK E&C, SK E&C has a right of first refusal during the term of the agreement, with certain exceptions, to serve as distributor of Energy Servers for any fuel cell generation project in the Republic of Korea, and we have the right of first refusal to serve as SK E&C’s supplier of generation equipment for any Bloom Energy fuel cell project in the Republic of Korea. Under the terms of each purchase order, title, risk of loss and acceptance of the Energy Servers pass from us to SK E&C upon delivery at the named port of lading for shipment in the United States for the Energy Servers shipped in 2018 and thereafter, upon delivery at the named port of unlading in the Republic of Korea, prior to unloading subject to final purchase order terms. The Preferred Distributor Agreement has an initial term expiring on December 31, 2021, and thereafter will automatically be renewed for three-year renewal terms unless either party terminates this agreement by prior written notice under certain circumstances.
Under the terms of the Preferred Distributor Agreement, we (or our subsidiary) contract directly with the customer to provide operations and maintenance services for the Energy Servers. We have established a subsidiary in the Republic of Korea, Bloom Energy Korea, LLC, to which we subcontract such operations and maintenance services. The terms of the operations and maintenance are negotiated on a case-by-case basis with each customer, but are generally expected to provide the customer with the option to receive services for at least 10 years, and for up to the life of the Energy Servers.
SK E&C Joint Venture Agreement. In September 2019, we entered into a joint venture agreement with SK E&C to establish a light-assembly facility in the Republic of Korea for sales of certain portions of our Energy Server for the stationary utility and commercial and industrial market in the Republic of Korea. The joint venture is majority controlled and managed by us, with the facility, which became operational in July 2020. Other than a nominal initial capital contribution by Bloom Energy, the joint venture will be funded by SK E&C. SK E&C, who currently acts as a distributor for our Energy Servers for the stationary utility and commercial and industrial market in the Republic of Korea, will be the primary customer for the products assembled by the joint venture.
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Community Distributed Generation Programs
In July 2015, the state of New York introduced its Community Distributed Generation ("CDG") program, which extends New York’s net metering program in order to allow utility customers to receive net metering credits for electricity generated by distributed generation assets located on the utility’s grid but not physically connected to the customer’s facility. This program allows for the use of multiple generation technologies, including fuel cells. Since then the states of Connecticut and Maine have instituted a similar program and we expect that other states may adopt similar programs in the future. In June 2020, the New York Public Service Commission issued an Order that limited the CDG compensation structure for “high capacity factor resources,” including fuel cells, in a way that will make the economics for these types of projects more challenging in the future. However, the projects that were already under contract were grandfathered into the program under the previous compensation structure.
We have entered into sales, installation, operations and maintenance agreements with three developers for the deployment of our Energy Servers pursuant to the New York CDG program for a total of 441 systems. As of March 31, 2021, we have recognized revenue associated with 221 of such systems, which included 146 systems during the first quarter of 2021. We continue to believe that these types of subscriber-based programs could be a source of future revenue and will continue to look to generate sales through these programs during 2021.

Comparison of the Three Months Ended March 31, 2021 and 2020
Key Operating Metrics
In addition to the measures presented in the condensed consolidated financial statements, we use certain key operating metrics below to evaluate business activity, to measure performance, to develop financial forecasts and to make strategic decisions.
We no longer consider billings related to our products to be a key operating metric. Billings as a metric was introduced to provide insight into our customer contract billings as differentiated from revenue when a significant portion of those customer contracts had product and installation billings recognized as electricity revenue over the term of the contract instead of at the time of delivery or acceptance. Today, a very small portion of our customer contracts have revenue recognized over the term of the contract, and thus it is no longer a meaningful metric for us.
Acceptances
We use acceptances as a key operating metric to measure the volume of our completed Energy Server installation activity from period to period. Acceptance typically occurs upon transfer of control to our customers, which is either at the time when systems are shipped and delivered to our customers, or when the system is turned on and producing full power.
The product acceptances in the three months ended March 31, 2021 and 2020 were as follows:
 Three Months Ended
March 31,
Change
 20212020Amount %
 
Product accepted during the period
(in 100 kilowatt systems)
359 256 103 40.2 %
Product accepted for the three months ended March 31, 2021 compared to the same period in 2020 increased by 103 systems, or 40.2%, as demand increased for our Energy Servers in the utility sector where we accepted 146 systems as part of the CDG program.
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Our customers have several purchase options for our Energy Servers. The portion of acceptances attributable to each purchase option in the three months ended March 31, 2021 and 2020 was as follows:
 Three Months Ended
March 31,
 20212020
   
Direct Purchase (including Third-Party PPAs and International Channels)98 %98 %
Managed Services%%
100 %100 %
The portion of total revenue attributable to each purchase option in the three months ended March 31, 2021 and 2020 was as follows:
 Three Months Ended
March 31,
 20212020
   
Direct Purchase (including Third-Party PPAs and International Channels)87 %85 %
Traditional Lease%%
Managed Services%%
Portfolio Financings%%
100 %100 %
Costs Related to Our Products
Total product related costs for the three months ended March 31, 2021 and 2020 was as follows:
 Three Months Ended
March 31,
Change
20212020Amount%
 
Product costs of product accepted in the period$2,324 /kW$2,514 /kW$(190) /kW(7.6)%
Period costs of manufacturing related expenses not included in product costs (in thousands)$3,586 $6,354 $(2,768)(43.6)%
Installation costs on product accepted in the period$164 /kW$784 /kW$(620) /kW(79.1)%
Product costs of product accepted for the three months ended March 31, 2021 compared to the same period in 2020 decreased by approximately $190 per kilowatt driven generally by our ongoing cost reduction efforts to reduce material costs in conjunction with our suppliers and our reduction in labor and overhead costs through improved processes and automation at our manufacturing facilities.
Period costs of manufacturing related expenses for the three months ended March 31, 2021 compared to the same period in 2020 decreased by approximately $2.8 million primarily driven by higher absorption of fixed manufacturing costs into product costs due to a larger volume of builds through our factory tied to our acceptance growth, which resulted in higher factory utilization and higher utilization of inventory materials.
Installation costs on product accepted for the three months ended March 31, 2021 compared to the same period in 2020 decreased by approximately $620 per kilowatt. Each customer site is different and installation costs can vary due to a number of factors, including site complexity, size, location of gas, personalized applications, the customer's option to complete the installation of our Energy Servers themselves, and the timing between the delivery and final installation of our product acceptances under certain circumstances. As such, installation on a per kilowatt basis can vary significantly from period-to-period. For the three months ended March 31, 2021, the decrease in install cost was driven by site mix as many of the acceptances did not have installation, either because the installation was done by our partner in the Republic of Korea or the
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final installation associated with a specific customer will be completed later in the year although the Energy Servers were delivered and accepted during the quarter.

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Results of Operations
A discussion regarding the comparison of our financial condition and results of operations for the three months ended March 31, 2021 and 2020 is presented below (in thousands, except percentage data).
Revenue
 Three Months Ended
March 31,
Change
 20212020Amount%
(dollars in thousands)
Product$137,930 $99,559 $38,371 38.5 %
Installation2,659 16,618 (13,959)(84.0)%
Service36,417 25,147 11,270 44.8 %
Electricity17,001 15,375 1,626 10.6 %
Total revenue$194,007 $156,699 $37,308 23.8 %
Total Revenue
Total revenue increased by $37.3 million, or 23.8%, for the three months ended March 31, 2021 as compared to the prior year period. This increase was primarily driven by a $38.4 million increase in product revenue and $11.3 million increase in service revenue partially offset by a $14.0 million decrease in installation revenue.
Product Revenue
Product revenue increased by $38.4 million, or 38.5%, for the three months ended March 31, 2021 as compared to the prior year period. The product revenue increase was driven primarily by a 40.2% increase in product acceptances enabled by the expansion of our CDG program. Product revenue was minimally impacted by price reductions on a per unit basis.
Installation Revenue
Installation revenue decreased by $14.0 million, or 84.0%, for the three months ended March 31, 2021 as compared to the prior year period. This decrease in installation revenue was driven by site mix as many of the acceptances did not have installation, either because the installation was done by our partner in the Republic of Korea or the final installation associated with a specific customer will be completed later in the year although the Energy Servers were delivered and accepted during the quarter.
Service Revenue
Service revenue increased by $11.3 million, or 44.8% for the three months ended March 31, 2021 as compared to the prior year period. This was primarily due to the 25.5% increase in our installed base and the maintenance contract renewals associated with it including growth internationally, and our efforts to proactively manage the growing fleet.
Electricity Revenue
Electricity revenue increased by $1.6 million, or 10.6%, for the three months ended March 31, 2021 as compared to the prior year period due to the increase in the managed services asset base.
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Cost of Revenue
 Three Months Ended
March 31,
Change
 20212020Amount %
 (dollars in thousands)
Product$87,294 $72,489 $14,805 20.4 %
Installation4,625 20,779 (16,154)(77.7)%
Service36,118 30,970 5,148 16.6 %
Electricity11,319 12,530 (1,211)(9.7)%
Total cost of revenue$139,356 $136,768 $2,588 1.9 %
Total Cost of Revenue
Total cost of revenue increased by $2.6 million, or 1.9%, for the three months ended March 31, 2021 as compared to the prior year period primarily driven by a $14.8 million increase in cost of product revenue and $5.1 million increase in cost of service revenue partially offset by a $16.2 million decrease in cost of installation revenue.
Cost of Product Revenue
Cost of product revenue increased by $14.8 million, or 20.4%, for the three months ended March 31, 2021 as compared to the prior year period. The cost of product revenue increase was driven primarily by a 40.2% increase in product acceptances, partially offset by ongoing cost reduction efforts, which reduced material, labor and overhead costs on a per unit basis by 12.3%.
Cost of Installation Revenue
Cost of installation revenue decreased by $16.2 million, or 77.7%, for the three months ended March 31, 2021 as compared to the prior year period. This decrease in cost of installation revenue, similar to the $14.0 million decrease in installation revenue, was driven by site mix as many of the acceptances did not have installation in the three months ended March 31, 2021.
Cost of Service Revenue
Cost of service revenue increased by $5.1 million, or 16.6%, for the three months ended March 31, 2021 as compared to the prior year period. This increase was primarily due to the 25.5% increase in our installed base and the maintenance contract renewals associated with it, partially offset by the significant improvements in power module life, cost reductions and our actions to proactively manage the fleet optimizations.
Cost of Electricity Revenue
Cost of electricity revenue decreased by $1.2 million, or 9.7%, for the three months ended March 31, 2021 as compared to the prior year period, primarily due to the $0.8 million change in the fair value of the natural gas fixed price forward contract and lower property tax expenses.
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Gross Profit and Gross Margin
 Three Months Ended
March 31,
Change
 20212020
 (dollars in thousands)
Gross profit:
Product$50,636$27,070$23,566 
Installation(1,966)(4,161)2,195 
Service299(5,823)6,122 
Electricity5,6822,8452,837 
Total gross profit$54,651$19,931$34,720 
Gross margin:
Product37 %27 %
Installation(74)%(25)%
Service%(23)%
Electricity33 %19 %
Total gross margin28 %13 %
Total Gross Profit
Gross profit improved by $34.7 million in the three months ended March 31, 2021 as compared to the prior year period primarily driven by the improvement in our product category as it reaches gross margin of 37%, and our service category as it reaches profitability.
Product Gross Profit
Product gross profit increased by $23.6 million in the three months ended March 31, 2021 as compared to the prior year period. The improvement is driven by a 40.2% increase in product acceptances, and a 10% improvement in product gross margin as our per-unit product cost reduction of 12.3% outpaced our minimal product price reductions.
Installation Gross Loss
Installation gross loss decreased by $2.2 million in the three months ended March 31, 2021 as compared to the prior year period driven by the site mix, as many of the acceptances did not have installation in the current time period, and other site related factors such as site complexity, size, local ordinance requirements, and location of the utility interconnect.
Service Gross Profit (Loss)
Service gross profit (loss) improved by $6.1 million in the three months ended March 31, 2021 as compared to the prior year period to achieve a positive gross margin of 1%. This was primarily due to the significant improvements in power module life, cost reductions, installed base and international growth, and our actions to proactively manage the fleet optimizations.
Electricity Gross Profit
Electricity gross profit improved by $2.8 million in the three months ended March 31, 2021 as compared to the prior year period mainly due to the increase in the managed service asset base and the $0.8 million change in the fair value of the natural gas fixed price forward contract.
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Operating Expenses
 Three Months Ended
March 31,
Change
 20212020Amount %
 (dollars in thousands)
Research and development$23,295 $23,279 $16 0.1 %
Sales and marketing19,952 13,949 6,003 43.0 %
General and administrative25,801 29,098 (3,297)(11.3)%
Total operating expenses$69,048 $66,326 $2,722 4.1 %
Total Operating Expenses
Total operating expenses increased by $2.7 million in the three months ended March 31, 2021 as compared to the prior year period. This increase was primarily attributable to our investment in front-end origination’s capability both in the United States and internationally, investment in brand and product management, and our continued investment in our R&D capabilities to support our technology roadmap.
Research and Development
Research and development expenses stayed relatively flat in the three months ended March 31, 2021 as compared to the prior year period; however, we are shifting our investments from sustaining engineering projects for the current Energy Server platform, to continued development of the next generation platform and to support our technology roadmap enabling the hydrogen, electrolyzer, carbon capture, marine and biogas solutions.
Sales and Marketing
Sales and marketing expenses increased by $6.0 million in the three months ended March 31, 2021 as compared to the prior year period driven by the efforts to expand our United States and international sales force, as well as investment in brand and product management.
General and Administrative
General and administrative expenses decreased by $3.3 million in the three months ended March 31, 2021 as compared to the prior year period due to a $5.1 million reduction in legal expenses and $2.3 million reduction in stock-based compensation expenses, partially offset by a $3.1 million increase in outside services and consulting expenses, and $0.6 million increase in payroll spend.
Stock-Based Compensation
 Three Months Ended
March 31,
Change
 20212020Amount%
 (dollars in thousands)
Cost of revenue$2,999 $5,507 $(2,508)(45.5)%
Research and development4,908 6,096 (1,188)(19.5)%
Sales and marketing4,085 3,890 195 5.0 %
General and administrative5,218 7,526 (2,308)(30.7)%
Total stock-based compensation$17,210 $23,019 $(5,809)(25.2)%
Total stock-based compensation for the three months ended March 31, 2021 compared to the prior year period decreased by $5.8 million primarily driven by the vesting of the one-time employee grants at the time of IPO, which completed in July 2020.
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Other Income and Expense
 Three Months Ended
March 31,
Change
 20212020
 (in thousands)
Interest income$74 $819 $(745)
Interest expense(14,731)(20,754)6,023 
Interest expense - related parties— (1,366)1,366 
Other expense, net(85)(8)(77)
Loss on extinguishment of debt— (14,098)14,098 
Gain (loss) on revaluation of embedded derivatives(518)284 (802)
Total$(15,260)$(35,123)$19,863 
Interest Income
Interest income is derived from investment earnings on our cash balances primarily from money market funds.
Interest income for the three months ended March 31, 2021 as compared to the prior year period decreased by $0.7 million primarily due to the decrease in the rates of interest earned on our cash balances.
Interest Expense
Interest expense is from our debt held by third parties.
Interest expense for the three months ended March 31, 2021 as compared to the prior year period decreased by $6.0 million. This decrease was primarily due to lower interest expense as a result of refinancing our notes at a lower interest rate, and the elimination of the amortization of the debt discount associated with the 6% notes which have now been converted.
Interest Expense - Related Parties
Interest expense - related parties is from our debt held by related parties.
Interest expense - related parties for the three months ended March 31, 2021 as compared to the prior year period decreased by $1.4 million due to the conversion of all of our notes held by related parties during 2020.
Other Expense, net
Other expense, net is primarily derived from investments in joint ventures, plus the impact of foreign currency translation.
Other expense, net for the three months ended March 31, 2021 as compared to the prior year period decreased by $0.1 million due to changes in foreign currency translation expense and export incentive income.
Loss on Extinguishment of Debt
Loss on extinguishment of debt for the three months ended March 31, 2021 as compared to the prior year period improved by $14.1 million resulting from our debt restructuring and debt extinguishment in the prior year's period. There were no comparable debt restructuring activities in the current year's period.
Gain (Loss) on Revaluation of Embedded Derivatives
Gain (loss) on revaluation of embedded derivatives is derived from the change in fair value of our sales contracts of embedded EPP derivatives valued using historical grid prices and available forecasts of future electricity prices to estimate future electricity prices.
Gain (loss) on revaluation of embedded derivatives for the three months ended March 31, 2021 as compared to the prior year period worsened by $0.8 million due to the change in fair value of our embedded EPP derivatives in our sales contracts.
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Provision for Income Taxes
 Three Months Ended
March 31,
Change
 20212020Amount%
 (dollars in thousands)
Income tax provision$124 $124 $— — %
Income tax provision consists primarily of income taxes in foreign jurisdictions in which we conduct business. We maintain a full valuation allowance for domestic deferred tax assets, including net operating loss and certain tax credit carryforwards.
Income tax provision change for the three months ended March 31, 2021 as compared to the prior year period is immaterial.
Net Loss Attributable to Noncontrolling Interests and Redeemable Noncontrolling Interests
 Three Months Ended
March 31,
Change
 20212020Amount%
 (dollars in thousands)
Net loss attributable to noncontrolling interests and redeemable noncontrolling interests$(4,892)$(5,693)$801 (14.1)%
Net loss attributable to noncontrolling interests is the result of allocating profits and losses to 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 the flip structure of the PPA Entities.
Net loss attributable to noncontrolling interests and redeemable noncontrolling interests for the three months ended March 31, 2021 as compared to the prior year period improved by $0.8 million due to increased losses in our PPA Entities, which are allocated to our noncontrolling interests.

