# Bloom Energy Corp (BE) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Bloom Energy Corp's 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1664703/000162828023004301/be-20221231.htm
Accession: 0001628280-23-004301
Filing date: 2023-02-21
Report date: 2022-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/BE/
All MD&A years: /company/BE/mda/
Previous year: /company/BE/mda/fy2021/ (FY 2021)
Next year: /company/BE/mda/fy2023/ (FY 2023)

ITEM 7 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS

Overview

Description of Bloom Energy

Our mission is to make clean, reliable energy affordable for everyone in the world. We created the first large-scale, commercially viable solid oxide fuel-cell based power generation platform that empowers businesses, essential services, critical infrastructure and communities to responsibly take charge of their energy.

Our technology, invented in the United States, is one of the most advanced electricity and hydrogen producing technologies on the market today. Our fuel-flexible Bloom Energy Servers can use biogas, hydrogen, natural gas, or a blend of fuels to create resilient, sustainable and cost-predictable power at significantly higher efficiencies than traditional, combustion-based resources. In addition, our same solid oxide platform that powers our fuel cells can be used to create hydrogen, which is increasingly recognized as a critically important tool for the decarbonization of the energy economy. Our enterprise customers include some of the largest multinational corporations in the world. We also have strong relationships with some of the largest utility companies in the United States and the Republic of Korea.

At Bloom Energy, we look forward to a net-zero future. Our technology is designed to help enable this future by delivering reliable, low-carbon, electricity in a world facing unacceptable levels of power disruptions. Our resilient platform has kept electricity available for our customers through hurricanes, earthquakes, typhoons, forest fires, extreme heat and grid failures. Unlike traditional combustion power generation, our platform is community-friendly and designed to significantly reduce emissions of criteria air pollutants. We have made tremendous progress towards renewable fuel production through our biogas, hydrogen and electrolyzer programs, and we believe that we are well-positioned as a core platform and fixture in the new energy paradigm to help organizations and communities achieve their net-zero objectives.

We market and sell our Energy Servers primarily through our direct sales organization in the United States, and we 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 also expanded our product and financing options to 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.

Strategic Investment

On October 23, 2021, we entered into a Securities Purchase Agreement (the “SPA”) with SK ecoplant Co., Ltd. (“SK ecoplant,” formerly known as SK Engineering & Construction Co., Ltd.) in connection with our strategic partnership. Pursuant to the SPA, on December 29, 2021, we sold to SK ecoplant 10 million shares of our zero coupon, non-voting redeemable convertible Series A preferred stock, par value $0.0001 per share (the “RCPS”), at a purchase price of $25.50 per share for an aggregate purchase price of $255 million (the “Initial Investment”). On November 8, 2022, each share of Series A Preferred Stock was converted into 10,000,000 shares of Class A Common Stock.

Simultaneous with the execution of the SPA, we and SK ecoplant executed an amendment to the Joint Venture Agreement (the “JVA”), an amendment and restatement to our Preferred Distribution Agreement (“PDA Restatement”) and a new Commercial Cooperation Agreement regarding initiatives pertaining to the hydrogen market and general market expansion for the Bloom Energy Server and Bloom Energy Electrolyzer. For additional details about the transaction with SK ecoplant, please see Note 17 - SK ecoplant Strategic Investment, and for more information about our joint venture with SK ecoplant, please see Note 12 - Related Party Transactions in Part II, Item 8, Financial Statements and Supplementary Data.

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Certain Factors Affecting our Performance

Global Macroeconomic Conditions

We generally are seeing worsening global macroeconomic conditions, including rising interest rates, recession fears, foreign exchange rate volatility and inflationary pressures, as well as increasing geopolitical instability. These conditions impact our business in several ways. For example, the strengthening U.S. dollar has caused our Energy Servers to become more expensive in several markets outside the United States, which, coupled with worsening global macroeconomic conditions, has the potential to adversely impact demand for our Energy Servers. Our Energy Servers run on a variety of fuels, including natural gas. The rising cost of natural gas, limited availability of natural gas supply, as well as disruptions to the world gas markets has increased the cost of our Energy Servers for the end customers. These conditions also impact our manufacturing and supply chain, as discussed below. To date, the potential impact of these conditions on customer demand largely has been offset by the customers’ need for resiliency and a quick time to power that our Energy Server provides as well as the sustainability that both our Energy Servers and Electrolyzers provide.

Supply Chain Constraints

We continue to see effects from global supply chain disruptions and are experiencing supply chain challenges and logistics constraints. While we have not experienced any significant component shortages to date, we are facing pressures from longer lead times, shipping and freight delays, and increased costs of raw materials. These dynamics could worsen as a result of continued increase in geopolitical instability. In addition, the current inflationary environment and war in Ukraine has led to an increase in the price of components and raw materials. In the event we are unable to mitigate the impacts of delays and/or price increases in raw materials, components and freight, it could delay the manufacturing and installation of our Energy Servers and increase the costs of our Energy Servers, which would adversely impact our cash flows and results of operations, including our revenues and gross margin. We expect these supply chain challenges and logistics constraints to continue for the foreseeable future.

Manufacturing and Labor Market Constraints

We are experiencing impacts from the ongoing labor shortage and continue to face challenges in hiring for our manufacturing facilities. While we continue to dedicate resources to supporting our capacity expansion efforts, we are experiencing difficulties with hiring and retention, particularly for our new manufacturing facility in Fremont, California. In addition, the current inflationary environment has led to rising wages and labor rates as well as increased competition for labor. To date, we have been able to mitigate any significant impact to production through a contingent workforce and other measures. In the event we are unable to continue to mitigate the impacts of these challenges, it could delay the manufacturing and installation of our Energy Servers or Electrolyzers and we may be unable to meet customer demand, which could adversely impact our cash flows and results of operations, including our revenues and gross margin. We expect the hiring and retention challenges arising from the labor shortages to continue for the foreseeable future.

Customer Financing Constraints

Our ability to obtain financing for our Energy Servers partly depends on the creditworthiness of our customers, and deterioration of our customers’ credit ratings can impact the financing for their use of an Energy Server. We continue to work on obtaining the financing required for our 2023 installations, but if we are unable to secure such financing our revenue, cash flow and liquidity could be materially impacted. We expect that in the United States, the Inflation Reduction Act of 2022 (the “IRA”) and the transferability of tax credits, should make the financing market more robust.

Installations and Maintenance of Energy Servers

In 2022, our installation projects have experienced some delays relating to, among other things, shortages in available parts and labor for design, installation and other work, and the inability or delay in our ability to access customer facilities due to shutdowns or other restrictions. Despite the impact on installations during the year ending December 31, 2022 and given our mitigation strategies, we only had a couple instances of a significant delay in the installation of our Energy Servers as a result of supply chain issues that pushed installations out a quarter.

If we are delayed in or unable to perform scheduled or unscheduled maintenance, our previously installed Energy Servers would 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 year ended December 31, 2022, we experienced no delays in servicing our Energy Servers.

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COVID-19 Pandemic

We continue to monitor and adjust, as appropriate, our operations in response to the COVID-19 pandemic. We maintain protocols to minimize the risk of COVID-19 transmission within our facilities. We will continue to follow CDC and local guidelines. For more information regarding the risks posed to our Company by the COVID-19 pandemic, refer to Part I, Item 1A, Risk Factors – Risks Related to Our Products and Manufacturing – Our business has been and continues to be adversely affected by the COVID-19 pandemic.

Environmental, Social and Governance (“ESG”)

We are committed to a goal of providing consistent returns to our shareholders while maintaining a strong sense of good corporate citizenship that places a high value on the environment, welfare of our employees, the communities in which we operate, the customers we serve, and the world as a whole. We believe that prioritizing, improving, and managing our Environmental, Social, and Governance (“ESG”) related risks, opportunities and programs will allow us to better create long-term value for our investors.

We released our 2021 Sustainability Report, Solutions for a Decarbonized Future, (the “Report”) during the first quarter of 2022 using accepted ESG frameworks and standards, including alignment with Sustainability Accounting Standards Board standards and the Task Force on Climate-related Financial Disclosures recommendations. In addition, the Report also utilized certain Global Reporting Initiative standards and was mapped against United Nations Sustainable Development Goals. We plan to issue the Report on an annual basis.

Our mission is to make clean, reliable energy affordable for everyone in the world. To that end, we strive to empower businesses and communities to responsibly take charge of their energy while addressing both the causes and consequences of climate change. We aim to serve our customers with products that are resilient, providing uninterrupted power with predictable pricing over the long-term, while addressing sustainability issues by developing an increasingly broad portfolio of decarbonized solutions.

The Report can be found on our website at https://www.bloomenergy.com/sustainibility. Website references throughout this document are provided for convenience only, and the content on the referenced websites is not incorporated by reference into this report.

Inflation Reduction Act of 2022 – New and Expanded Production and Tax Credits for Manufacturers and Projects to Support Clean Energy

On August 16, 2022, President Biden signed into law the Inflation Reduction Act of 2022 (the “IRA”). The IRA contains provisions which we expect will have a significant impact on the development and financing of clean energy projects in the United States. The IRA includes the extension and expansion of the Investment Tax Credit (“ITC”) and Production Tax Credit (“PTC”) and the addition of expanded tax credits for other technologies and for manufacturing of clean energy equipment as well as terms allowing parties to more easily monetize the tax credits. The IRA also includes some targeted bonus credit incentives intended to encourage development in low-income communities, the use of domestically produced materials, and compliance with certain labor-related requirements.

The IRA contains several credits and incentive provisions that may be relevant to us, which we have summarized below:

•Section 48 – ITC, which provides a tax credit based on capital investment in a variety of renewable and conventional energy technologies to incentivize investment in new energy resources and more efficient use of fuel, including fuel cell technology;

•Section 48C – Qualified Advanced Energy Project (reenacted), which provides an ITC through a competitive application process administered through the Department of Energy equal to 6% or 30% of the investment with respect to advanced energy projects;

•Section 45V – Clean Hydrogen, which provides a PTC of up to $3 per kg of qualified clean hydrogen over a 10-year credit period for the production of qualified clean hydrogen at a qualified facility in the US; and

•Section 45Q – Carbon Capture Sequestration, which provides a credit ranging from $12-$17 or $60-$85 per metric ton based on the amount of carbon oxides captured from a qualified facility over a 12-year period

We believe that the programs and credits included in the IRA align well with our business model and could provide significant benefits with respect to incentivizing the purchase of our current product offerings and technologies. In particular, the new PTC

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for qualified clean hydrogen and credit for carbon capture could result in increased demand for commercial solutions to hydrogen production technology and carbon capture, including our solid oxide fuel-cell based electrolyzer and energy server. As Treasury has not yet issued guidance on several of the provisions that applicable to our business, we continue to assess the impact.

Liquidity and Capital Resources

We improved our liquidity in 2022 and at the same time increased our working capital spend. We have entered into new leases intended to maintain sufficient manufacturing facilities to meet anticipated demand in 2023 and beyond, including new product line expansion. In addition, we have also increased the amount spent on working capital to enhance our marketing efforts and to expand into new geographies both domestically and internationally.

On August 10, 2022, pursuant to the SPA, SK ecoplant notified us of its intent to exercise its option to purchase additional shares of our Class A common stock, pursuant to a Second Tranche Exercise Notice (as defined in the SPA). It elected to purchase 13,491,701 shares (the “Second Tranche Shares”) at a purchase price of $23.05 per share, calculated as a 15% premium to the volume-weighted average closing price of the 20 consecutive trading day period immediately preceding the exercise of the option. The aggregate purchase price approximates cash proceeds to be received by us of $311.0 million, net of related incremental direct costs of $0.1 million. The closing of this purchase (the “Second Closing Date”) was expected to be the later of the parties receiving clearance from the U.S. Department of Justice and the Federal Trade Commission of the purchase under the Hart-Scott-Rodino Antitrust Improvements Act of 1974 (the “HSR”), as amended (which was October 7, 2022), and December 6, 2022.

On December 6, 2022, SK ecoplant and Bloom mutually agreed to delay the Second Closing Date until March 31, 2023, unless an earlier date is mutually agreed upon, and subject to and assuming the satisfaction of applicable regulatory clearance.

On August 19, 2022, we completed an underwritten public offering, pursuant to which we issued and sold 13,000,000 shares of Class A common stock at a price of $26.00 per share (the “Offering”). As a part of the Offering, the underwriters were provided a 30-day option to purchase an additional 1,950,000 shares of our Class A common stock at the same price, less underwriting discounts and commissions, which was exercised contemporaneously with the Offering. The aggregate net proceeds received by us from the Offering were $371.5 million, after deducting underwriting discounts and commissions of $16.5 million and incremental costs directly attributable to the Offering of $0.7 million.

As of December 31, 2022, we had cash and cash equivalents of $348.5 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 December 31, 2022, we had $285.8 million of total outstanding recourse debt, $125.8 million of non-recourse debt and $9.5 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 II, Item 8, Financial Statements and Supplementary Data.

The combination of our existing cash and cash equivalents is expected to be sufficient to meet our anticipated cash flow needs for at least the next 12 months. 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, strategic opportunities or otherwise. We may, from time to time, engage in a variety of financing transactions for such purposes, including factoring our accounts receivable. We may not be able to secure timely additional financing on favorable terms, or at all. The terms of any additional financing 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, 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. 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. Failure to obtain this financing or financing in future quarters may affect our results of operations, including our revenues and cash flows.

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As of December 31, 2022, the current portion of our total debt was $26.0 million, of which $13.3 million was outstanding non-recourse debt.

A summary of our consolidated sources and uses of cash, cash equivalents and restricted cash was as follows (in thousands):

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[["","","Years Ended December 31,"],["","","2022","","2021"],["Net cash (used in) provided by:"],["Operating activities","","$","(191,723)","","","$","(60,681)"],["Investing activities","","(116,823)","","","(46,696)"],["Financing activities","","211,364","","","306,375"]]
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Net cash provided by (used in) our PPA Entities, which are incorporated into the consolidated statements of cash flows, was as follows (in thousands):

[[GREPCENT_TABLE]]
[["","","Years Ended December 31,"],["","","2022","","2021"],["PPA Entities \u00b9"],["Net cash provided by PPA operating activities","","$","245,557","","","$","3,188"],["Net cash (used in) provided by PPA financing activities","","(259,854)","","","3,231"]]
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1 The PPA Entities’ operating and financing cash flows are a subset of our 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 consolidated cash flows of the PPA Entities in which we have only a minority interest.

Operating Activities

Our operating activities 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 year ended December 31, 2022, as compared to the prior year period of $60.7 million, was primarily due to the increase in our net loss of $121.7 million and the increase in working capital of $141.8 million during the year ended December 31, 2022 due to the timing of revenue transactions and corresponding collections, the increase in accounts receivable triggered by the increase in sales compounded by the decision not to sell our receivables in the fourth quarter of 2022, the increase in inventory levels to support future demand, and the timing of payments to vendors.