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Liquidity and Capital Resources
As of March 31, 2021, we had cash and cash equivalents of $180.7 million. Our cash and cash equivalents consist of highly liquid investments with maturities of three months or less, including money market funds. We maintain these balances with high credit quality counterparties, continually monitor the amount of credit exposure to any one issuer and diversify our investments in order to minimize our credit risk.
As of March 31, 2021, we had $290.1 million of total outstanding recourse debt, $218.4 million of non-recourse debt and $19.9 million of other long-term liabilities. For a complete description of our outstanding debt, please see Note 7 - Outstanding Loans and Security Agreements in Part I, Item 1, Financial Statements.
The combination of our existing cash and cash equivalents are expected to be sufficient to meet our anticipated cash flow needs for the next 12 months and thereafter for the foreseeable future. If these sources of cash are insufficient to satisfy our near-term or future cash needs, we may require additional capital from equity or debt financings to fund our operations, in particular, our manufacturing capacity, product development and market expansion requirements, to timely respond to competitive market pressures or strategic opportunities, or otherwise. In addition, we are continuously evaluating alternatives for efficiently funding our capital expenditures and ongoing operations. We may, from time to time, engage in a variety of financing transactions for such purposes. We may not be able to secure timely additional financing on favorable terms, or at all. The terms of any additional financings may place limits on our financial and operating flexibility. If we raise additional funds through further issuances of equity or equity-linked securities, our existing stockholders could suffer dilution in their percentage ownership of us, and any new securities we issue could have rights, preferences and privileges senior to those of holders of our common stock.
Our future capital requirements will depend on many factors, including our rate of revenue growth, the timing and extent of spending on research and development efforts and other business initiatives, the rate of growth in the volume of system builds and the need for additional manufacturing space, the expansion of sales and marketing activities both in domestic and international markets, market acceptance of our products, our ability to secure financing for customer use of our Energy Servers, the timing of installations, and overall economic conditions including the impact of COVID-19 on our ongoing and future operations. In order to support and achieve our future growth plans, we may need or seek advantageously to obtain additional funding through an equity or debt financing. As of March 31, 2021, we were still working to secure financing for the planned installations of our energy servers in 2021. Failure to obtain this financing will affect our results of operations, including revenues and cash flows.
As of March 31, 2021, the current portion of our total debt is $118.5 million, all of which is outstanding non-recourse debt. We expect a certain portion of the non-recourse debt would be refinanced by the applicable PPA Entity prior to maturity.
A summary of our condensed consolidated sources and uses of cash, cash equivalents and restricted cash is as follows (in thousands):
 Three Months Ended
March 31,
 20212020
 
Net cash provided by (used in):
Operating activities$(89,035)$(27,948)
Investing activities(12,932)(12,360)
Financing activities51,150 16,839 
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Net cash provided by (used in) our PPA Entities, which are incorporated into the condensed consolidated statements of cash flows was as follows (in thousands):
 Three Months Ended
March 31,
 20212020
PPA Entities ¹
Net cash provided by PPA operating activities$5,976 $10,258 
Net cash used in PPA financing activities(9,506)(8,957)
1 The PPA Entities' operating and financing cash flows are a subset of our condensed consolidated cash flows and represent the stand-alone cash flows prepared in accordance with U.S. GAAP. Operating activities consist principally of cash used to run the operations of the PPA Entities, the purchase of Energy Servers from us and principal reductions in loan balances. Financing activities consist primarily of changes in debt carried by our PPAs, and payments from and distributions to noncontrolling partnership interests. We believe this presentation of net cash provided by (used in) PPA activities is useful to provide the reader with the impact to condensed consolidated cash flows of the PPA Entities in which we have only a minority interest.
Operating Activities
Our operating activities have consisted of net loss adjusted for certain non-cash items plus changes in our operating assets and liabilities or working capital. The increase in cash used in operating activities during the three months ended March 31, 2021 as compared to the prior year period was primarily the result of our net working capital increase of $93.3 million in the three months ended March 31, 2021 to support a shipment to a customer in the Republic of Korea with collections expected in the three months ending June 30, 2021, and to build systems to satisfy demand in future quarters. In addition, we experienced decreases in deferred revenue and customer deposits, and accrued expenses and other current liabilities during the three months ended March 31, 2021.
Investing Activities
Our investing activities have consisted of capital expenditures that include increasing our production capacity. We expect to continue such activities as our business grows. Cash used in investing activities of $12.9 million during the three months ended March 31, 2021 was primarily the result of expenditures on tenant improvements for a newly leased engineering building in Fremont, California. We will continue to make payments in the three months ending June 30, 2021 to complete this project. We also signed another building lease in January 2021 for a new manufacturing facility in Fremont, California. We expect to make capital expenditures over the next few quarters to ready this facility for production, which includes the purchase of new equipment and other tenant improvements. We intend to fund these capital expenditures from cash on hand as well as cash flow to be generated from operations. We may also evaluate and arrange equipment lease financing to fund these capital expenditures.
Financing Activities
Historically, our financing activities have consisted of borrowings and repayments of debt including to related parties, proceeds and repayments of financing obligations, distributions paid to noncontrolling interests and redeemable noncontrolling interests, and the proceeds from the issuance of our common stock. Net cash provided by financing activities during the three months ended March 31, 2021 was $51.2 million, an increase of $34.3 million compared to the prior year period primarily due to proceeds from stock option exercises and our employee stock purchase plan.

Critical Accounting Policies and Estimates
The condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles as applied in the United States ("U.S. GAAP") The preparation of the condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures. Our discussion and analysis of our financial results under Results of Operations below are based on our audited results of operations, which we have prepared in accordance with U.S. GAAP. In preparing these condensed consolidated financial statements, we make assumptions, judgments and estimates that can affect the reported amounts of assets, liabilities, revenues and expenses, and net income. On an ongoing basis, we base our estimates on historical experience, as appropriate, and on various other assumptions that we believe to be reasonable under the circumstances. Changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ
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significantly from the estimates made by our management. We evaluate our estimates and assumptions on an ongoing basis. To the extent that there are material differences between these estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected. We believe that the following critical accounting policies involve a greater degree of judgment and complexity than our other accounting policies. Accordingly, these are the policies we believe are the most critical to understanding and evaluating the condensed consolidated financial condition and results of operations.
The accounting policies that most frequently require us to make assumptions, judgments and estimates, and therefore are critical to understanding our results of operations, include:
•    Revenue Recognition;
•    Leases: Incremental Borrowing Rate;
•    Stock-Based Compensation;
•    Income Taxes;
•    Principles of Consolidation; and
•    Allocation of Profits and Losses of Consolidated Entities to Noncontrolling Interests and Redeemable Noncontrolling Interests
Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our Annual Report on Form 10-K for our fiscal year ended December 31, 2020 provides a more complete discussion of our critical accounting policies and estimates. During the three months ended March 31, 2021, there were no significant changes to our critical accounting policies and estimates, except as noted below:

We adopted ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40) ("ASU 2020-06"), which simplifies the accounting for convertible instruments. We applied the modified retrospective method as of January 1, 2021 in our condensed consolidated financial statements. Upon adoption of ASU 2020-06, we no longer record the conversion feature of convertible notes in equity. Instead, our convertible notes are accounted for as a single liability measured at their amortized cost and there is no longer a debt discount representing the difference between the carrying value, excluding issuance costs, and the principal of the convertible debt instrument. As a result, there is no longer interest expense relating to the amortization of the debt discount over the term of the convertible debt instrument. Similarly, the portion of issuance costs previously allocated to equity are now reclassified to debt and will be amortized as interest expense. As a result of this change in accounting policy, management no longer considers valuation of the Green Notes to be a critical accounting policy and estimate.


ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There were no significant changes to our quantitative and qualitative disclosures about market risk during three months ended March 31, 2021. Please refer to Part II, Item 7A, Quantitative and Qualitative Disclosures about Market Risk included in our Annual Report on Form 10-K for our fiscal year ended December 31, 2020 for a more complete discussion of the market risks we consider.


ITEM 4 - CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer (our principal executive officer) and Chief Financial Officer (our principal financial officer) as appropriate, to allow for timely decisions regarding required disclosure.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of March 31, 2021. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of March 31, 2021, our disclosure controls and procedures were effective.
Inherent Limitations on Effectiveness of Internal Controls
Our management, including the CEO and CFO, does not expect that our disclosure controls or our internal controls over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of the effectiveness of controls to future periods are subject to risks. Over time, controls may become inadequate because of changes in business conditions or deterioration in the degree of compliance with policies or procedures.
Changes in Internal Control over Financial Reporting
During the three months ended March 31, 2021, there were no changes in our internal controls over financial reporting, which were identified in connection with management’s evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


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Part II
ITEM 1 - LEGAL PROCEEDINGS
For a discussion of legal proceedings, see Note 13 - Commitments and Contingencies in Part I, Item 1, Financial Statements
We are, and from time to time we may become, involved in legal proceedings or be subject to claims arising in the ordinary course of our business. We are not presently a party to any other legal proceedings that in the opinion of our management and if determined adversely to us, would individually or taken together have a material adverse effect on our business, operating results, financial condition or cash flows.