Investing Activities

Our investing activities have consisted of capital expenditures, including investments to increase our production capacity. We expect to continue such investing activities as our business grows. Cash used in investing activities of $116.8 million during the year ended December 31, 2022, an increase of $70.1 million compared to the prior year period, was primarily due to expenditures on tenant improvements for a newly leased engineering and manufacturing building in Fremont, California, opened in July 2022. We expect to continue to make capital expenditures over the next few quarters to prepare our new manufacturing facility in Fremont, California 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, proceeds and repayments of financing obligations, distributions paid to noncontrolling interests, contributions from noncontrolling interests, and the proceeds from the issuance of our common stock. Net cash provided by financing activities during the year ended December 31, 2022 was $211.4 million, a decrease of $95.0 million compared to prior year period, and was comprised primarily of the repayment of debt related to PPA IIIa and PPA IV of $100.7 million and other debt of $19.9 million, repayment of financing

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obligations of $35.5 million, purchase of noncontrolling interest of PPA IV and PPA V of $12.0 million, and distributions and payments to noncontrolling interests of $6.9 million, partially offset by the proceeds from our public share offering of $371.6 million and the proceeds from our issuance of common stock of $15.3 million.

We believe we have sufficient capital to operate our business over the next 12 months, including the completion of the build out of our manufacturing facilities. Our working capital was strengthened with the initial investment by SK ecoplant and our public offering. In addition, we may still enter the equity or debt market as needed to support the expansion of our business. Please refer to Note 7 - Outstanding Loans and Security Agreements in Part II, Item 8, Financial Statements and Supplementary Data; and Part I, 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.

Purchase and Financing Options

Overview

In order to appeal to the largest variety of customers, we make available several options to our customers. Both in the United States and abroad, we sell Energy Servers directly to customers. In the United States, we also enable customers’ use of the Energy Servers through a power purchase or lease option, made possible through third-party ownership financing arrangements.

Often our offerings take advantage of local incentives. In the United States, our financing arrangements are structured to optimize both federal and local incentives, including the ITC and accelerated depreciation. Internationally, our sales are made primarily to distributors who on-sell to, and install for, customers; these deals are also structured to use local incentives applicable to our Energy Servers. Increasingly, we use trusted installers and other sourcing collaborations in the United States to generate transactions.

Whichever option is selected by a customer in the Unites States or internationally, the contract structure will include obligations on our part to operate and maintain the Energy Server (“O&M Agreement”). The O&M Agreement may either be (i) for a one-year period, subject to annual renewal at the customer’s option, which historically are almost always renewed year over year, or (ii) for a fixed term. In the United States, the contract structure often includes obligations on our part to install the Energy Servers (“Installation Obligations”). Consequently, our transactions may generate revenue from the sale of Energy Servers and electricity, performance of O&M Obligations, and performance of Installation Obligations.

In addition to customary workmanship and materials warranties, as part of the O&M Agreement, we provide warranties and guaranties regarding the efficiency and output of our Energy Servers to the customer and, in certain financing structures, to the financing parties as well. We refer to a “performance warranty” as an obligation to repair or replace the Energy Servers as necessary to return performance of an Energy Server to the warranted performance level. We refer to a “performance guaranty” as an obligation to make a payment to compensate for the failure of the Energy Server to meet the guaranteed performance level. Our obligation to make payments under a performance guaranty is always contractually capped.

Energy Server Sales

There are customers who purchase our Energy Servers directly from us pursuant to customary equipment sales contracts. In connection with the purchase of Energy Servers, the customers also enter into a contract with us for the O&M Obligations. The customer may elect to engage us to provide the Installation Obligations or engage a third-party provider. Internationally, sales often occur through distribution arrangements pursuant to which local construction service providers perform the Installation Obligations, as is the case in the Republic of Korea, and we contract directly with the customer to provide O&M Obligations.

In the past, a customer could enter into a contract for the sale of our Energy Servers and finance that acquisition through a sale-leaseback with a financial institution. In most cases, the financial institution completed its purchase from us immediately after commissioning. We both (i) facilitated this financing arrangement between the financial institution and the customer and (ii) provided ongoing operations and maintenance services for the Energy Servers (such arrangement, a “Traditional Lease”). Our current practices no longer contemplate these types of transactions.

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Customer Financing Options

With respect to the third-party financing options in the United States, a customer may choose to contract for the use of our Energy Servers in exchange for a capacity-based payment and, in some cases, an output-based payment based on kw/hour (each, a “Managed Services Agreement”), or for the purchase of electricity generated by the Energy Servers in exchange for a scheduled dollars per kilowatt hour rate (a “Power Purchase Agreement” or “PPA”).

Capacity-based payments in a Managed Services Agreement are required regardless of the level of performance of the Energy Server. Managed Services Agreements are then financed pursuant to a sale-leaseback with a financial institution (a “Managed Services Financing”).

PPAs are typically financed on a portfolio basis. We have financed portfolios through tax equity partnerships, acquisition financings and direct sales to investors (each, a “Portfolio Financing”).

In the United States, our capacity to offer our Energy Servers through either of these financed arrangements depends in large part on the ability of financing parties to optimize the tax benefits associated with an Energy Server, such as the ITC or accelerated depreciation. Interest rate fluctuations, and internationally, currency exchanges fluctuations, may also impact the attractiveness of any financing offerings for our customers. Our ability to finance a Managed Services Agreement or a PPA is also related to, and may be limited by, the creditworthiness of the customer. Additionally, the Managed Services Financing option is limited by a customer’s willingness to commit to making the capacity-based payment to a financing party regardless of performance.

In each of our financing 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. Increasingly, however, we are making sales to third-party developers.

Each of our financing transaction structures is described in further detail below.

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Managed Services Financing

Under our Managed Services Financing option, we enter into a Managed Services Agreement with a customer for a certain term. The fixed capacity-based payments made by the customer under the Managed Services Agreement are applied toward our obligation to pay down our periodic lease liability under a sale-leaseback transaction with a financier. We assign all our rights to such fixed payments made by the customer to the financier, as lessor.

Once we enter into a Managed Services Agreement with the customer, and a financier is identified, we sell the Energy Server to the financier, as lessor, who then leases it back to us, as lessee, pursuant to a sale-leaseback transaction. Certain of our sale-leaseback transactions failed to achieve all of the criteria for sale accounting and consequently were re-characterized for accounting purposes. For such re-characterized transactions, the proceeds from the transaction were recognized as a financing obligation within our consolidated balance sheet. For successful sale-and-leaseback transactions, the financier of a Managed Services Agreement typically pays the purchase price for an Energy Server at or around acceptance, and we recognize the fair market value of the Energy Servers sold within product and install revenue and recognize a right-of-use (“ROU”) asset and a lease liability on our consolidated balance sheet. Any proceeds in excess of the fair value of the Energy Servers are recognized as a financing obligation.

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The duration of our current Managed Services Agreement offerings is between five and ten years.

Our Managed Services Agreements typically provide for performance warranties of both the efficiency and output of the Energy Server and may include other warranties depending on the type of deployment. We often structure payments from the customer as a dollars per kilowatt flat payment. In some cases, the structure may also include a variable payment based on the Energy Server’s performance or a performance-related set-off. As of December 31, 2022, we had incurred no liabilities due to failure to repair or replace our Energy Servers pursuant to these performance warranties.