ITEM 1A - RISK FACTORS
Investing in our securities involves a high degree of risk. You should carefully consider the material risks and uncertainties described below that make an investment in us speculative or risky, as well as the other information in this Quarterly Report on Form 10-Q, including our condensed consolidated financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” before you decide to purchase our securities. The occurrence of one or more of these risks may cause the market price of our Class A common stock to decline, and you could lose all or part of your investment. It is not possible to predict or identify all such risks and uncertainties, as our operations could also be affected by factors, events or uncertainties that are not presently known to us or that we currently do not consider to present significant risks to our operations. Therefore, you should not consider the following risks to be a complete statement of all the potential risks or uncertainties that we face.
Risk Factor Summary

The following summarizes the more complete risk factors that follow. It should be read in conjunction with the complete Risk Factors section and should not be relied upon as an exhaustive summary of all the material risks facing our business.
Risks Related to Our Business, Industry and Sales
The distributed generation industry is an emerging market and distributed generation may not receive widespread market acceptance, which may make evaluating our business and future prospects difficult.
Our products involve a lengthy sales and installation cycle, and if we fail to close sales on a regular and timely basis, our business could be harmed.
Our Energy Servers have significant upfront costs, and we will need to attract investors to help customers finance purchases.
The economic benefits of our Energy Servers to our customers depend on the cost of electricity available from alternative sources, including local electric utility companies, and such cost structure is subject to change.
We rely on interconnection requirements and net metering arrangements that are subject to change.
We currently face and will continue to face significant competition.
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 ability to develop new products and enter into new markets could be negatively impacted if we are unable to identify partners to assist in such development or expansion.
Risks Related to Our Products and Manufacturing
Our business has been and will continue to be adversely affected by the COVID-19 pandemic.
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.
If we are not able to continue to reduce our cost structure in the future, our ability to become profitable may be impaired.
If our Energy Servers contain manufacturing defects, our business and financial results could be harmed.
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.
If our estimates of the useful life for our Energy Servers are inaccurate or we do not meet our performance warranties and performance guaranties, or if we fail to accrue adequate warranty and guaranty reserves, our business and financial results could be harmed.
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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.
Any significant disruption in the operations at our manufacturing facilities could delay the production of our Energy Servers, which would harm our business and results of operations.
The failure of our suppliers to continue to deliver necessary raw materials or other components of our Energy Servers in a timely manner and to specification 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 have, in some instances, entered into long-term supply agreements that could result in insufficient inventory and negatively affect our results of operations.
Risks Related to Government Incentive Programs
Our business currently benefits from the availability of rebates, tax credits and other financial programs and incentives, and the reduction, modification, or elimination of such benefits could cause our revenue to decline and harm our financial results.
We rely on tax equity financing arrangements to realize the benefits provided by ITCs and accelerated tax depreciation and in the event these programs are terminated, our financial results could be harmed.
Risks Related to Legal Matters and Regulations
We are subject to various environmental laws and regulations that could impose substantial costs upon us and cause delays in the delivery and installation of our Energy Servers.
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.
As a technology based, in part, on fossil fuel, we may be subject to a heightened risk of regulation, to a potential for the loss of certain incentives, and to changes in our customers’ energy procurement policies.
Risks Related to Our Intellectual Property
Our failure to protect our intellectual property rights may undermine our competitive position, and litigation to protect our intellectual property rights may be costly.
Our patent applications may not result in issued patents, and our issued patents may not provide adequate protection, either of which may have a material adverse effect on our ability to prevent others from commercially exploiting products similar to ours.
Risks Related to Our Financial Condition and Operating Results
We have incurred significant losses in the past and we may not be profitable for the foreseeable future.
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.
If we fail to manage our growth effectively, our business and operating results may suffer.
The accounting treatment related to our revenue-generating transactions is complex, and if we are unable to attract and retain highly qualified accounting personnel to evaluate the accounting implications of our complex or non-routine transactions, our ability to accurately report our financial results may be harmed.
If we fail to maintain effective internal control over financial reporting in the future, the accuracy and timing of our financial reporting may be adversely affected.
Risks Related to Our Liquidity
We must maintain the confidence of our customers in our liquidity, including in our ability to timely service our debt obligations and in our ability to grow our business over the long-term.
Our substantial indebtedness, and restrictions imposed by the agreements governing our and our PPA Entities’ (defined herein) outstanding indebtedness, may limit our financial and operating activities and may adversely affect our ability to incur additional debt to fund future needs.
We may not be able to generate sufficient cash to meet our debt service obligations.
Risks Related to Our Operations
We may have conflicts of interest with our PPA Entities (defined herein).
Expanding operations internationally could expose us to additional risks.
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.
Risks Related to Ownership of Our Common Stock
The stock price of our Class A common stock has been and may continue to be volatile.
The dual class structure of our common stock and the voting agreements among certain stockholders have the effect of concentrating voting control of our Company with KR Sridhar, our Chairman and Chief Executive Officer, and also
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with those stockholders who held our capital stock prior to the completion of our initial public offering, including our directors, executive officers and significant stockholders, which limits or precludes your ability to influence corporate matters including the election of directors and the approval of any change of control transaction, and may adversely affect the trading price of our Class A common stock.
We may issue additional shares of our Class A common stock in connection with any future conversion of the Green Notes (defined herein) and thereby dilute our existing stockholders and potentially adversely affect the market price of our Class A common stock.

Risks Related to Our Business, Industry and Sales
The distributed generation industry is an emerging market and distributed generation may not receive widespread market acceptance, which may make evaluating our business and future prospects difficult.
The distributed generation industry is still relatively nascent in an otherwise mature and heavily regulated industry, and we cannot be sure that potential customers will accept distributed generation broadly, or our Energy Server products specifically. Enterprises may be unwilling to adopt our solution over traditional or competing power sources for any number of reasons, including the perception that our technology or our company is unproven, lack of confidence in our business model, the perceived unavailability of back-up service providers to operate and maintain the Energy Servers, and lack of awareness of our product or their perception of regulatory or political headwinds. Because distributed generation is an emerging industry, broad acceptance of our products and services is subject to a high level of uncertainty and risk. If the market develops more slowly than we anticipate, our business will be harmed.
From our inception in 2001 through 2009, we were focused principally on research and development activities relating to our Energy Server technology. We did not deploy our first Energy Server and did not recognize any revenue until 2009. Since that initial deployment, our business has expanded significantly over a comparatively short time, and we have had a limited history operating our business at its current scale. Consequently, predicting our future revenue and appropriately budgeting for our expenses is difficult, and we have limited insight into trends that may emerge and affect our business. If actual results differ from our estimates or if we adjust our estimates in future periods, our operating results and financial position could be materially and adversely affected.
Our products involve a lengthy sales and installation cycle, and if we fail to close sales on a regular and timely basis, our business could be harmed.
Our sales cycle is typically 12 to 18 months but can vary considerably. In order to make a sale, we must typically provide a significant level of education to prospective customers regarding the use and benefits of our product and our technology. The period between initial discussions with a potential customer and the eventual sale of even a single product typically depends on a number of factors, including the potential customer’s budget and decision as to the type of financing it chooses to use, as well as the arrangement of such financing. Prospective customers often undertake a significant evaluation process that 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. Generally, the time between the entry into a sales contract with a customer and the installation of our Energy Servers can range from nine to twelve months or more. This lengthy sales and installation cycle is subject to a number of significant risks over which we have little or no control. Because of both the long sales and long installation cycles, we may expend significant resources without having certainty of generating a sale.
These lengthy sales and installation cycles increase the risk that an installation may be delayed and/or may not be completed. In some instances, a customer can cancel an order for a particular site prior to installation, and we may be unable to recover some or all of our costs in connection with design, permitting, installation and site preparations incurred prior to cancellation. Cancellation rates can be between 10% and 20% in any given period due to factors outside of our control, including an inability to install an Energy Server at the customer’s chosen location because of permitting or other regulatory issues, delays or unanticipated costs in securing interconnection approvals or necessary utility infrastructure, unanticipated changes in the cost, or other reasons unique to each customer. Our operating expenses are based on anticipated sales levels, and many of our expenses are fixed. If we are unsuccessful in closing sales after expending significant resources or if we experience delays or cancellations, our business could be materially and adversely affected. Since, in general,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.
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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 expand our offerings to customers who lack the financial capability to purchase our Energy Servers directly and/or who prefer to lease the product or contract for our services on a pay-as-you-go model, we subsequently developed various financing options that enabled customers use of the Energy Servers without a direct purchase through third-party ownership financing arrangements. For an overview of these different financing arrangements, please see Part I, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations – Purchase and Lease Options. At present, we still had not secured funding for all of our planned installations in 2021. If we are not able to secure funding in a timely fashion, our results of operations and financial condition will be negatively impacted. We continue to innovate our customer contracts to attempt to attract new customers and these may have different terms and financing conditions from prior transactions.
We rely on and need to grow committed financing capacity with existing partners or attract additional partners to support our growth, finance new projects and new types of product offerings, including fuel cells for the hydrogen market. In addition, at any point in time, our ability to deploy 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 an investors ability to utilize tax credits and other government incentives, interest rate and/or currency exchange fluctuations, our perceived creditworthiness and the condition of credit markets generally. Our financing of customer purchases of our Energy Servers is subject to conditions such as the customer’s credit quality and the expected minimum internal rate of return on the customer engagement, and if these conditions are not satisfied, we may be unable to finance purchases of our Energy Servers, which would have an adverse effect on our revenue in a particular period. If we are unable to help our customers arrange financing for our Energy Servers generally, our business will be harmed. Additionally, the Traditional Lease option and the Managed Services Financing option, as with all leases, are also limited by the customer’s willingness to commit to making fixed payments regardless of the performance of the Energy Servers or our performance of our obligations under the customer agreement. To the extent we are unable to arrange future financings for any of our current projects, our business would be negatively impacted.
Further, our sales process for transactions that require financing require that we make certain assumptions regarding the cost of financing capital. Actual financing costs may vary from our estimates due to factors outside of our control, including changes in customer creditworthiness, macroeconomic factors, the returns offered by other investment opportunities available to our financing partners, and other factors. If the cost of financing ultimately exceeds our estimates, we may be unable to proceed with some or all of the impacted projects or our revenue from such projects may be less than our estimates.
The economic benefits of our Energy Servers to our customers depend on the cost of electricity available from alternative sources, including local electric utility companies, and such cost structure is subject to change.
We believe that a customer’s decision to purchase our Energy Servers is significantly influenced by the price, the price predictability of electricity generated by our Energy Servers in comparison to the retail price, and the future price outlook of electricity from the local utility grid and other energy sources. The economic benefit of our Energy Servers to our customers includes, among other things, the benefit of reducing such customer’s payments to the local utility company. The rates at which electricity is available from a customer’s local electric utility company is subject to change and any changes in these rates may affect the relative benefits of our Energy Servers. Even in markets where we are competitive today, rates for electricity could decrease and render our Energy Servers uncompetitive. Several factors could lead to a reduction in the price or future price outlook for grid electricity, including the impact of energy conservation initiatives that reduce electricity consumption, construction of additional power generation plants (including nuclear, coal or natural gas) and technological developments by others in the electric power industry, which could result in electricity being available at costs lower than those that can be achieved from our Energy Servers. If the retail price of grid electricity does not increase over time at the rate that we or our customers expect, it could reduce demand for our Energy Servers and harm our business.
Further, the local electric utility or regulatory authorities may impose “departing load,” “standby,” power factor charges, greenhouse gas emissions charges, or other charges on our customers in connection with their acquisition or use of our Energy Servers, the amounts of which are outside of our control and which may have a material impact on the economic benefit of our Energy Servers to our customers. Changes in the rates offered by local electric utilities and/or in the applicability or amounts of charges and other fees imposed or incentives granted by such utilities on customers acquiring our Energy Servers could adversely affect the demand for our Energy Servers.
In some states and countries, the current low cost of grid electricity, even together with available subsidies, does not render our product economically attractive. If we are unable to reduce our costs to a level at which our Energy Servers would be
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competitive in such markets, or if we are unable to generate demand for our Energy Servers based on benefits other than electricity cost savings, such as reliability, resilience, or environmental benefits, our potential for growth may be limited.
Furthermore, an increase in the price of natural gas or curtailment of availability (e.g., as a consequence of physical limitations or adverse regulatory conditions for the delivery of production of natural gas) or the inability to obtain natural gas service could make our Energy Servers less economically attractive to potential customers and reduce demand.
We rely on interconnection requirements and net metering arrangements that are subject to change.
Because our Energy Servers are designed to operate at a constant output 24x7, and our customers’ demand for electricity typically fluctuates over the course of the day or week, there are often periods when our Energy Servers are producing more electricity than a customer may require, and such excess electricity must be exported to the local electric utility. Many, but not all, local electric utilities provide compensation to our customers for such electricity under “net metering” programs. Utility tariffs and fees, interconnection agreements and net metering requirements are subject to changes in availability and terms and some jurisdictions do not allow interconnections or export at all. At times in the past, such changes have had the effect of significantly reducing or eliminating the benefits of such programs. Changes in the availability of, or benefits offered by, utility tariffs, the net metering requirements or interconnection agreements in place in the jurisdictions in which we operate or in which we anticipate expanding into in the future could adversely affect the demand for our Energy Servers. For example, in California, the net metering tariff applicable to fuel cells currently expires in 2021. We are currently working on an alternative microgrid tariff that would be applicable to fuel cells. We cannot predict the outcome of the regulatory proceedings addressing such requirements, in which we remain an active participant. If there is not an economical tariff for fuel cells in California it may limit or end our ability to sell and install our Energy Servers in California.
We currently face and will continue to face significant competition.
We compete for customers, financing partners, and incentive dollars with other electric power providers. Many providers of electricity, such as traditional utilities and other companies offering distributed generation products, have longer operating histories, customer incumbency advantages. access to and influence with local and state governments, and access to more capital resources than us. Significant developments in alternative technologies, such as energy storage, wind, solar, or hydro power generation, or improvements in the efficiency or cost of traditional energy sources, including coal, oil, natural gas used in combustion, or nuclear power, may materially and adversely affect our business and prospects in ways we cannot anticipate. We may also face new competitors who are not currently in the market. If we fail to adapt to changing market conditions and to compete successfully with grid electricity or new competitors, our growth will be limited, which would adversely affect our business results.
We derive a substantial portion of our revenue and backlog from a limited number of customers, and the loss of or a significant reduction in orders from a large customer could have a material adverse effect on our operating results and other key metrics.
In any particular period, a substantial amount of our total revenue has and could continue to come from a relatively small number of customers. As an example, in the year ended December 31, 2020, two customers, SK E&C and Duke Energy, accounted for approximately 34% and 28% of our total revenue. A unit of The Southern Company wholly owns a Third-Party PPA, and that entity purchases Energy Servers, which are then provided to various end customers under PPAs. The loss of any large customer order or any delays in installations of new Energy Servers with any large customer would materially and adversely affect our business results.
Our ability to develop new products and enter into new markets could be negatively impacted if we are unable to identify partners to assist in such development or expansion.
We continue to develop new products for new markets and, as we move into those markets, we may need to identify new business partners and suppliers in order to facilitate such development and expansion, such as our entry into the hydrogen market. Identifying such partners and suppliers is a lengthy process and is subject to significant risks and uncertainties, such as an inability to negotiate mutually-acceptable terms for the partnership. In addition, there could be delays in the design, manufacture and installation of such new products and we may not be timely in the development of new products, limiting our ability to expand our business and harming our financial condition and results of operations.
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Risks Related to Our Products and Manufacturing
Our business has been and continues to be adversely affected by the COVID-19 pandemic.
We continue to monitor and adjust as appropriate our operations in response to the COVID-19 pandemic. The precautions that we have implemented in our operations may not be sufficient to prevent exposure to COVID-19, and it is possible an asymptomatic individual could enter our facilities and transmit the virus to others.
In addition, certain roles within our facilities involve greater mobility throughout our facilities and potential exposure to more employees. In the event one of such employees suffers from COVID-19, or if we otherwise believe that a significant number of employees have been exposed and sent home, particularly in our manufacturing facilities, our production could be significantly impacted. Furthermore, since our manufacturing process involves tasks performed at both our California facility and Delaware facility, significant exposure at either facility would have a substantial impact on our overall production, and in such case, our cash flow and results of operations including revenue will be adversely affected.
We have experienced COVID-19 related delays from certain vendors and suppliers, which, in turn, could cause delays in the manufacturing and installation of our Energy Servers and adversely impact our cash flows and results of operations including revenue. Alternative or replacement suppliers, may not be available and ongoing delays could affect our business and growth. For example, particular suppliers on which we rely were shut down in 2020, and we were not able to obtain all the needed parts. We may experience future disruptions in the availability or price of these or other parts, and we cannot guarantee that we will succeed in finding alternate suppliers that are able to meet our needs. In addition, international air and sea logistics systems have been heavily impacted by the COVID-19 pandemic. Air carriers have significantly reduced their passenger and air freight capacity, and many ports are either temporarily closed or have reduced their hours of operation. Actions by government agencies may further restrict the operations of freight carriers, which would negatively impact our ability to receive the parts and supplies we need to manufacture our Energy Servers or to deliver them to our customers.
As discussed elsewhere, we also rely on third party financing for our customers’ purchases of our Energy Server and the current environment may cause third party financiers experience liquidity problems or elect to suspend or cancel investments in our projects, an inability to secure financing for our customer purchases, an increase in the time to solidify new relationships, and negative impacts on the creditworthiness of our customers. If we are delayed in obtaining financing for the purchase of our Energy Servers on behalf of our customers, our cash flow and results of operations, including revenue will be adversely affected. For the three months ended March 31, 2021, we were delayed in obtaining financing for our 2021 installations and cash flow was impacted as we did not receive deposits from financiers in advance of purchase of our Energy Servers. If delays in financing continue, then our cash flows, results of operations and revenue will be adversely impacted.
Our installation and maintenance operations have also been, and will continue to be, adversely impacted by the COVID-19 pandemic. For example, our installation projects have experienced and may continue to experience delays relating to, among other things, shortages in available labor for design, installation and other work; the inability or delay in our ability to access customer facilities due to shutdowns or other restrictions; the decreased productivity of our general contractors, their sub-contractors, medium-voltage electrical gear suppliers, and the wide range of engineering and construction related specialist suppliers on whom we rely for successful and timely installations; the stoppage of work by gas and electric utilities on which we are critically dependent for hook ups; and the unavailability of necessary civil and utility inspections as well as the review of our permit submissions and issuance of permits by multiple authorities that have jurisdiction over our activities.
We are not the only business impacted by these shortages and delays, which means that we may in the future face increased competition for scarce resources, which may result in continuing delays or increases in the cost of obtaining such services, including increased labor costs and/or fees to expedite permitting. In addition, we have experienced interruptions and delays caused by confusion related to exemptions for “essential business” among our suppliers and their sub-contractors and the relevant permitting utilities related to our construction activities. Future changes in applicable government orders or regulations, or changes in the interpretation of existing orders or regulations, could result in reductions in the scope of permitted construction activities or prohibitions on such activities. An inability to install our Energy Servers would negatively impact our acceptances, and thereby impact our cash flows and results of operations, including revenue.
As to maintenance, if we are delayed in or unable to perform scheduled or unscheduled maintenance, our previously-installed Energy Servers will likely experience adverse performance impacts including reduced output and/or efficiency, which could result in warranty and/or guaranty claims by our customers. Further, due to the nature of our Energy Servers, if we are unable to replace worn parts in accordance with our standard maintenance schedule, we may be subject to increased costs in the future.
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We continue to remain in close communication with our manufacturing facilities, employees, customers, suppliers and partners, but there is no guarantee we will be able to mitigate the impact of this dynamic and evolving situation.
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. For example, we recently entered leased a new facility to increase our production capacity in order to meet our planned 2021 production targets, but we still need to complete the required build out in a timely manner. Our ability to plan, construct and equip additional manufacturing facilities is subject to significant risks and uncertainties, including the following:
The risks inherent in the development and construction of new facilities, including risks of delays and cost overruns as a result of factors outside our control, which may include delays in government approvals, burdensome permitting conditions, and delays in the delivery of manufacturing equipment and subsystems that we manufacture or obtain from suppliers.
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 or develop our existing facilities in a timely manner, we may be unable to further scale our business, which would negatively affect our results of operations and financial condition. In addition, if any of our supply chain partners suffer from capacity constraints, deployment delays, work stoppages or any other reduction in output, we may be unable to meet our delivery schedule, which could result in lost revenue and deployment delays that could harm our business and customer relationships. If the demand for our Energy Servers or our production output decreases or does not rise as expected, we may not be able to spread a significant amount of our fixed costs over the production volume, resulting in a greater than expected per unit fixed cost, which would have a negative impact on our financial condition and our results of operations.
If we are not able to continue to reduce our cost structure in the future, our ability to become profitable may be impaired.
We must continue to reduce the manufacturing costs for our Energy Servers to expand our market. Additionally, certain of our existing service contracts were entered into based on projections regarding service costs reductions that assume continued advances in our manufacturing and services processes that we may be unable to realize. The cost of components and raw materials, for example, could increase in the future, offsetting any successes in reducing our manufacturing and services costs. 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. In order to expand into new electricity markets (in which the price of electricity from the grid is lower) while still maintaining our current margins, we will need to continue to reduce our costs. Increases in any of these costs or our failure to achieve projected cost reductions could adversely affect our results of operations and financial condition and harm our business and prospects. If we are unable to reduce our cost structure in the future, we may not be able to achieve profitability, which could have a material adverse effect on our business and our prospects.
If our Energy Servers contain manufacturing defects, our business and financial results could be harmed.
Our Energy Servers are complex products and they may contain undetected or latent errors or defects. In the past, we have experienced latent defects only discovered once the Energy Server is deployed in the field. Changes in our supply chain or the failure of our suppliers to otherwise provide us with components or materials that meet our specifications could introduce defects into our products. As we grow our manufacturing volume, the chance of manufacturing defects could increase. In
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addition, new product introductions or design changes made for the purpose of cost reduction, performance improvement, fulfilling new customer requirements or improved reliability could introduce new design defects that may impact Energy Server performance and life. Any design or manufacturing defects or other failures of our Energy Servers to perform as expected could cause us to incur significant service and re-engineering costs, divert the attention of our engineering personnel from product development efforts, and significantly and adversely affect customer satisfaction, market acceptance, and our business reputation.
Furthermore, we may be unable to correct manufacturing defects or other failures of our Energy Servers in a manner satisfactory to our customers, which could adversely affect customer satisfaction, market acceptance, and our business reputation.
The performance of our Energy Servers may be affected by factors outside of our control, which could result in harm to our business and financial results.
Field conditions, such as the quality of the natural gas supply and utility processes, which vary by region and may be subject to seasonal fluctuations or environmental factors such as smoke from wild fires, have affected the performance of our Energy Servers and are not always possible to predict until the Energy Server is in operation. As we move into new geographies and deploy new service configurations, we may encounter new and unanticipated field conditions. Adverse impacts on performance may require us to incur significant service and re-engineering costs or divert the attention of our engineering personnel from product development efforts. Furthermore, we may be unable to adequately address the impacts of factors outside of our control in a manner satisfactory to our customers. Any of these circumstances could significantly and adversely affect customer satisfaction, market acceptance, and our business reputation.
If our estimates of the useful life for our Energy Servers are inaccurate or we do not meet our performance warranties and performance guaranties, or if we fail to accrue adequate warranty and guaranty reserves, our business and financial results could be harmed.
We offer certain customers the opportunity to renew their O&M Agreements (defined herein) on an annual basis, for up to 30 years, at prices predetermined at the time of purchase of the Energy Server. We also provide performance warranties and performance guaranties covering the efficiency and output performance of our Energy Servers. Our pricing of these contracts and our reserves for warranty and replacement are based upon our estimates of the useful life of our Energy Servers and their components, including assumptions regarding improvements in power module life that may fail to materialize. We do not have a long history with a large number of field deployments, especially for new product introductions, and our estimates may prove to be incorrect. Failure to meet these warranty and performance guaranty levels may require us to replace the Energy Servers at our expense or refund their cost to the customer, or require us to make cash payments to the customer based on actual performance, as compared to expected performance, capped at a percentage of the relevant equipment purchase prices. We accrue for product warranty costs and recognize losses on service or performance warranties when required by U.S. GAAP based on our estimates of costs that may be incurred and based on historical experience. However, as we expect our customers to renew their O&M agreements each year, the total liability over time may be more than the accrual. Actual warranty expenses have in the past been and may in the future be greater than we have assumed in our estimates, the accuracy of which may be hindered due to our limited history operating at our current scale.
As of March 31, 2021, we had a total of 23 megawatts in total deployed early generation servers, including our first and second generation servers, out of our total acceptances, net of 568 megawatts. None of these early generation servers are recognized as our property, plant and equipment. We expect that our deployed early generation Energy Servers, if not upgraded with our more current generation power modules, may continue to perform at a lower output and efficiency level and, as a result, the maintenance costs may exceed the contracted prices that we expect to generate if our customers continue to renew their maintenance service agreements with respect to those servers. Further, the Energy Servers held on our condensed consolidated financial statements, including those acquired through our Managed Services Financing option and our Portfolio Financings, could be impaired or have their useful life shortened in the future if adequate maintenance services are not performed or if a determination is made to upgrade the Energy Servers.
Our business is subject to risks associated with construction, utility interconnection, cost overruns and delays, including those related to obtaining government permits and other contingencies that may arise in the course of completing installations.
Because we generally do not recognize revenue on the sales of our Energy Servers until installation and acceptance except where a third party is responsible for installation (such as in our sales in the Republic of Korea and certain cases in the United States), our financial results depend to a large extent on the timeliness of the installation of our Energy Servers.
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Furthermore, in some cases, the installation of our Energy Servers may be on a fixed price basis, which subjects us to the risk of cost overruns or other unforeseen expenses in the installation process.
The construction, installation, and operation of our Energy Servers at a particular site is also generally subject to oversight and regulation in accordance with national, state, and local laws and ordinances relating to building codes, safety, environmental protection, and related matters, and typically require various local and other governmental approvals and permits, including environmental approvals and permits, that vary by jurisdiction. In some cases, these approvals and permits require periodic renewal. It is difficult and costly to track the requirements of every individual authority having jurisdiction over our installations, to design our Energy Servers to comply with these varying standards, and to obtain all applicable approvals and permits. We cannot predict whether or when all permits required for a given project will be granted or whether the conditions associated with the permits will be achievable. The denial of a permit or utility connection essential to a project or the imposition of impractical conditions would impair our ability to develop the project. In addition, we cannot predict whether the permitting process will be lengthened due to complexities and appeals. Delay in the review and permitting process for a project can impair or delay our and our customers’ abilities to develop that project or may increase the cost so substantially that the project is no longer attractive to us or our customers. Furthermore, unforeseen delays in the review and permitting process could delay the timing of the installation of our Energy Servers and could therefore adversely affect the timing of the recognition of revenue related to the installation, which could harm our operating results in a particular period.
In addition, the completion of many of our installations depends on the availability of and timely connection to the natural gas grid and the local electric grid. In some jurisdictions, local utility companies or the municipality have denied our request for connection or have required us to reduce the size of certain projects. In addition, some municipalities have recently adopted restrictions that prohibit any new construction that allows for the use of natural gas. For more information regarding these restrictions, please see the risk factor entitled "As a technology based, in part, on fossil fuel, we may be subject to a heightened risk of regulation, to a potential for the loss of certain incentives, and to changes in our customers’ energy procurement policies." Any delays in our ability to connect with utilities, delays in the performance of installation-related services, or poor performance of installation-related services by our general contractors or sub-contractors will have a material adverse effect on our results and could cause operating results to vary materially from period to period.
Furthermore, we rely on the ability of our third-party general contractors to install Energy Servers at our customers’ sites and to meet our installation requirements. We currently work with a limited number of general contractors, which has impacted and may continue to impact our ability to make installations as planned. Our work with contractors or their sub-contractors may have the effect of our being required to comply with additional rules (including rules unique to our customers), working conditions, site remediation, and other union requirements, which can add costs and complexity to an installation project. The timeliness, thoroughness, and quality of the installation-related services performed by some of our general contractors and their sub-contractors in the past have not always met our expectations or standards and may not meet our expectations and standards in the future.
Any significant disruption in the operations at our manufacturing facilities could delay the production of our Energy Servers, which would harm our business and results of operations.
We manufacture our Energy Servers in a limited number of manufacturing facilities, any of which could become unavailable either temporarily or permanently for any number of reasons, including equipment failure, material supply, public health emergencies or catastrophic weather or geologic events. For example, several of our manufacturing facilities are located in Northern California, an area that is susceptible to earthquakes, floods and other natural disasters. In the event of a significant disruption to our manufacturing process or supply chain, we may not be able to easily shift production to other facilities or to make up for lost production, which could result in harm to our reputation, increased costs, and lower revenues.
The failure of our suppliers to continue to deliver necessary raw materials or other components of our Energy Servers in a timely manner and to specification could prevent us from delivering our products within required time frames and could cause installation delays, cancellations, penalty payments, and damage to our reputation.