Portfolio Financings

In the past, we financed the Energy Servers subject to our PPAs through two types of Portfolio Financings. In one type of transaction, we sold a portfolio of PPAs to a tax equity partnership in which we held a managing member interest (such partnership in which we hold an interest, a “PPA Entity”). In these transactions, we sold the portfolio of Energy Servers to a limited liability project company of which the PPA Entity was the sole member (such portfolio owner, a “Portfolio Company”). Whether an investor, a tax equity partnership, or a single member limited liability company, the Portfolio Company was the entity that directly owned the portfolio. The Portfolio Company sold the electricity generated by the Energy Servers contemplated by the PPAs to the customers. We recognized revenue as the electricity was produced. Our current practices no longer contemplate these types of transactions, and we are in the process of restructuring existing PPA Entities by (i) acquiring the outstanding equity interests of our investors and tax equity partners, (ii) selling 100% of the equity interests in the PPA Entity or the Portfolio Company to a new investor or tax equity partnership in which we do not have an equity interest, and (iii) entering into a new equipment supply and installation agreement and related agreements to upgrade and/or replace the Energy Servers owned by the Portfolio Company. As of December 31, 2022, we only had one PPA Entity remaining known as PPA V. Bloom does not have active and formal plans to sell this entity.

We also finance PPAs through a second type of Portfolio Financing pursuant to which we (i) directly sell a portfolio of PPAs and the Energy Servers to an investor or tax equity partnership or (ii) sell a Portfolio Company, in each case to an investor or tax equity partnership (in either case, an “Equity Investor”) in which we do not have an equity interest (a “Third-Party PPA”). Like the other Portfolio Financing structure, the Equity Investor owns the Portfolio Company or the Energy Servers directly, and in each case, sells the electricity generated by the Energy Servers contemplated by the PPAs to the customers. For further discussion, see Note 11 - Portfolio Financings in Part II, Item 8, Financial Statements and Supplementary Data.

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When we finance a portfolio of Energy Servers and PPAs through a Portfolio Financing, we typically enter into, with the Portfolio Company or directly with the Equity Investor, as the case may be, a sale, engineering, procurement and construction agreement (“EPC Agreement”) and a multi-year O&M Agreement, including the provision of performance warranties and guaranties. As owner of the portfolio of PPAs and related Energy Servers, the portfolio owner receives all customer payments generated under the PPAs, the benefits of the ITC and accelerated tax depreciation, 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 customer under the PPA.

The sales of our Energy Servers 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, delivery, or when the Energy Servers are shipped and delivered and are physically ready for startup and commissioning, and upon acceptance of the Energy Server.

Obligations to Portfolio Companies

Our Portfolio Financings involve many obligations on our part to the Portfolio Company or Equity Investor, as applicable. 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 Portfolio Company or Equity Investor;

•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; and

•complying with any other specific requirements contained in the PPAs with customers.

In some cases, the EPC Agreement obligates us to repurchase the Energy Server in the event of certain IP infringement claims. In others, a repurchase of the Energy Server is only one optional remedy we have to cure an IP infringement claim. The O&M Agreement grants the Equity Investor the right to obligate us to repurchase the Energy Servers in the event the Energy

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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 warranty cure 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 Agreement extends to the entire fleet of Energy Servers sold in the event a systemic failure that affects more than a specified number of Energy Servers.

In some Portfolio Financings, we have also agreed to pay liquidated damages to the applicable Portfolio Company or Equity Investor, as the case may be, in the event of delays in the manufacture, installation and commissioning of our Energy Servers, either in the form of a cash payment or a reduction in the purchase price for the applicable Energy Servers.

Administration of Portfolio Companies

In each of our Portfolio Financings in which we hold an equity interest in the PPA Entity, we perform certain administrative services as managing member, including invoicing the end customers for amounts owed under the PPAs, administering the cash receipts of the Portfolio 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.

For those Portfolio Financings with project debt, the Portfolio Company owned by each of our PPA Entities (with the exception of one PPA Entity) incurred debt in order to finance the acquisition of the Energy Servers. The lenders for these transactions are a combination of banks and/or institutional investors. In each case, the debt is secured by all of the assets of the applicable Portfolio Company, such assets being primarily comprised of the Energy Servers and a collateral assignment of each of the contracts to which the Portfolio 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 Portfolio Company. The lenders have no recourse to us or to any of the other equity investors in the Portfolio Company for liabilities arising out of the portfolio.

We have determined that we are the primary beneficiary in the remaining PPA V Entity, subject to reassessments performed as a result of upgrade transactions. Accordingly, we consolidate 100% of the assets, liabilities and operating results of the PPA V Entity, including the Energy Servers and lease income, in our consolidated financial statements. We recognize the Equity Investors’ share of the net assets of the investment entity as noncontrolling interests in the subsidiary in our consolidated balance sheet. We recognize the amounts that are contractually payable to these investors in each period as distributions to noncontrolling interests in our consolidated statements of changes in stockholders’ equity (deficit).

Our consolidated statements of cash flows reflect cash received from the Equity Investors in the PPA V Entity as proceeds from investments by noncontrolling interests in the subsidiary. Our consolidated statements of cash flows also reflect cash paid to these investors as distributions paid to noncontrolling interests in the subsidiary. We reflect any unpaid distributions to these Equity Investors in the PPA V Entity as distributions payable to noncontrolling interests in the subsidiary on our consolidated balance sheets. However, the PPA V Entity is a separate and distinct legal entity, and we may not receive cash or other distributions from the PPA V Entity 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 rates of return to the Equity Investors, or otherwise.

For further information about our Portfolio Financings, see Note 11 - Portfolio Financings in Part II, Item 8, Financial Statements and Supplementary Data.

Delivery and Installation

The transfer of control of our product to our customer based on its delivery and installation has a significant impact on the timing of the recognition of our product and installation revenue. Many factors can cause a lag between the time that a customer signs a contract 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, customer facility construction schedules, customers’ operational considerations and the timing of financing. 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, such as, for sales contracts, delays in their financing arrangements. 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.

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Performance Guarantees

As of December 31, 2022, we had incurred no liabilities due to failure to repair or replace Energy Servers pursuant to any performance warranties made under an O&M Agreement. For O&M Agreements that are subject to renewal, our future service revenue from such agreements are subject to our obligations to make payments for underperformance against the performance guaranties, which are capped at an aggregate total of approximately $524.5 million (including $416.6 million related to portfolio financing entities and $107.9 million related to all other transactions, and include payments for both low output and low efficiency) and our aggregate remaining potential liability under this cap was approximately $477.9 million against future O&M Agreements subject to renewal. For the year ended December 31, 2022, we made performance guarantee payments of $12.1 million.

International Channel Partners

India. In India, sales activities are currently conducted by Bloom Energy (India) Pvt. Ltd., our wholly owned 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 were previously 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 sold Energy Servers to Bloom Energy Japan and we recognized revenue once the Energy Servers left the port in the United States. Bloom Energy Japan then entered into the contract with the end customer and performed all installation work as well as some of the operations and maintenance work. As of July 1, 2021, we acquired Softbank Corp’s interest in Bloom Energy Japan for a cash payment and are now the sole owner of Bloom Energy Japan.

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 in November 2018 with SK ecoplant for the marketing and sale of Bloom Energy Servers for the stationary utility and commercial and industrial South Korean power market.

As part of our expanded strategic partnership with SK ecoplant, the parties executed the PDA Restatement in October 2021, which incorporates previously amended terms and establishes: (i) SK ecoplant’s purchase commitments of at least 500MW of power for our Energy Servers between 2022 and 2025 on a take or pay basis (ii) rollover procedures; (iii) premium pricing for product and services; (iv) termination procedures for material breaches; and (v) procedures if there are material changes to the Republic of Korea Hydrogen Portfolio Standard. For additional details about the transaction with SK ecoplant, please see Note 17 - SK ecoplant Strategic Investment.