We rely on a limited number of third-party suppliers for some of the raw materials and components for our Energy Servers, including certain rare earth materials and other materials that may be of limited supply. If our suppliers provide insufficient inventory at the level of quality required to meet customer demand or if our suppliers are unable or unwilling to provide us with the contracted quantities (as we have limited or in some case no alternatives for supply), our results of operations could be materially and negatively impacted. If we fail to develop or maintain our relationships with our suppliers, or if there is otherwise a shortage or lack of availability of any required raw materials or components, we may be unable to manufacture our Energy Servers or our Energy Servers may be available only at a higher cost or after a long delay. Such delays
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could prevent us from delivering our Energy Servers to our customers within required time frames and cause order cancellations. We have had to create our own supply chain for some of the components and materials utilized in our fuel cells. We have made significant expenditures in the past to develop our supply chain. In many cases, we entered into contractual relationships with suppliers to jointly develop the components we needed. These activities are time and capital intensive. Accordingly, the number of suppliers we have for some of our components and materials is limited and, in some cases, sole sourced. In addition, some of our suppliers use proprietary processes to manufacture components. We may be unable to obtain comparable components from alternative suppliers without considerable delay, expense, or at all, as replacing these suppliers could require us either to make significant investments to bring the capability in-house or to invest in a new supply chain partner. Some of our suppliers are smaller, private companies, heavily dependent on us as a customer. If our suppliers face difficulties obtaining the credit or capital necessary to expand their operations when needed, they could be unable to supply necessary raw materials and components needed to support our planned sales and services operations, which would negatively impact our sales volumes and cash flows.
Moreover, we have in the past and may in the future experience unanticipated disruptions to operations or other difficulties with our supply chain or internalized supply processes due to exchange rate fluctuations, volatility in regional markets from where materials are obtained (particularly China, India and Taiwan), changes in the general macroeconomic outlook, global trade disputes, political instability, expropriation or nationalization of property, public health emergencies such as the COVID-19 pandemic, civil strife, strikes, insurrections, acts of terrorism, acts of war, or natural disasters. The failure by us to obtain raw materials or components in a timely manner or to obtain raw materials or components that meet our quantity and cost requirements could impair our ability to manufacture our Energy Servers or increase their costs or service costs of our existing portfolio of Energy Servers under maintenance services agreements. If we cannot obtain substitute materials or components on a timely basis or on acceptable terms, we could be prevented from delivering our Energy Servers to our customers within required time frames, which could result in sales and installation delays, cancellations, penalty payments, or damage to our reputation, any of which could have a material adverse effect on our business and results of operations. In addition, we rely on our suppliers to meet quality standards, and the failure of our suppliers to meet or exceed those quality standards could cause delays in the delivery of our products, cause unanticipated servicing costs, and cause damage to our reputation.
We have, in some instances, entered into long-term supply agreements that could result in insufficient inventory and negatively affect our results of operations.
We have entered into long-term supply agreements with certain suppliers. Some of these supply agreements provide for fixed or inflation-adjusted pricing, substantial prepayment obligations and in a few cases, supplier purchase commitments. These arrangements could mean that we end up paying for inventory that we did not need or that was at a higher price than the market. Further, we face significant specific counterparty risk under long-term supply agreements when dealing with suppliers without a long, stable production and financial history. Given the uniqueness of our product, many of our suppliers do not have a long operating history and are private companies that may not have substantial capital resources. In the event any such supplier experiences financial difficulties, it may be difficult or impossible, or may require substantial time and expense, for us to recover any or all of our prepayments. We do not know whether we will be able to maintain long-term supply relationships with our critical suppliers or whether we may secure new long-term supply agreements. Additionally, many of our parts and materials are procured from foreign suppliers, which exposes us to risks including unforeseen increases in costs or interruptions in supply arising from changes in applicable international trade regulations such as taxes, tariffs, or quotas. Any of the foregoing could materially harm our financial condition and our results of operations.
We face supply chain competition, including competition from businesses in other industries, which could result in insufficient inventory and negatively affect our results of operations.
Certain of our suppliers also supply parts and materials to other businesses including businesses engaged in the production of consumer electronics and other industries unrelated to fuel cells. As a relatively low-volume purchaser of certain of these parts and materials, we may be unable to procure a sufficient supply of the items in the event that our suppliers fail to produce sufficient quantities to satisfy the demands of all of their customers, which could materially harm our financial condition and our results of operations.
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
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repair or replace if they did not function properly. If any of these suppliers were to experience financial difficulties or go out of business or if there were any damage to or a breakdown of our manufacturing equipment and we could not obtain replacement equipment in a timely manner, our business would suffer. In addition, a supplier’s failure to supply this equipment in a timely manner with adequate quality and on terms acceptable to us could disrupt our production schedule or increase our costs of production and service.
Possible new trade tariffs could have a material adverse effect on our business.
Our business is dependent on the availability of raw materials and components for our Energy Servers, particularly electrical components common in the semiconductor industry, specialty steel products / processing and raw materials. Tariffs imposed on steel and aluminum imports have increased the cost of raw materials for our Energy Servers and decreased the available supply. Additional new trade tariffs or other trade protection measures that are proposed or threatened and the potential escalation of a trade war and retaliation measures could have a material adverse effect on our business, results of operations and financial condition.
To the extent practicable, given the limitations in supply chain previously discussed, our business is subject to the risk of price fluctuations and periodic delays in the delivery of certain raw materials, which tariffs may exacerbate despite our current alternative sources for these materials. Disruptions in the supply of raw materials and components could temporarily impair our ability to manufacture our Energy Servers for our customers or require us to pay higher prices in order to obtain these raw materials or components from other sources, which could affect our business and our results of operations. Consequently, the imposition of tariffs on items imported by us from China or other countries could increase our costs and could have a material adverse effect on our business and our results of operations.
A failure to properly comply (or to comply properly) with foreign trade zone laws and regulations could increase the cost of our duties and tariffs.
We have established two foreign trade zones, one in California and one in Delaware, through qualification with U.S. Customs and Border Protection, and are approved for "zone to zone" transfers between our California and Delaware facilities. Materials received in a foreign trade zone are not subject to certain U.S. duties or tariffs until the material enters U.S. commerce. We benefit from the adoption of foreign trade zones by reduced duties, deferral of certain duties and tariffs, and reduced processing fees, which help us realize a reduction in duty and tariff costs. However, the operation of our foreign trade zones requires compliance with applicable regulations and continued support of U.S. Customs and Border Protection with respect to the foreign trade zone program. If we are unable to maintain the qualification of our foreign trade zones, or if foreign trade zones are limited or unavailable to us in the future, our duty and tariff costs would increase, which could have an adverse effect on our business and results of operations.
Risks Related to Government Incentive Programs
Our business currently benefits from the availability of rebates, tax credits and other financial programs and incentives, and the reduction, modification, or elimination of such benefits could cause our revenue to decline and harm our financial results.
The U.S. federal government and some state and local governments provide incentives to end users and purchasers of our Energy Servers in the form of rebates, tax credits, and other financial incentives, such as system performance payments and payments for renewable energy credits associated with renewable energy generation. In addition, some countries outside the United States also provide incentives to end users and purchasers of our Energy Servers. We currently have operations and sell our Energy Servers in Japan, India, and the Republic of Korea (collectively, our "Asia Pacific region"), where in some locations such as the Republic of Korea, Renewable Portfolio Standards ("RPS") are in place to promote the adoption of renewable power generation, including fuel cells. Our Energy Servers have qualified for tax exemptions, incentives, or other customer incentives in many states including the states of California, Connecticut, Massachusetts, New Jersey and New York. Some states have utility procurement programs and/or renewable portfolio standards for which our technology is eligible. Our Energy Servers are currently installed in ten U.S. states, each of which may have its own enabling policy framework. We rely on these governmental rebates, tax credits, and other financial incentives to lower the effective price of the Energy Servers to our customers in the U. S. and the Asia Pacific region. Financiers and Equity Investors in our PPA Programs may also take advantage of these financial incentives, lowering the cost of capital and energy to our customers. However, these incentives or RPS may expire on a particular date, end when the allocated funding is exhausted, or be reduced or terminated as a matter of regulatory or legislative policy.
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For example, the RPS is scheduled to be replaced at the beginning of 2022 with the Hydrogen Portfolio Standard (“HPS”). This may impact the demand for our Energy Servers in the Republic of Korea. Initially, we do not expect the HPS to require 100% hydrogen as an input fuel for fuel cell projects. The Ministry of Trade, Industry, and Economy is running a stakeholder process in 2021 to determine the specifics of the HPS incentive mechanism. For the three months ended March 31, 2021 and for the year ended December 31, 2020, our revenue in the Republic of Korea accounted for 43% and 34% of our total revenue, respectively. Therefore, if sales of our Energy Servers to this market decline in the future, this may have a material adverse effect on our financial condition and results of operations.
As another example, in the United States, commercial purchasers of fuel cells are eligible to claim the federal ITC. While the current administration has proposed extending the ITC for up to 10 years as part of its infrastructure plan, under current law the ITC will phase out on December 31, 2023, as noted below:
installations that commence construction before January 1, 2023 are eligible for a 26% credit;
installations that commence construction in 2023 are eligible for a 22% credit; and
installations have to be placed in service by January 1, 2026 or the installations become ineligible for the credit.
The ITC program has operational criteria that extend for five years. If the energy property is disposed or otherwise ceases to be qualified investment credit property before the close of the five-year recapture period is fulfilled, it could result in a partial reduction of the incentives. In the case of a Portfolio Financing, the owner of the portfolio bears the risk of repayment if the assets placed in service do not meet the ITC operational criteria in the future.
As another example, many of our installations in California interconnect with investor-owned utilities on Fuel Cell Net Energy Metering (“FC NEM”) tariffs. It is not yet clear that the FC NEM tariffs will be available for new installations after December 31, 2021 and installations that are currently on FC NEM tariffs will have to meet more stringent standards regarding the emissions of greenhouse gases that are under development in order to remain eligible for the FC NEM tariffs. It is not certain that our efforts to obtain an acceptable substitute prior to that deadline will be successful. If our customers are unable to interconnect under the FC NEM tariffs the costs of interconnection may increase and such an increase may negatively impact demand for our products. Additionally, the uncertainty regarding the requirements for continued service under the FC NEM tariffs may negatively impact the perceived value or risks of our products, which may negatively impact demand for our products. Recognizing this, we are working with the appropriate regulatory channels to establish interconnection opportunities through an active proceeding at the California Public Utilities Commission. The proceeding, which is focused on the commercialization of microgrids, is currently ongoing, and we anticipate clarity on interconnection opportunities by late 2021.
Changes in the availability of rebates, tax credits, and other financial programs and incentives could reduce demand for our Energy Servers, impair sales financing, and adversely impact our business results. The continuation of these programs and incentives depends upon political support which to date has been bipartisan and durable. Nevertheless, one set of political activists aggressively seeks to eliminate these programs while another set seeks to deny access to these programs and incentives for any technology that relies on natural gas, regardless of the technology’s positive contribution to reducing air pollution, reducing carbon emissions or enabling electric service to be more reliable and resilient.
We rely on tax equity financing arrangements to realize the benefits provided by ITCs and accelerated tax depreciation and in the event these programs are terminated, our financial results could be harmed.
We expect that Energy Server deployments through certain of our financed transactions will receive capital from Equity Investors who derive a significant portion of their economic returns through tax benefits. Equity Investors are generally entitled to substantially all of the project’s tax benefits, such as those provided by the ITC and Modified Accelerated Cost Recovery System ("MACRS") or bonus depreciation, until the Equity Investors achieve their respective agreed rates of return. The number of and available capital from potential Equity Investors is limited, we compete with other energy companies eligible for these tax benefits to access such investors, and the availability of capital from Equity Investors is subject to fluctuations based on factors outside of our control such as macroeconomic trends and changes in applicable taxation regimes. Concerns regarding our limited operating history, lack of profitability and that we are only the party who can perform operations and maintenance on our Energy Servers have made it difficult to attract investors in the past. Our ability to obtain additional financing in the future depends on the continued confidence of banks and other financing sources in our business model, the market for our Energy Servers, and the continued availability of tax benefits applicable to our Energy Servers. In addition, conditions in the general economy and financial and credit markets may result in the contraction of available tax equity financing. If we are unable to enter into tax equity financing agreements with attractive pricing terms, or at all, we may not be able to obtain the capital needed to fund our financing programs or use the tax benefits provided by the ITC and MACRS depreciation, which
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could make it more difficult for customers to finance the purchase of our Energy Servers. Such circumstances could also require us to reduce the price at which we are able to sell our Energy Servers and therefore harm our business, our financial condition, and our results of operations.
Risks Related to Legal Matters and Regulations
We are subject to various environmental laws and regulations that could impose substantial costs upon us and cause delays in the delivery and installation of our Energy Servers.
We are subject to national, state, and local environmental laws and regulations as well as environmental laws in those foreign jurisdictions in which we operate. Environmental laws and regulations can be complex and may often change. These laws can give rise to liability for administrative oversight costs, cleanup costs, property damage, bodily injury, fines, and penalties. Capital and operating expenses needed to comply with environmental laws and regulations can be significant, and violations may result in substantial fines and penalties or third-party damages. In addition, maintaining compliance with applicable environmental laws requires significant time and management resources and could cause delays in our ability to build out, equip and operate our facilities as well as service our fleet, which would adversely impact our business, our prospects, our financial condition, and our operating results. In addition, environmental laws and regulations such as the Comprehensive Environmental Response, Compensation and Liability Act in the United States impose liability on several grounds including for the investigation and cleanup of contaminated soil and ground water, for building contamination, for impacts to human health and for damages to natural resources. If contamination is discovered in the future at properties formerly owned or operated by us or currently owned or operated by us, or properties to which hazardous substances were sent by us, it could result in our liability under environmental laws and regulations. Many of our customers who purchase our Energy Servers have high sustainability standards, and any environmental noncompliance by us could harm our reputation and impact a current or potential customer’s buying decision. Additionally, in many cases we contractually commit to performing all necessary installation work on a fixed-price basis, and unanticipated costs associated with environmental remediation and/or compliance expenses may cause the cost of performing such work to exceed our revenue. The costs of complying with environmental laws, regulations, and customer requirements, and any claims concerning noncompliance or liability with respect to contamination in the future, could have a material adverse effect on our financial condition or our operating results.
The installation and operation of our Energy Servers are subject to environmental laws and regulations in various jurisdictions, and there is uncertainty with respect to the interpretation of certain environmental laws and regulations to our Energy Servers, especially as these regulations evolve over time.
Bloom is committed to compliance with applicable environmental laws and regulations including health and safety standards, and we continually review the operation of our Energy Servers for health, safety, and environmental compliance. Our Energy Servers, like other fuel cell technology-based products of which we are aware, produce small amounts of hazardous wastes and air pollutants, and we seek to address these in accordance with applicable regulatory standards.
Maintaining compliance with laws and regulations can be challenging given the changing patchwork of environmental laws and regulations that prevail at the federal, state, regional, and local level. Most existing environmental laws and regulations preceded the introduction of our innovative fuel cell technology and were adopted to apply to technologies existing at the time (i.e., large coal, oil, or gas-fired power plants). Currently, there is generally little guidance from these agencies on how certain environmental laws and regulations may or may not be applied to our technology.
For example, natural gas, which is the primary fuel used in our Energy Servers, contains benzene, which is classified as a hazardous waste if it exceeds 0.5 milligrams per liter. A small amount of benzene found in the public natural gas supply (equivalent to what is present in one gallon of gasoline in an automobile fuel tank, which are exempt from federal regulation) is collected by the gas cleaning units contained in our Energy Servers that are typically replaced once every 15 to 36 months by us from customers’ sites. From 2010 to late 2016 and in the regular course of maintenance of the Energy Servers, we periodically replaced the units in our servers relying upon a federal environmental exemption that permitted the handling of such units without manifesting the contents as containing a hazardous waste. Although over the years and with the approval of two states, we believed that we operated under the exemption, the U.S. Environmental Protection Agency ("EPA") issued guidance for the first time in late 2016 that differed from our belief and conflicted with the state approvals we had obtained. We have complied with the new guidance and, given the comparatively small quantities of benzene produced, we do not anticipate significant additional costs or risks from our compliance with the revised 2016 guidance. In order to put this matter behind us and with no admission of law or fact, we agreed to a consent agreement that was ratified and incorporated by reference into a final order that was entered by an Environmental Appeals Judge for EPA’s Environmental Appeals Board in May of 2020. Consistent with the consent agreement and final order, a final payment of approximately $1.2 million was made in the fourth quarter of 2020 and
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EPA has confirmed the matter is formally resolved. Additionally, a nominal penalty was paid to a state agency under that state’s environmental laws relating to the operation of our Energy Server under the exemption prior to the issuance of the revised EPA guidance.
Small amounts of chromium in the hexavalent form (“CR+6”), were previously a concern. Our Energy Servers do not present a significant health hazard based on our modeling, testing methodology, and measurements. There are several supporting elements to this position including that the potential for CR+6 emissions from our Energy Servers are in very low concentrations, are emitted as nanoparticles that convert to the non-hazardous form CR+3 rapidly, are quickly dispersed into the air, and are not emitted in close proximity to locations where people would be expected to have a prolonged exposure. Nevertheless, we have engineered a technology solution that we are deploying.
Several states in which we currently operate, including California, require permits for emissions of air pollutants based on the quantity of emissions, most of which require permits only for quantities of emissions that are higher than those observed from our Energy Servers. Other states in which we operate, including New York, New Jersey, and North Carolina, have specific exemptions for fuel cells. Some states in which we operate have CR+6 limits that are an order of magnitude over our operating range. Within California, the Bay Area Air Quality Management District requires a permit for emissions that are more than 0.00051 lbs/year. Other California regulations require that levels of CR+6 be below 0.00005 µg/m³, which is the level that triggers a Proposition 65 warning regarding the presence of CR+6 unless it can be shown to be at levels that do not pose a significant health risk. We have determined that the standards applicable in California in this regard are more stringent than those in any other state or foreign location in which we have installed Energy Servers to date, therefore, deployment of our solution has been focused on California's standards.
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 a new technology solution for their Energy Servers to comply with the stricter standards imposed by California. We currently plan to satisfy these requests from customers. Failure or delay in attaining regulatory approval could result in our not being able to operate in a particular local jurisdiction.
These examples illustrate that our technology is moving faster than the regulatory process in many instances. It is possible that regulators could delay or prevent us from conducting our business in some way pending agreement on, and compliance with, shifting regulatory requirements. Such actions could delay the installation of Energy Servers, could result in penalties, could require modification or replacement or could trigger claims of performance warranties and defaults under customer contracts that could require us to repurchase their Energy Servers, any of which could adversely affect our business, our financial performance, and our reputation. In addition, new laws or regulations or new interpretations of existing laws or regulations could present marketing, political or regulatory challenges and could require us to upgrade or retrofit existing equipment, which could result in materially increased capital and operating expenses.
Furthermore, we have not yet determined whether our Energy Servers will satisfy regulatory requirements in the other states in the United States and in international locations in which we do not currently sell Energy Servers but may pursue in the future.
As a technology based, in part, on fossil fuel, we may be subject to a heightened risk of regulation, to a potential for the loss of certain incentives, and to changes in our customers’ energy procurement policies.
Although the current generation of our Energy Servers running on natural gas produce nearly 23% less carbon emissions compared to the average of U.S. combustion power generation, the operation of our Energy Servers does produce carbon dioxide ("CO2"), which has been shown to be a contributing factor to global climate change. As such, we may be negatively impacted by CO2-related changes in applicable laws, regulations, ordinances, rules, or the requirements of the incentive programs on which we and our customers currently rely. Changes (or a lack of change to comprehensively recognize the risks of climate change and recognize the benefit of our technology as one means to maintain reliable and resilient electric service with a lower greenhouse gas emission profile) in any of the laws, regulations, ordinances, or rules that apply to our installations and new technology could make it illegal or more costly for us or our customers to install and operate our Energy Servers on particular sites, thereby negatively affecting our ability to deliver cost savings to customers, or we could be prohibited from completing new installations or continuing to operate existing projects. Certain municipalities in California have already banned the use of distributed generation products that utilize fossil fuel. Additionally, our customers’ and potential customers’ energy procurement policies may prohibit or limit their willingness to procure our Energy Servers. Our business prospects may be negatively impacted if we are prevented from completing new installations or our installations become more costly as a result of laws, regulations, ordinances, or rules applicable to our Energy Servers, or by our customers’ and potential customers’ energy procurement policies.
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Existing regulations and changes to such regulations impacting the electric power industry may create technical, regulatory, and economic barriers, which could significantly reduce demand for our Energy Servers or affect the financial performance of current sites.
The market for electricity generation products is heavily influenced by U.S. federal, state, local, and foreign government regulations and policies as well as by internal policies and regulations of electric utility providers. These regulations and policies often relate to electricity pricing and technical interconnection of customer-owned electricity generation. These regulations and policies are often modified and could continue to change, which could result in a significant reduction in demand for our Energy Servers. For example, utility companies commonly charge fees to larger industrial customers for disconnecting from the electric grid or for having the capacity to use power from the electric grid for back-up purposes. These fees could change, thereby increasing the cost to our customers of using our Energy Servers and making them less economically attractive.
In addition, our project with Delmarva Power & Light Company (the "Delaware Project") is subject to laws and regulations relating to electricity generation, transmission, and sale in Delaware and at the federal level.
A law governing the sale of electricity from the Delaware Project was necessary to implement part of several incentives that Delaware offered to us to build our major manufacturing facility ("Manufacturing Center") in Delaware. Those incentives have proven controversial in Delaware, in part because our Manufacturing Center, while a significant source of continuing manufacturing employment, has not expanded as quickly as projected. The opposition to the Delaware Project is an example of potentially material risks associated with electric power regulation.
At the federal level, FERC has authority to regulate under various federal energy regulatory laws, wholesale sales of electric energy, capacity, and ancillary services, and the delivery of natural gas in interstate commerce. Also, several of the tax equity partnerships in which we have an interest are subject to regulation under FERC with respect to market-based sales of electricity, which requires us to file notices and make other periodic filings with FERC, which increases our costs and subjects us to additional regulatory oversight.
Although we generally are not regulated as a utility, federal, state, and local government statutes and regulations concerning electricity heavily influence the market for our product and services. These statutes and regulations often relate to electricity pricing, net metering, incentives, taxation, and the rules surrounding the interconnection of customer-owned electricity generation for specific technologies. In the United States, governments frequently modify these statutes and regulations. Governments, often acting through state utility or public service commissions, change and adopt different requirements for utilities and rates for commercial customers on a regular basis. Changes, or in some cases a lack of change, in any of the laws, regulations, ordinances, or other rules that apply to our installations and new technology could make it more costly for us or our customers to install and operate our Energy Servers on particular sites and, in turn, could negatively affect our ability to deliver cost savings to customers for the purchase of electricity.
We may become subject to product liability claims, which could harm our financial condition and liquidity if we are not able to successfully defend or insure against such claims.
We may in the future become subject to product liability claims. Our Energy Servers are considered high energy systems because they use flammable fuels and may operate at 480 volts. Although our Energy Servers are certified to meet ANSI, IEEE, ASME, and NFPA design and safety standards, if an Energy Server is not properly handled in accordance with our servicing and handling standards and protocols, there could be a system failure and resulting liability. These claims could require us to incur significant costs to defend. Furthermore, any successful product liability claim could require us to pay a substantial monetary award. Moreover, a product liability claim could generate substantial negative publicity about us and our Energy Servers, which could harm our brand, our business prospects, and our operating results. Our product liability insurance may not be sufficient to cover all potential product liability claims. Any lawsuit seeking significant monetary damages either in excess of our coverage or outside of our coverage may have a material adverse effect on our business and our financial condition.
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Current or future litigation or administrative proceedings could have a material adverse effect on our business, our financial condition and our results of operations.
We have been and continue to be involved in legal proceedings, administrative proceedings, claims, and other litigation that arise in the ordinary course of business. Purchases of our products have also been the subject of litigation. For information regarding pending legal proceedings, please see Part II, Item 1, Legal Proceedings and Note 13 - Commitments and Contingencies in Part I, Item 1, Financial Statements. In addition, since our Energy Server is a new type of product in a nascent market, we have in the past needed and may in the future need to seek the amendment of existing regulations, or in some cases the development of new regulations, in order to operate our business in some jurisdictions. Such regulatory processes may require public hearings concerning our business, which could expose us to subsequent litigation.
Unfavorable outcomes or developments relating to proceedings to which we are a party or transactions involving our products such as judgments for monetary damages, injunctions, or denial or revocation of permits, could have a material adverse effect on our business, our financial condition, and our results of operations. In addition, settlement of claims could adversely affect our financial condition and our results of operations.
Risks Related to Our Intellectual Property
Our failure to protect our intellectual property rights may undermine our competitive position, and litigation to protect our intellectual property rights may be costly.