Under the terms of the PDA Restatement, 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 ecoplant Joint Venture Agreement. In September 2019, we entered into a joint venture agreement with SK ecoplant 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 a variable interest entity (“VIE”) of Bloom and we consolidate it in our financial statements as we are the primary beneficiary and therefore have the power to direct activities which are most significant to the joint venture. The joint venture facility became operational in July 2020. Other than a nominal initial capital contribution by Bloom Energy, the joint venture is funded by SK ecoplant. SK ecoplant, who currently acts as a distributor for our Energy Servers for the stationary utility and commercial and industrial market in the Republic of Korea, is our primary customer for the products assembled by the joint venture. In October 2021, as part of our expanded strategic partnership with SK ecoplant, the parties agreed to amend the JVA to increase the scope of assembly work done in the joint venture facility. The joint venture was further developed in 2022.

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Comparison of the Years Ended December 31, 2022 and 2021

A discussion regarding our results of operations for 2022 compared to 2021 is presented in this section. A discussion of our results of operations for 2021 compared to 2020 can be found under Item 7 of Part II of our Annual Report on Form 10-K for the year ended December 31, 2021.

Key Operating Metrics

In addition to the measures presented in the 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:

•Product accepted - the number of customer acceptances of our Energy Servers in any period. We recognize revenue when an acceptance is achieved. We use this metric to measure the volume of deployment activity. We measure each Energy Server manufactured, shipped and accepted in terms of 100 kilowatt equivalents.

•Product costs of product accepted in the period (per kilowatt) - the average unit product cost for the Energy Servers that are accepted in a period. We use this metric to provide insight into the trajectory of product costs and, in particular, the effectiveness of cost reduction activities.

•Period costs of manufacturing expenses not included in product costs - the manufacturing and related operating costs that are incurred to procure parts and manufacture Energy Servers that are not included as part of product costs. We use this metric to measure any costs incurred to run our manufacturing operations that are not capitalized (i.e., absorbed, such as stock-based compensation) into inventory and therefore, expensed to our consolidated statement of operations in the period that they are incurred.

•Installation costs on product accepted (per kilowatt) - the average unit installation cost for Energy Servers that are accepted in a given period. This metric is used to provide insight into the trajectory of install costs and, in particular, to evaluate whether our installation costs are in line with our installation billings.

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 has revenue recognized over the term of the contract, and thus it is no longer a meaningful metric for us.

Product 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 depending on the contract terms is when the system is shipped and delivered to our customer, when the system is shipped and delivered and is physically ready for startup and commissioning, or when the system is shipped and delivered and is turned on and producing power.

The product acceptances in the years ended December 31, 2022 and 2021 were as follows:

[[GREPCENT_TABLE]]
[["","","","","","","Years Ended December 31,","","Change"],["","","","","","","","","","","2022","","2021","","Amount","","%"],["Product accepted during the period (in 100 kilowatt systems)","","","","","","","","","","2,281","","","1,879","","","402","","","21.4","%"]]
[[/GREPCENT_TABLE]]

Product accepted for the year ended December 31, 2022 compared to the same period in 2021 increased by 402 systems, or 21.4%. Acceptance volume increased as demand increased for the Energy Servers.

[[GREPCENT_TABLE]]
[["","","","","","","Years Ended December 31,","","Change"],["","","","","","","","","","","2022","","2021","","Amount","","%"],["Megawatts accepted, net","","","","","","","","","","228","","","188","","","40","","","21.3","%"]]
[[/GREPCENT_TABLE]]

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Megawatts accepted, net, increased approximately 40 megawatts, or 21.3%, for the year ended December 31, 2022 compared to the year ended December 31, 2021. The increase in acceptances achieved from December 31, 2021 to December 31, 2022 was added to our installed base and, therefore, increased our megawatts accepted, net, from 188 megawatts to 228 megawatts.

Purchase Options

Our customers have several purchase options for our Energy Servers. The portion of acceptances attributable to each purchase option in the years ended December 31, 2022 and 2021 was as follows:

[[GREPCENT_TABLE]]
[["","","","","Years Ended December 31,"],["","","","","","","2022","","2021"],["Direct Purchase (including Third-Party PPAs and International Channels)","","","","","","98","%","","96","%"],["Managed Services","","","","","","2","%","","4","%"],["","","","","","","100","%","","100","%"]]
[[/GREPCENT_TABLE]]

The portion of total revenue attributable to each purchase option in the years ended December 31, 2022 and 2021 was as follows:

[[GREPCENT_TABLE]]
[["","","","","Years Ended December 31,"],["","","","","","","2022","","2021"],["Direct Purchase (including Third-Party PPAs and International Channels)","","","","","","91","%","","84","%"],["Traditional Lease","","","","","","1","%","","1","%"],["Managed Services","","","","","","5","%","","10","%"],["Portfolio Financings","","","","","","3","%","","5","%"],["","","","","","","100","%","","100","%"]]
[[/GREPCENT_TABLE]]

Costs Related to Our Products

Total product related costs for the years ended December 31, 2022 and 2021 was as follows:

[[GREPCENT_TABLE]]
[["","","","","","","Years Ended December 31,","","Change"],["","","","","","","","","","","2022","","2021","","Amount","","%"],["Product costs of product accepted in the period","","","","","","","","","","$2,453/kW","","$2,346/kW","","$107/kW","","4.6","%"],["Period costs of manufacturing related expenses not included in product costs (in thousands)","","","","","","","","","","$","56,630","","","$","30,762","","","$","25,868","","","84.1","%"],["Installation costs on product accepted in the period","","","","","","","","","","$456/kW","","$587/kW","","-$131/kW","","(22.3)","%"]]
[[/GREPCENT_TABLE]]

Product costs related to products accepted for the year ended December 31, 2022 compared to the same period in 2021 increased by approximately $107 per kilowatt, driven by some of the cost pressures seen in the external inflationary environment with commodity pricing and logistics costs increasing significantly from the prior year period. Our ongoing cost reduction efforts to reduce material costs, labor and overhead through improved automation of our manufacturing facilities, our increased facility utilization and our ongoing material cost reduction programs with our vendors continued but were offset by the temporary increases in product costs that we experienced.

Period costs of manufacturing related expenses for the year ended December 31, 2022 compared to the same period in 2021 increased by approximately $25.9 million, primarily as a result of costs incurred to support capacity expansion efforts which are expected to be brought online in future periods.

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Installation costs on product accepted for the year ended December 31, 2022 compared to the same period in 2021 decreased by approximately $131 per kilowatt. For the year ended December 31, 2022, the decrease in installation costs was driven by the change in the mix of sites requiring Bloom installation. Each customer site is different and installation costs can vary due to a number of factors, including site complexity, size, and location of gas, among other factors. As such, installation on a per kilowatt basis can vary significantly from period to period. In addition, some customers handle their own installation for which we have little to no installation costs.

Results of Operations

A discussion regarding the comparison of our financial condition and results of operations for the years ended December 31, 2022 and 2021 is presented below.

Revenue

[[GREPCENT_TABLE]]
[["","","","","","","Years Ended December 31,","","Change"],["","","","","","","","","","","2022","","2021","","Amount","","%"],["","","","","(dollars in thousands)"],["Product","","","","","","","","","","$","880,664","","$","663,512","","$","217,152","","32.7","%"],["Installation","","","","","","","","","","92,120","","96,059","","(3,939)","","(4.1)","%"],["Service","","","","","","","","","","150,954","","144,184","","6,770","","4.7","%"],["Electricity","","","","","","","","","","75,387","","68,421","","6,966","","10.2","%"],["Total revenue","","","","","","","","","","$","1,199,125","","$","972,176","","$","226,949","","23.3","%"]]
[[/GREPCENT_TABLE]]

Total Revenue

Total revenue increased by $226.9 million, or 23.3%, for the year ended December 31, 2022 as compared to the prior year period. This increase was primarily driven by a $217.2 million increase in product revenue, a $7.0 million increase in electricity revenue, and a $6.8 million increase in service revenue, offset by a $3.9 million decrease in installation revenue.

Product Revenue

Product revenue increased by $217.2 million, or 32.7%, for the year ended December 31, 2022 as compared to the prior year period. The product revenue increase was driven primarily by a 21.4% increase in product acceptances resulting from higher demand in existing markets, increase in product volume and improved pricing driven by the PPA IV Upgrade and PPA IIIa Upgrade (with revenue recognized of $102.3 million and $49.8 million, respectively).

Installation Revenue

Installation revenue decreased by $3.9 million, or (4.1)%, for the year ended December 31, 2022 as compared to the prior year period. This decrease in installation revenue was driven by the change in mix of product acceptances requiring installations by us, as fewer sites had installation costs in fiscal year 2022, offset by the revenue recognized from the PPA IIIa Upgrade of $4.6 million.

Service Revenue

Service revenue increased by $6.8 million, or 4.7%, for the year ended December 31, 2022 as compared to the prior year period. This increase was primarily due to the 21.4% increase in acceptances plus the maintenance contract renewals associated with the increase in our fleet of Energy Servers, partially offset by the impact of product performance guarantees. We expect our service revenue to grow in future periods.

Electricity Revenue

Electricity revenue includes both revenue from contracts with customers and revenue from contracts that contain leases.

Electricity revenue increased by $7.0 million, or 10.2%, for the year ended December 31, 2022 as compared to the prior year period primarily due to the increase in installed units as a result of the increase of $7.1 million in Managed Services transactions recorded in the second half of fiscal year 2021.

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Cost of Revenue

[[GREPCENT_TABLE]]
[["","","","","","","Years Ended December 31,","","Change"],["","","","","","","","","","","2022","","2021","","Amount","","%"],["","","","","(dollars in thousands)"],["Product","","","","","","","","","","$","616,178","","","$","471,654","","","$","144,524","","","30.6","%"],["Installation","","","","","","","","","","104,111","","","110,214","","","(6,103)","","","(5.5)","%"],["Service","","","","","","","","","","168,491","","","148,286","","","20,205","","","13.6","%"],["Electricity","","","","","","","","","","162,057","","","44,441","","","117,616","","","264.7","%"],["Total cost of revenue","","","","","","","","","","$","1,050,837","","","$","774,595","","","$","276,242","","","35.7","%"]]
[[/GREPCENT_TABLE]]

Total Cost of Revenue

Total cost of revenue increased by $276.2 million, or 35.7%, for the year ended December 31, 2022 as compared to the prior year period primarily driven by a $144.5 million increase in cost of product revenue, a $117.6 million increase in cost of electricity revenue, and a $20.2 million increase in cost of service revenue, offset by a $6.1 million decrease in cost of installation revenue. The total cost of revenue increase was primarily driven by the write-off of old Energy Servers of $44.8 million and $64.0 million as a result of the PPA IIIa Upgrade and PPA IV Upgrade, respectively, increased freight charges and other supply chain-related pricing pressures and costs incurred to support capacity expansion efforts which are expected to be brought online in future periods. This increase was partially offset by our ongoing cost reduction efforts to reduce material costs in conjunction with our suppliers and our reduction in labor and overhead costs through increased volume, improved processes and automation at our manufacturing facilities.

Cost of Product Revenue

Cost of product revenue increased by $144.5 million, or 30.6%, for the year ended December 31, 2022 as compared to the prior year period. The cost of product revenue increase was driven primarily by a 21.4% increase in product acceptances, the sale of new Energy Servers of $21.8 million and $37.4 million as a result of the PPA IIIa Upgrade and PPA IV Upgrade, respectively, increased freight charges and other supply chain-related pricing pressures and costs incurred in support of upcoming capacity expansion efforts. This increase was partially offset by our ongoing cost reduction efforts to reduce material costs in conjunction with our suppliers and our reduction in labor and overhead costs through increased volume, improved processes and automation at our manufacturing facilities.

Cost of Installation Revenue

Cost of installation revenue decreased by $6.1 million, or (5.5)%, for the year ended December 31, 2022 as compared to the prior year period. This decrease was driven by the change in mix of product acceptances requiring Bloom Energy installations, as fewer sites had installation costs in the year ended December 31, 2022, partially offset by installation of the new Energy Servers as a result of the PPA IIIa Upgrade of $3.2 million.

Cost of Service Revenue

Cost of service revenue increased by $20.2 million, or 13.6%, for the year ended December 31, 2022 as compared to the prior year period. This increase was primarily due to the deployment of field replacement units, partially offset by cost reductions and our actions to proactively manage fleet optimizations.

Cost of Electricity Revenue

Cost of electricity revenue includes both cost of revenue from contracts with customers and cost of revenue from contracts that contain leases.

Cost of electricity revenue increased by $117.6 million, or 264.7%, for the year ended December 31, 2022 as compared to the prior year period, primarily due to the write-off of old Energy Servers of $44.8 million and $64.0 million as a result of the PPA IIIa Upgrade and PPA IV Upgrade, respectively, and an increase in installed units driven by Managed Services transactions recorded in the second half of fiscal year 2021.

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Gross Profit and Gross Margin

[[GREPCENT_TABLE]]
[["","","","","","","Years Ended December 31,","","Change"],["","","","","","","","2022","","2021"],["","","","","","","","(dollars in thousands)"],["Gross profit:"],["Product","","","","","","","","$","264,486","","$","191,858","","$","72,628"],["Installation","","","","","","","","(11,991)","","(14,155)","","$","2,164"],["Service","","","","","","","","(17,537)","","(4,102)","","$","(13,435)"],["Electricity","","","","","","","","(86,670)","","23,980","","$","(110,650)"],["Total gross profit","","","","","","","","$","148,288","","$","197,581","","$","(49,293)"],["Gross margin:"],["Product","","","","","","","","30","%","","29","%"],["Installation","","","","","","","","(13)","%","","(15)","%"],["Service","","","","","","","","(12)","%","","(3)","%"],["Electricity","","","","","","","","(115)","%","","35","%"],["Total gross margin","","","","","","","","12","%","","20","%"]]
[[/GREPCENT_TABLE]]

Total Gross Profit

Gross profit decreased by $49.3 million in the year ended December 31, 2022 as compared to the prior year period, primarily driven by the $110.7 million decrease in electricity gross profit primarily due to the write-off of old Energy Servers of $44.8 million and $64.0 million as a result of the PPA IIIa Upgrade and the PPA IV Upgrade, respectively; the $13.4 million decrease in service gross profit due to a 21.4% increase in acceptances in addition to maintenance contract renewals associated with the increase in our fleet of Energy Servers. This decrease was partially offset by our ongoing cost reduction efforts to reduce material costs in conjunction with our suppliers and our reduction in labor and overhead costs through increased volume, improved processes and automation at our manufacturing facilities, as well as increase in product gross of profit of $28.0 million and $64.9 million as a result of the PPA IIIa Upgrade and the PPA IV Upgrade, respectively.

Product Gross Profit

Product gross profit increased by $72.6 million in the year ended December 31, 2022 as compared to the prior year period. The improvement is driven by the 21.4% increase in product acceptances, gross profit from the PPA IIIa Upgrade and PPA IV Upgrade of $28.0 million and $64.9 million, respectively, and our ongoing cost reduction efforts to reduce material costs in conjunction with our suppliers and our reduction in labor and overhead costs through increased volume, improved processes and automation at our manufacturing facilities, partially offset by increased freight charges and other supply chain-related pricing pressures and costs incurred to support capacity expansion efforts which are expected to be brought online in future periods.

Installation Gross Loss

Installation gross loss decreased by $2.2 million in the year ended December 31, 2022 as compared to the prior year period driven by the change in site mix and other site related factors such as site complexity, size, local ordinance requirements and location of the utility interconnect.