Policing unauthorized use of proprietary technology can be difficult and expensive, and the protective measures we have taken to protect our trade secrets may not be sufficient to prevent such use. For example, many of our engineers reside in California where it is not legally permissible to prevent them from working for a competitor. Also, litigation may be necessary to enforce our intellectual property rights, to protect our trade secrets, or to determine the validity and scope of the proprietary rights of others. Such litigation may result in our intellectual property rights being challenged, limited in scope, or declared invalid or unenforceable. We cannot be certain that the outcome of any litigation will be in our favor, and an adverse determination in any such litigation could impair our intellectual property rights, our business, our prospects, and our reputation.
We rely primarily on patent, trade secret, and trademark laws and non-disclosure, confidentiality, and other types of contractual restrictions to establish, maintain, and enforce our intellectual property and proprietary rights. However, our rights under these laws and agreements afford us only limited protection and the actions we take to establish, maintain, and enforce our intellectual property rights may not be adequate. For example, our trade secrets and other confidential information could be disclosed in an unauthorized manner to third parties, our owned or licensed intellectual property rights could be challenged, invalidated, circumvented, infringed, or misappropriated or our intellectual property rights may not be sufficient to provide us with a competitive advantage, any of which could have a material adverse effect on our business, financial condition, or operating results. In addition, the laws of some countries do not protect proprietary rights as fully as do the laws of the United States. As a result, we may not be able to protect our proprietary rights adequately abroad.
In connection with our expansion into new markets, we may need to develop relationships with new partners,
including project developers and/or financiers who may require access to certain of our intellectual property in order to mitigate perceived risks regarding our ability to service their projects over the contracted project duration. If we are unable to come to agreement regarding the terms of such access or find alternative means to address this perceived risk, such failure may negatively impact our ability to expand into new markets. Alternatively, we may be required to develop new strategies for the protection of our intellectual property, which may be less protective than our current strategies and could therefore erode our competitive position.
Our patent applications may not result in issued patents, and our issued patents may not provide adequate protection, either of which may have a material adverse effect on our ability to prevent others from commercially exploiting products similar to ours.
We cannot be certain that our pending patent applications will result in issued patents or that any of our issued patents will afford protection against a competitor. The status of patents involves complex legal and factual questions, and the breadth of claims allowed is uncertain. As a result, we cannot be certain that the patent applications that we file will result in patents being issued or that our patents and any patents that may be issued to us in the future will afford protection against competitors with similar technology. In addition, patent applications filed in foreign countries are subject to laws, rules, and procedures that differ from those of the United States, and thus we cannot be certain that foreign patent applications related to issued U.S.
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patents will be issued in other regions. Furthermore, even if these patent applications are accepted and the associated patents issued, some foreign countries provide significantly less effective patent enforcement than in the United States.
In addition, patents issued to us may be infringed upon or designed around by others and others may obtain patents that we need to license or design around, either of which would increase costs and may adversely affect our business, our prospects, and our operating results.
We may need to defend ourselves against claims that we infringed, misappropriated, or otherwise violated the intellectual property rights of others, which may be time-consuming and would cause us to incur substantial costs.
Companies, organizations, or individuals, including our competitors, may hold or obtain patents, trademarks, or other proprietary rights that they may in the future believe are infringed by our products or services. These companies holding patents or other intellectual property rights allegedly relating to our technologies could, in the future, make claims or bring suits alleging infringement, misappropriation, or other violations of such rights, or otherwise assert their rights and by seeking licenses or injunctions. Several of the proprietary components used in our Energy Servers have been subjected to infringement challenges in the past. We also generally indemnify our customers against claims that the products we supply don't infringe, misappropriate, or otherwise violate third party intellectual property rights, and we therefore may be required to defend our customers against such claims. If a claim is successfully brought in the future and we or our products are determined to have infringed, misappropriated, or otherwise violated a third party’s intellectual property rights, we may be required to do one or more of the following:
cease selling or using our products that incorporate the challenged intellectual property;
pay substantial damages (including treble damages and attorneys’ fees if our infringement is determined to be willful);
obtain a license from the holder of the intellectual property right, which may not be available on reasonable terms or at all; or
redesign our products or means of production, which may not be possible or cost-effective.
Any of the foregoing could adversely affect our business, prospects, operating results, and financial condition. In addition, any litigation or claims, whether or not valid, could harm our reputation, result in substantial costs and divert resources and management attention.
We also license technology from third parties and incorporate components supplied by third parties into our products. We may face claims that our use of such technology or components infringes or otherwise violates the rights of others, which would subject us to the risks described above. We may seek indemnification from our licensors or suppliers under our contracts with them, but our rights to indemnification or our suppliers’ resources may be unavailable or insufficient to cover our costs and losses.
Risks Related to Our Financial Condition and Operating Results
We have incurred significant losses in the past and we may not be profitable for the foreseeable future.
Since our inception in 2001, we have incurred significant net losses and have used significant cash in our business. As of March 31, 2021, we had an accumulated deficit of $3.1 billion. We expect to continue to expand our operations, including by investing in manufacturing, sales and marketing, research and development, staffing systems, and infrastructure to support our growth. We anticipate that we will incur net losses for the foreseeable future. Our ability to achieve profitability in the future will depend on a number of factors, including:
growing our sales volume;
increasing sales to existing customers and attracting new customers;
expanding into new geographical markets and industry market sectors;
attracting and retaining financing partners who are willing to provide financing for sales on a timely basis and with attractive terms;
continuing to improve the useful life of our fuel cell technology and reducing our warranty servicing costs;
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reducing the cost of producing our Energy Servers;
improving the efficiency and predictability of our installation process;
improving the effectiveness of our sales and marketing activities;
attracting and retaining key talent in a competitive marketplace; and
the amount of stock-based compensation recognized in the period.
Even if we do achieve profitability, we may be unable to sustain or increase our profitability in the future.
Our financial condition and results of operations and other key metrics are likely to fluctuate on a quarterly basis in future periods, which could cause our results for a particular period to fall below expectations, resulting in a severe decline in the price of our Class A common stock.
Our financial condition and results of operations and other key metrics have fluctuated significantly in the past and may continue to fluctuate in the future due to a variety of factors, many of which are beyond our control. For example, the amount of product revenue we recognize in a given period is materially dependent on the volume of installations of our Energy Servers in that period and the type of financing used by the customer.
In addition to the other risks described herein, the following factors could also cause our financial condition and results of operations to fluctuate on a quarterly basis:
the timing of installations, which may depend on many factors such as availability of inventory, product quality or performance issues, or local permitting requirements, utility requirements, environmental, health, and safety requirements, weather, the COVID-19 pandemic or such other health emergency, and customer facility construction schedules;
size of particular installations and number of sites involved in any particular quarter;
the mix in the type of purchase or financing options used by customers in a period, the geographical mix of customer sales, and the rates of return required by financing parties in such period;
whether we are able to structure our sales agreements in a manner that would allow for the product and installation revenue to be recognized upfront;
delays or cancellations of Energy Server installations;
fluctuations in our service costs, particularly due to unexpected costs of servicing and maintaining Energy Servers;
weaker than anticipated demand for our Energy Servers due to changes in government incentives and policies or due to other conditions;
fluctuations in our research and development expense, including periodic increases associated with the pre-production qualification of additional tools as we expand our production capacity;
interruptions in our supply chain;
the length of the sales and installation cycle for a particular customer;
the timing and level of additional purchases by existing customers;
unanticipated expenses or installation delays associated with changes in governmental regulations, permitting requirements by local authorities at particular sites, utility requirements and environmental, health, and safety requirements;
disruptions in our sales, production, service or other business activities resulting from disagreements with our labor force or our inability to attract and retain qualified personnel; and
unanticipated changes in federal, state, local, or foreign government incentive programs available for us, our customers, and tax equity financing parties.
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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 our projections or the expectations of investors and financial analysts, which could have an adverse effect on the price of our Class A common stock.
If we fail to manage our growth effectively, our business and operating results may suffer.
Our current growth and future growth plans may make it difficult for us to efficiently operate our business, challenging us to effectively manage our capital expenditures and control our costs while we expand our operations to increase our revenue. If we experience a significant growth in orders without improvements in automation and efficiency, we may need additional manufacturing capacity and we and some of our suppliers may need additional and capital intensive equipment. Any growth in manufacturing must include a scaling of quality control as the increase in production increases the possible impact of manufacturing defects. In addition, any growth in the volume of sales of our Energy Servers may outpace our ability to engage sufficient and experienced personnel to manage the higher number of installations and to engage contractors to complete installations on a timely basis and in accordance with our expectations and standards. Any failure to manage our growth effectively could materially and adversely affect our business, our prospects, our operating results, and our financial condition. Our future operating results depend to a large extent on our ability to manage this expansion and growth successfully.
The accounting treatment related to our revenue-generating transactions is complex, and if we are unable to attract and retain highly qualified accounting personnel to evaluate the accounting implications of our complex or non-routine transactions, our ability to accurately report our financial results may be harmed.
Our revenue-generating transactions include the Traditional Lease, Managed Services Financings, sales to international channel partners, and Portfolio Financings, all of which are accounted for differently in our condensed consolidated financial statements. Many of the accounting rules related to our financing transactions are complex and require experienced and highly skilled personnel to review and interpret the proper accounting treatment with respect thereto. Competition for senior finance and accounting personnel in the San Francisco Bay Area who have public company reporting experience is intense, and if we are unable to recruit and retain personnel with the required level of expertise to evaluate and accurately classify our revenue-producing transactions, our ability to accurately report our financial results may be harmed.
If we fail to maintain effective internal control over financial reporting in the future, the accuracy and timing of our financial reporting may be adversely affected.
We are required to comply with Section 404 of the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley Act"). The provisions of the act require, among other things, that we maintain effective internal control over financial reporting and disclosure controls and procedures. Preparing our financial statements involves a number of complex processes, many of which are done manually and are dependent upon individual data input or review. These processes include, but are not limited to, calculating revenue, deferred revenue and inventory costs. While we continue to automate our processes and enhance our review and put in place controls to reduce the likelihood for errors, we expect that for the foreseeable future many of our processes will remain manually intensive and thus subject to human error if we are unable to implement key operation controls around pricing, spending and other financial processes. For example, prior to our adoption of Section 404B of the Sarbanes-Oxley Act, we identified a material weakness in our internal control over financial reporting at December 31, 2019 related to the accounting for and disclosure of complex or non-routine transactions, which has been remediated. If we are unable to successfully maintain effective internal control over financial reporting, we may fail to prevent or detect material misstatements in our financial statements, in which case investors may lose confidence in the accuracy and completeness of our financial reports. 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 ("NOLs") that we can use in the future to offset taxable income for U.S. federal and state income tax purposes. Our NOLs will expire, if unused, beginning in 2022 and 2028, respectively. A lack of future taxable income would adversely affect our ability to utilize these NOLs. In addition, under Section 382 of the Internal Revenue Code of 1986, as amended (the "Code"), a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its NOLs to offset future taxable income. Changes in our stock ownership as well as other changes that may be outside of our control could result in ownership changes under Section 382 of the Code, which could cause our NOLs to be subject to certain limitations. Our NOLs may also be impaired under similar
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provisions of state law. Our deferred tax assets, which are currently fully reserved with a valuation allowance, may expire unutilized or underutilized, which could prevent us from offsetting future taxable income.
Risks Related to Our Liquidity
We must maintain the confidence of our customers in our liquidity, including in our ability to timely service our debt obligations and in our ability to grow our business over the long-term.
Currently, we are the only provider able to fully support and maintain our Energy Servers. If potential customers believe we do not have sufficient capital or liquidity to operate our business over the long-term or that we will be unable to maintain their Energy Servers and provide satisfactory support, customers may be less likely to purchase or lease our products, particularly in light of the significant financial commitment required. In addition, financing sources may be unwilling to provide financing on reasonable terms. Similarly, suppliers, financing partners, and other third parties may be less likely to invest time and resources in developing business relationships with us if they have concerns about the success of our business.
Accordingly, in order to grow our business, we must maintain confidence in our liquidity and long-term business prospects among customers, suppliers, financing partners, and other parties. This may be particularly complicated by factors such as:
our limited operating history at a large scale;
the size of our debt obligations;
our lack of profitability;
unfamiliarity with or uncertainty about our Energy Servers and the overall perception of the distributed generation market;
prices for electricity or natural gas in particular markets;
competition from alternate sources of energy;
warranty or unanticipated service issues we may experience;
the environmental consciousness and perceived value of environmental programs to our customers;
the size of our expansion plans in comparison to our existing capital base and the scope and history of operations;
the availability and amount of tax incentives, credits, subsidies or other incentive programs; and
the other factors set forth in this “Risk Factors” section.
Several of these factors are largely outside our control, and any negative perceptions about our liquidity or long-term business prospects, even if unfounded, would likely harm our business.
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Our substantial indebtedness, and restrictions imposed by the agreements governing our and our PPA Entities’ outstanding indebtedness, may limit our financial and operating activities and may adversely affect our ability to incur additional debt to fund future needs.