Service Gross Loss

Service gross loss increased by $13.4 million in the year ended December 31, 2022 as compared to the prior year period. This was primarily due to deployments of field replacement units and the impact of product performance guarantees offset by cost reductions and our actions to proactively manage fleet optimizations.

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Electricity Gross (Loss) Profit

Electricity gross profit decreased by $110.7 million in the year ended December 31, 2022 as compared to the prior year period, mainly due to the impairment of old Energy Servers of $44.8 million and $64.0 million as a result of the PPA IIIa Upgrade and the PPA IV Upgrade, respectively, partially offset by the increase of $7.1 million in Managed Services transactions recorded in the second half of fiscal year 2021.

Operating Expenses

[[GREPCENT_TABLE]]
[["","","","","","","Years Ended December 31,","","Change"],["","","","","","","","","","","2022","","2021","","Amount","","%"],["","","","","(dollars in thousands)"],["Research and development","","","","","","","","","","$","150,606","","","$","103,396","","","$","47,210","","","45.7","%"],["Sales and marketing","","","","","","","","","","90,934","","","86,499","","","4,435","","","5.1","%"],["General and administrative","","","","","","","","","","167,740","","","122,188","","","45,552","","","37.3","%"],["Total operating expenses","","","","","","","","","","$","409,280","","","$","312,083","","","$","97,197","","","31.1","%"]]
[[/GREPCENT_TABLE]]

Total Operating Expenses

Total operating expenses increased by $97.2 million in the year ended December 31, 2022 as compared to the prior year period. This increase was primarily attributable to our investment in business development and front-end sales 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 increased by $47.2 million in the year ended December 31, 2022 as compared to the prior year period. This increase was primarily due to increases in employee compensation and benefits of $30.2 million to expand our employee base in order to support our technology roadmap, including our hydrogen, electrolyzer, marine and biogas solutions.

Sales and Marketing

Sales and marketing expenses increased by $4.4 million in the year ended December 31, 2022 as compared to the prior year period. This increase was primarily driven by increases in employee compensation and benefits of $14.2 million to expand our U.S. and international sales force, increased investment in brand and product management, partially offset by a decrease in outside services.

General and Administrative

General and administrative expenses increased by $45.6 million in the year ended December 31, 2022 as compared to the prior year period. This increase was primarily driven by increases in employee compensation and benefits of $29.7 million, an increase of $4.7 million related to the PPA IV Upgrade due to the write-off of prepaid insurance, an increase in professional services of $3.9 million, an increase in factoring fees of $3.3 million, and an increase in rent expense of $3.3 million.

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Stock-Based Compensation

[[GREPCENT_TABLE]]
[["","","","","","","Years Ended December 31,","","Change"],["","","","","","","","","","","2022","","2021","","Amount","","%"],["","","","","(dollars in thousands)"],["Cost of revenue","","","","","","","","","","$","18,955","","","$","13,811","","","$","5,144","","","37.2","%"],["Research and development","","","","","","","","","","33,956","","","20,274","","","$","13,682","","","67.5","%"],["Sales and marketing","","","","","","","","","","18,651","","","17,085","","","$","1,566","","","9.2","%"],["General and administrative","","","","","","","","","","42,404","","","24,962","","","$","17,442","","","69.9","%"],["Total stock-based compensation","","","","","","","","","","$","113,966","","","$","76,132","","","$","37,834","","","49.7","%"]]
[[/GREPCENT_TABLE]]

Total stock-based compensation increased by $37.8 million for the year ended December 31, 2022 compared to the prior year period, primarily driven by the efforts to expand our employee base across all of the Company’s functions.

Other Income and Expense

[[GREPCENT_TABLE]]
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Interest Income

Interest income is derived from investment earnings on our cash balances, primarily from money market funds. Interest income increased by $3.6 million for the year ended December 31, 2022 as compared to the prior year period, primarily due to an increase in the rates of interest earned on our cash balances.

Interest Expense

Interest expense is from our debt held by third parties. Interest expense decreased by $15.5 million for the year ended December 31, 2022 as compared to the prior year period. This decrease was primarily as a result of repayments of the 7.5% Term Loan due September 2028 and 6.07% Senior Secured Notes due March 2030, as well as refinancing our notes at a lower interest rate.

Other Income (Expense), net

Other income (expense), net, is primarily derived from investments in joint ventures, plus the impact of foreign currency translation. Other income (expense), net increased by $13.1 million for the year ended December 31, 2022 as compared to the prior year period, due to the gain on the revaluation of the option to purchase Class A common stock upon receipt of the notice of exercise from SK ecoplant on August 10, 2022 of $9.0 million, partially offset by a loss on remeasurement of $3.5 million of our equity investment in the Bloom Energy Japan joint venture and the joint venture in China, an increase in loss on foreign currency translation of $0.7 million, as well as loss recognized on interest rate swaps of $10.9 million in 2021 which were settled as of December 31, 2021.

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Loss on Extinguishment of Debt

Loss on extinguishment of debt increased by $9.0 million for the year ended December 31, 2022 as compared to the prior year period, due to the repayment of 7.5% Term Loan due September 2028 and 6.07% Senior Secured Notes due March 2030 as part of the PPA IIIa Upgrade and PPA IV Upgrade, respectively.

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 increased by $1.5 million for the year ended December 31, 2022 as compared to the prior year period, due to the change in fair value of our embedded EPP derivatives in our sales contracts.

Provision for Income Taxes

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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. The income tax provision increased for the year ended December 31, 2022 as compared to the prior year period. The increase was primarily due to fluctuations in the effective tax rates on income earned by international entities.

Net Loss Attributable to Noncontrolling Interests and Redeemable Noncontrolling Interests

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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 improved by $15.2 million for the year ended December 31, 2022 as compared to the prior year period, due to decreased losses in our PPA Entities, which are allocated to our noncontrolling interests, as well as PPA IV Upgrade.

Critical Accounting Policies and Estimates

The 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 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 above are based on our audited results of operations, which we have prepared in accordance with U.S. GAAP. In preparing these 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 representative of estimation uncertainty and are reasonably likely to occur from period to period. Accordingly, actual results could differ 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

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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 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

We apply Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers. We identify our contracts with customers, determine our performance obligations and the transaction price, and after allocating the transaction price to the performance obligations, we recognize revenue as we satisfy our performance obligations and transfer control of our products and services to our customers. Most of our contracts with customers contain performance obligations with a combination of our Energy Server product, installation and maintenance services. For these performance obligations, we allocate the total transaction price to each performance obligation based on the relative standalone selling price using a cost-plus margin approach.

We generally recognize product revenue from contracts with customers at the point that control is transferred to the customers. This occurs when we achieve customer acceptance and typically occurs upon transfer of control to our customers, which depending on the contract terms is when the system is shipped and delivered to our customers, when the system is shipped and delivered and is physically ready for startup and commissioning, or when the system is shipped and delivered and is turned on and producing power.

For certain installations, control of installations transfers to the customer over time, and the related revenue is recognized over time as the performance obligation is satisfied using the cost-to-total cost (percentage-of-completion) method. We use an input measure of progress to determine the amount of revenue to recognize during each reporting period when such revenue is recognized over time, based on the costs incurred to satisfy the performance obligation.

Service revenue is recognized ratably over the term of the first or renewed one-year service period. Given our customers’ renewal history, we anticipate that most of them will continue to renew their maintenance services agreements each year for the period of their expected use of the Energy Server. The contractual renewal price may be less than the standalone selling price of the maintenance services and consequently the contract renewal option may provide the customer with a material right. We estimate the standalone selling price for customer renewal options that give rise to material rights using the practical alternative by reference to optional maintenance services renewal periods expected to be provided and the corresponding expected consideration for these services. This reflects the fact that our additional performance obligations in any contractual renewal period are consistent with the services provided under the standard first-year warranty. Where we have determined that a customer has a material right as a result of their contract renewal option, we recognize that portion of the transaction price allocated to the material right over the period in which such rights are exercised.