As of March 31, 2021, we and our subsidiaries had approximately $508.5 million of total consolidated indebtedness, of which an aggregate of $290.1 million represented indebtedness that is recourse to us, all of which is classified as non-current. Of this $290.1 million in debt, $68.7 million represented debt under our 10.25% Senior Secured Notes (the "10.25% Senior Secured Notes"), and $221.4 million represented debt under the $230.0 million aggregate principal amount of our 2.50% Green Convertible Senior Notes due 2025 (the "Green Notes"). In addition, our PPA Entities’ (defined herein) outstanding indebtedness of $218.4 million represented indebtedness that is non-recourse to us. For a description and definition of PPA Entities, please see Part I, Item 2, Management’s Discussion and Analysis – Purchase and Lease Options – Portfolio Financings. The agreements governing our and our PPA Entities’ outstanding indebtedness contain, and other future debt agreements may contain, covenants imposing operating and financial restrictions on our business that limit our flexibility including, among other things:
borrow money;
pay dividends or make other distributions;
incur liens;
make asset dispositions;
make loans or investments;
issue or sell share capital of our subsidiaries;
issue guaranties;
enter into transactions with affiliates;
merge, consolidate or sell, lease or transfer all or substantially all of our assets;
require us to dedicate a substantial portion of cash flow from operations to the payment of principal and interest on indebtedness, thereby reducing the funds available for other purposes such as working capital and capital expenditures;
make it more difficult for us to satisfy and comply with our obligations with respect to our indebtedness;
subject us to increased sensitivity to interest rate increases;
make us more vulnerable to economic downturns, adverse industry conditions, or catastrophic external events;
limit our ability to withstand competitive pressures;
limit our ability to invest in new business subsidiaries that are not PPA Entity-related;
reduce our flexibility in planning for or responding to changing business, industry, and economic conditions; and/or
place us at a competitive disadvantage to competitors that have relatively less debt than we have.
Our PPA Entities’ debt agreements require the maintenance of financial ratios or the satisfaction of financial tests such as debt service coverage ratios and consolidated leverage ratios. Our PPA Entities’ ability to meet these financial ratios and tests may be affected by events beyond our control and, as a result, we cannot assure you that we will be able to meet these ratios and tests.
Upon the occurrence of certain events to us, including a change in control, a significant asset sale or merger or similar transaction, our liquidation or dissolution or the cessation of our stock exchange listing, each of which may constitute a fundamental change under the outstanding notes, holders of certain of the notes have the right to cause us to repurchase for cash any or all of such outstanding notes. We cannot provide assurance that we would have sufficient liquidity to repurchase such notes. Furthermore, our financing and debt agreements 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
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indebtedness if such amounts were accelerated upon an event of default. Borrowings under other debt instruments that contain cross-acceleration or cross-default provisions may, as a result, be accelerated and become due and payable as a consequence. We may be unable to pay these debts in such circumstances. We cannot provide assurance that the operating and financial restrictions and covenants in these agreements will not adversely affect our ability to finance our future operations or capital needs, or our ability to engage in other business activities that may be in our interest or our ability to react to adverse market developments.
As of March 31, 2021, we and our subsidiaries have approximately $508.5 million of total consolidated indebtedness, including $118.5 million in short-term debt and $390.0 million in long-term debt. Given our substantial level of indebtedness, it may be difficult for us to secure additional debt financing at an attractive cost, which may in turn impact our ability to expand our operations and our product development activities and to remain competitive in the market.
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 and on our future cash flow performance, which will be affected by a range of economic, competitive, and business factors, many of which are outside of our control.
We finance a significant volume of Energy Servers and receive equity distributions from certain of the PPA Entities that purchase the Energy Servers and other project intangibles through a series of milestone payments. The milestone payments and equity distributions contribute to our cash flow. These PPA Entities are separate and distinct legal entities, do not guarantee our debt obligations, and have no obligation, contingent or otherwise, to pay amounts due under our debt obligations or to make any funds available to pay those amounts, whether by dividend, distribution, loan, or other payments. It is possible that the PPA Entities may not contribute significant cash to us.
If we do not generate sufficient cash to satisfy our debt obligations, including interest payments, or if we are unable to satisfy the requirement for the payment of principal at maturity or other payments that may be required from time to time under the terms of our debt instruments, we may have to undertake alternative financing plans such as refinancing or restructuring our debt, selling assets, reducing or delaying capital investments, or seeking to raise additional capital. We cannot provide assurance that any refinancing or restructuring would be possible, that any assets could be sold, or, if sold, of the timing of the sales and the amount of proceeds realized from those sales, that additional financing could be obtained on acceptable terms, if at all, or that additional financing would be available or permitted under the terms of our various debt instruments then in effect. Furthermore, the ability to refinance indebtedness would depend upon the condition of the finance and credit markets at the time which have in the past been, and may in the future be, volatile. Our inability to generate sufficient cash to satisfy our debt obligations or to refinance our obligations on commercially reasonable terms or on a timely basis would have an adverse effect on our business, our results of operations and our financial condition.
Under some circumstances, we may be required to or elect to make additional payments to our PPA Entities or the Equity Investors.
Three of our PPA Entities are structured in a manner such that, other than the amount of any equity investment we have made, we do not have any further primary liability for the debts or other obligations of the PPA Entities. All of our PPA Entities that operate Energy Servers for end customers have significant restrictions on their ability to incur increased operating costs, or could face events of default under debt or other investment agreements if end customers are not able to meet their payment obligations under PPAs or if Energy Servers are not deployed in accordance with the project’s schedule. In three cases, if our PPA Entities experience unexpected, increased costs such as insurance costs, interest expense or taxes or as a result of the acceleration of repayment of outstanding indebtedness, or if end customers are unable or unwilling to continue to purchase power under their PPAs, there could be insufficient cash generated from the project to meet the debt service obligations of the PPA Entity or to meet any targeted rates of return of Equity Investors. If a PPA Entity fails to make required debt service payments, this could constitute an event of default and entitle the lender to foreclose on the collateral securing the debt or could trigger other payment obligations of the PPA Entity. To avoid this, we could choose to contribute additional capital to the applicable PPA Entity to enable such PPA Entity to make payments to avoid an event of default, which could adversely affect our business or our financial condition.
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Risks Related to Our Operations
We may have conflicts of interest with our PPA Entities.
In most of our PPA Entities, we act as the managing member and are responsible for the day-to-day administration of the project. However, we are also a major service provider for each PPA Entity in our capacity as the operator of the Energy Servers under an operations and maintenance agreement. Because we are both the administrator and the manager of our PPA Entities, as well as a major service provider, we face a potential conflict of interest in that we may be obligated to enforce contractual rights that a PPA Entity has against us in our capacity as a service provider. By way of example, a 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, 2021, conflicts of interest may arise in the future that cannot be foreseen at this time. In the event that prospective future Equity Investors and debt financing partners perceive there to exist any such conflicts, it could harm our ability to procure financing for our PPA Entities in the future, which could have a material adverse effect on our business.
Expanding operations internationally could expose us to additional risks.
Although we currently primarily operate in the United States, we continue to expand our business internationally. We currently have operations in the Asia Pacific region and more recently Dubai, United Arab Emirates. 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;
greater difficulties in securing or enforcing our intellectual property rights in certain jurisdictions;
difficulties in collecting payments in foreign currencies and associated foreign currency exposure;
restrictions on repatriation of earnings;
compliance with potentially conflicting and changing laws of taxing jurisdictions where we conduct business and compliance with applicable U.S. tax laws as they relate to international operations, the complexity and adverse consequences of such tax laws, and potentially adverse tax consequences due to changes in such tax laws; and
regional economic and political conditions.
In addition, a portion of our sales and expenses stem from countries outside of the United States, and are in currencies other than U.S. dollars, and therefore subject to foreign currency fluctuation. Accordingly, fluctuations in foreign currency rates
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could have a material impact on our financial results in future periods. As a result of these risks, any potential future international expansion efforts that we may undertake may not be successful, which may harm our ability for future growth.
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 Founder, President, Chief Executive Officer and Director, and other key employees. None of our key employees is bound by an employment agreement for any specific term. We cannot assure you that we will be able to successfully attract and retain senior leadership necessary to grow our business. Furthermore, there is increasing competition for talented individuals in our field, and competition for qualified personnel is especially intense in the San Francisco Bay Area where our principal offices are located. Our failure to attract and retain our executive officers and other key management, technical, engineering, and sales personnel could adversely impact our business, our prospects, our financial condition, and our operating results. In addition, we do not have “key person” life insurance policies covering any of our officers or other key employees.
A breach or failure of our networks or computer or data management systems could damage our operations and our reputation.
Our business is dependent on the security and efficacy of our networks and computer and data management systems. For example, our Energy Servers are connected to and controlled and monitored by our centralized remote monitoring service, and we rely on our internal computer networks for many of the systems we use to operate our business generally. 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, and the protective measures we have taken may be insufficient to prevent such events. A breach or failure of our networks or computer or data management systems due to intentional actions such as cyber-attacks, negligence, or other reasons could seriously disrupt our operations or could affect our ability to control or to assess the performance in the field of our Energy Servers and could result in disruption to our business and potentially legal liability. In addition, if certain of our IT systems failed, our production line might be affected, which could impact our business and operating results. These events, in addition to impacting our financial results, could result in significant costs or reputational consequences.
Our headquarters and other facilities are located in an active earthquake zone, and an earthquake or other types of natural disasters or resource shortages, including public safety power shut-offs that have occurred and will continue to occur in California, could disrupt and harm our results of operations.
We conduct a majority of our operations in the San Francisco Bay area in an active earthquake zone, and certain of our facilities are located within known flood plains. The occurrence of a natural disaster such as an earthquake, drought, flood, fire, localized extended outages of critical utilities (such as California's public safety power shut-offs) or transportation systems, or any critical resource shortages could cause a significant interruption in our business, damage or destroy our facilities, our manufacturing equipment, or our inventory, and cause us to incur significant costs, any of which could harm our business, our financial condition, and our results of operations. The insurance we maintain against fires, earthquakes and other natural disasters may not be adequate to cover our losses in any particular case.
Risks Related to Ownership of Our Common Stock
The stock price of our Class A common stock has been and may continue to be volatile.
The market price of our Class A common stock has been and may continue to be volatile. In addition to factors discussed in this Risk Factors section, the market price of our Class A common stock may fluctuate significantly in response to numerous factors, many of which are beyond our control, including:
overall performance of the equity markets;
actual or anticipated fluctuations in our revenue and other operating results;
changes in the financial projections we may provide to the public or our failure to meet these projections;
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failure of securities analysts to initiate or maintain coverage of us, changes in financial estimates by any securities analysts who follow us or our failure to meet these estimates or the expectations of investors;
the issuance of reports from short sellers that may negatively impact the trading price of our Class A common stock;
recruitment or departure of key personnel;
the economy as a whole and market conditions in our industry;
new laws, regulations, subsidies, or credits or new interpretations of them applicable to our business;
negative publicity related to problems in our manufacturing or the real or perceived quality of our products;
rumors and market speculation involving us or other companies in our industry;
announcements by us or our competitors of significant technical innovations, acquisitions, strategic partnerships, or capital commitments;
lawsuits threatened or filed against us;
other events or factors including those resulting from war, incidents of terrorism or responses to these events; and
sales or anticipated sales of shares of our Class A common stock by us or our stockholders.
In addition, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. Stock prices of many companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies. In the past, stockholders have instituted securities class action litigation following periods of market volatility. We are currently involved in securities litigation, which may subject us to substantial costs, divert resources and the attention of management from our business, and adversely affect our business.
The dual class structure of our common stock and the voting agreements among certain stockholders have the effect of concentrating voting control of our Company with KR Sridhar, our Chairman and Chief Executive Officer, and also with those stockholders who held our capital stock prior to the completion of our initial public offering, including our directors, executive officers and significant stockholders, which limits or precludes your ability to influence corporate matters including the election of directors and the approval of any change of control transaction, and may adversely affect the trading price of our Class A common stock.
Our Class B common stock has ten votes per share, and our Class A common stock has one vote per share. As of March 31, 2021, and after giving effect to the voting agreements between KR Sridhar, our Chairman and Chief Executive Officer, and certain holders of Class B common stock, our directors, executive officers, significant stockholders of our common stock, and their respective affiliates collectively held a majority of the voting power of our capital stock. Because of the ten-to-one voting ratio between our Class B and Class A common stock, the holders of our Class B common stock collectively will continue to control a majority of the combined voting power of our common stock and therefore are able to control all matters submitted to our stockholders for approval until the earliest to occur of (i) immediately prior to the close of business on July 27, 2023, (ii) immediately prior to the close of business on the date on which the outstanding shares of Class B common stock represent less than five percent (5%) of the aggregate number of shares of Class A common stock and Class B common stock then outstanding, (iii) the date and time or the occurrence of an event specified in a written conversion election delivered by KR Sridhar to our Secretary or Chairman of the Board to so convert all shares of Class B common stock, or (iv) immediately following the date of the death of KR Sridhar. This concentrated control limits or precludes Class A stockholders’ ability to influence corporate matters while the dual class structure remains in effect, including the election of directors, amendments of our organizational documents, and any merger, consolidation, sale of all or substantially all of our assets, or other major corporate transaction requiring stockholder approval. In addition, this may prevent or discourage unsolicited acquisition proposals or offers for our capital stock that Class A stockholders may feel are in their best interest as one of our stockholders.
Future transfers by holders of Class B common stock will generally result in those shares converting to Class A common stock, subject to limited exceptions such as certain transfers effected for estate planning purposes. The conversion of Class B common stock to Class A common stock will have the effect, over time, of increasing the relative voting power of those remaining holders of Class B common stock who retain their shares in the long-term.
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We may issue additional shares of our Class A common stock in connection with any future conversion of the Green Notes and thereby dilute our existing stockholders and potentially adversely affect the market price of our Class A common stock.
In the event that some or all of the Green Notes are converted and we elect to deliver shares of common stock, the ownership interests of existing stockholders will be diluted, and any sales in the public market of any shares of our Class A common stock issuable upon such conversion could adversely affect the prevailing market price of our Class A common stock. If we were not able to pay cash upon conversion of the Green Notes, the issuance of shares of Class A common stock upon conversion of the Green Notes could depress the market price of our Class A common stock.
The dual class structure of our common stock may adversely affect the trading market for our Class A common stock.
S&P Dow Jones and FTSE Russell have implemented changes to their eligibility criteria for inclusion of shares of public companies on certain indices, including the S&P 500, namely, to exclude companies with multiple classes of shares of common stock from being added to such indices. In addition, several shareholder advisory firms have announced their opposition to the use of multiple class structures. As a result, the dual class structure of our common stock may prevent the inclusion of our Class A common stock in such indices and has caused 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.
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 us more difficult, may limit attempts by our stockholders to replace or remove our current management, may limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, or employees, and may limit the market price of our Class A common stock.
Provisions in our restated certificate of incorporation and amended and restated bylaws may have the effect of delaying or preventing a change of control or changes in our management. Our restated certificate of incorporation and amended and restated bylaws include provisions that:
require that our board of directors is classified into three classes of directors with staggered three year terms;
permit the board of directors to establish the number of directors and fill any vacancies and newly created directorships;
require super-majority voting to amend some provisions in our restated certificate of incorporation and amended and restated bylaws;
authorize the issuance of “blank check” preferred stock that our board of directors could use to implement a stockholder rights plan;
only the chairman of our board of directors, our chief executive officer, or a majority of our board of directors are authorized to call a special meeting of stockholders;
prohibit stockholder action by written consent, which thereby requires all stockholder actions be taken at a meeting of our stockholders;
establish a dual class common stock structure in which holders of our Class B common stock may have the ability to control the outcome of matters requiring stockholder approval even if they own significantly less than a majority of the outstanding shares of our common stock, including the election of directors and significant corporate transactions such as a merger or other sale of our Company or substantially all of our assets;
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expressly authorize the board of directors to make, alter, or repeal our bylaws; and
establish advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted upon by stockholders at annual stockholder meetings.
In addition, our restated certificate of incorporation and our amended and restated bylaws provide that the Court of Chancery of the State of Delaware will be the exclusive forum for: any derivative action or proceeding brought on our behalf; any action asserting a breach of fiduciary duty; any action asserting a claim against us arising pursuant to the Delaware General Corporation Law, our restated certificate of incorporation or our amended and restated bylaws; or any action asserting a claim against us that is governed by the internal affairs doctrine. Our restated certificate of incorporation and our amended and restated bylaws provide that unless we consent in writing to the selection of an alternative forum, the federal district courts of the United States of America shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act. These choice of forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or any of our directors, officers, or other employees, which thereby may discourage lawsuits with respect to such claims. Alternatively, if a court were to find the choice of forum provision contained in our restated certificate of incorporation and our amended and restated bylaws to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could harm our business, our operating results, and our financial condition.
Moreover, Section 203 of the Delaware General Corporation Law may discourage, delay, or prevent a change in control of our Company. Section 203 imposes certain restrictions on mergers, business combinations, and other transactions between us and holders of 15% or more of our common stock.

ITEM 2 -UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None

ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None.

ITEM 4 - MINE SAFETY DISCLOSURES
Not applicable.

ITEM 5 - OTHER INFORMATION
None.

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ITEM 6 - EXHIBITS
Index to Exhibits
The exhibits listed below are filed or incorporated by reference as part of this Quarterly Report on Form 10-Q.
Incorporated by Reference
Exhibit NumberDescriptionFormFile No.ExhibitFiling Date
Lease Agreement between Pacific Commons Owner, LP, and Bloom Energy Corporation entered into as of March 13, 2021Filed herewith
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities and Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002Filed herewith
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities and Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002Filed herewith
**Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002Filed herewith
101.INSXBRL Instance Document- the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL documentFiled herewith
101.SCHInline XBRL Taxonomy Extension Schema DocumentFiled herewith
101.CALInline XBRL Taxonomy Extension Calculation Linkbase DocumentFiled herewith
101.DEFInline XBRL Taxonomy Extension Definition Linkbase DocumentFiled herewith
101.LABInline XBRL Taxonomy Extension Label Linkbase DocumentFiled herewith
101.PREInline XBRL Taxonomy Extension Presentation Linkbase DocumentFiled herewith
104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
^Management contracts or compensation plans or arrangements in which directors or executive officers are eligible to participate.
**The certifications furnished in Exhibit 32.1 hereto are deemed to accompany this Annual Report on Form 10-K and will not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.
Confidential treatment requested with respect to portions of this exhibit.
xPortions of this exhibit are redacted as permitted under Regulation S-K, Rule 601.




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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. 
BLOOM ENERGY CORPORATION
Date:May 6, 2021By:/s/ KR Sridhar
KR Sridhar
Founder, President, Chief Executive Officer and Director
(Principal Executive Officer)
Date:May 6, 2021By:/s/ Gregory Cameron
Gregory Cameron
Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)



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