Given that we typically sell an Energy Server with a maintenance service agreement and have not provided maintenance services to a customer who does not have use of an Energy Server, standalone selling prices are estimated using a cost-plus approach. Costs relating to Energy Servers include all direct and indirect manufacturing costs, applicable overhead costs and costs for normal production inefficiencies (i.e., variances). We then apply a margin to the Energy Servers which may vary with the size of the customer, geographic region and the scale of the Energy Server deployment. Costs relating to installation include all direct and indirect installation costs. The margin we apply reflects our profit objectives relating to installation. Costs for maintenance service arrangements are estimated over the life of the maintenance contracts and include estimated future service costs and future material costs. Material costs over the period of the service arrangement are impacted significantly by the longevity of the fuel cells themselves. After considering the total service costs, we apply a lower margin to our service costs than to our Energy Servers as it best reflects our long-term service margin expectations and comparable historical industry service margins. As a result, our estimate of our selling price is driven primarily by our expected margin on both the Energy Server and the maintenance service agreements based on their respective costs or, in the case of maintenance service agreements, the estimated costs to be incurred.

The total transaction price is determined based on the total consideration specified in the contract, including variable consideration in the form of a performance guaranty payment that represents potential amounts payable to customers. The expected value method is generally used when estimating variable consideration, which typically reduces the total transaction price due to the nature of the performance obligations to which the variable consideration relates. These estimates reflect our historical experience and current contractual requirements which cap the maximum amount that may be paid. The expected

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value method requires judgment and considers multiple factors that may vary over time depending upon the unique facts and circumstances related to each performance obligation. Depending on the facts and circumstances, a change in variable consideration estimate will either be accounted for at the contract level or using the portfolio method.

For successful sales-leaseback arrangements, we recognize product and installation revenue upon meeting criteria demonstrating we have transferred control to the customer (the Buyer-Lessor). When control of the Energy Server is transferred to the financier, and we determine the leaseback qualifies as an operating lease in accordance with ASC 842, Leases (“ASC 842”), we record a ROU asset and a lease liability, and recognize revenue based on the fair value of the Energy Servers with an allocation to product revenue and installations revenue based on the relative standalone selling prices. We recognize as financing obligations any proceeds received to finance our ongoing costs to operate the Energy Servers.

Valuation of Assets and Liabilities of the SK ecoplant Strategic Investment

In October 2021, we entered into an agreement with SK ecoplant that provides the opportunity, but does not require, an additional investment from SK ecoplant in our Class A common stock, subject to a cap on the total potential share purchase, and as a component of transaction, includes a purchase commitment by the investor for future product purchases. On August 10, 2022, we obtained notice from SK ecoplant of its desire to exercise its option to purchase additional Class A common stock (the “Second Tranche Shares”), which led to a final mark-to-market valuation of respective liability with subsequent reclassification of this previously liability-classified financial instrument to additional paid-in capital as a forward contract.

On December 6, 2022, we and SK ecoplant mutually agreed to delay the date of the payment for the Second Tranche Shares from December 6, 2022 to March 31, 2023, which resulted in the modification of the forward contract and triggered the fair value remeasurement of the freestanding equity-classified instrument that continued to qualify for equity classification under the guidance of ASC 815 Derivatives and Hedging. Since the change in fair value calculated as the difference between the fair value of the instrument immediately before the modification and the fair value of the instrument immediately after the modification was favorable to us, we did not recognize this change in fair value of the forward contract on the modification date or as of December 31, 2022.

Until our receipt of the notice from SK ecoplant of its intent to exercise its option to purchase additional Class A common stock, we were required to determine the fair value of the assets or liabilities for financial reporting purposes under ASC 820, and as applicable, under the guidance of ASC 815 and ASC Topic 480 Distinguishing Liabilities from Equity. We used third party valuation experts that were recognized as financial instrument accounting specialists to provide us with the initial Level 3 fair value measurement that estimated the fair value of the subject assets or liabilities using inputs of the number of shares, underlying prices of Bloom Energy stock, rights and obligations of the counterparties, valuation assumptions related to options, and the assessed value of our product revenue streams and the timing of expected revenue recognition. We determined our final estimate of fair value based on internal reviews and in consideration of the estimates received. The objective of the fair value measurement of our estimate was to represent the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We determined the reasonableness of our valuation methodology, assumptions on the timing and probability of a redemption event, and the expected number of shares to be exercised with the Option, and review the mathematical accuracy of the calculations before recording in our consolidated statement of operations and consolidated balance sheets. See Note 17 - SK ecoplant Strategic Investment.

Incremental Borrowing Rate (“IBR”) by Lease Class

We adopted ASC 842, Leases on January 1, 2020 on a modified retrospective basis. This guidance requires that, for all our leases, we recognize ROU assets representing our right to use the underlying asset for the lease term, and lease liabilities related to the rights and obligations created by those leases, on the balance sheet regardless of whether they are classified as financing or operating leases, with classification affecting the pattern and presentation of expenses and cash flows on the consolidated financial statements. Lease liabilities are measured at the lease commencement date as the present value of future minimum lease payments over the reasonably certain lease term. Lease ROU assets are measured as the lease liability plus unamortized initial direct costs and prepaid (accrued) lease payments less unamortized balance of lease incentives received. In measuring the present value of the future minimum lease payments, we used our collateralized incremental borrowing rate as our leases do not generally provide an implicit rate. The determination of the incremental borrowing rate considers qualitative and quantitative factors as well as the estimated impact that the collateral has on the rate. We determine our incremental borrowing rate based on the lease class of assets which relates to those supporting of manufacturing and general operations, and those supporting electricity revenue transactions.

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For successful sale-leasebacks, as Seller-Lessee, we determine the collateralized IBR on our leased equipment based on a fair value assessment provided by third-party valuation experts.

Stock-Based Compensation

We account for stock options and other equity awards, such as restricted stock units and performance-based stock units, to employees and non-employee directors under the provisions of ASC 718, Compensation-Stock Compensation. Accordingly, the stock-based compensation expense for these awards is measured based on the fair value on the date of grant. For stock options, we recognize the expense, net of estimated forfeitures, under the straight-line attribution over the requisite service period which is generally the vesting term. The fair value of the stock options is estimated using the Black-Scholes valuation model. For options with a vesting condition tied to the attainment of service and market conditions, stock-based compensation costs are recognized using Monte Carlo simulations. In addition, we use the Black-Scholes valuation model to estimate the fair value of stock purchase rights under the Bloom Energy Corporation 2018 Employee Stock Purchase Plan (the “2018 ESPP”). The fair value of the 2018 ESPP purchase rights is recognized as expense under the multiple options approach.

The Black-Scholes valuation model uses as inputs the fair value of our common stock and assumptions we make for the volatility of our common stock, the expected term of the award, the risk-free interest rate for a period that approximates the expected term of the stock options and the expected dividend yield. In developing estimates used to calculate assumptions, we established the expected term for employee options as well as expected forfeiture rates based on the historical settlement experience and after giving consideration to vesting schedules.

Income Taxes

We account for income taxes using the liability method under ASC 740, Income Taxes. Under this method, deferred tax assets and liabilities are determined based on net operating loss carryforwards, research and development credit carryforwards and temporary differences resulting from the different treatment of items for tax and financial reporting purposes. Deferred items are measured using the enacted tax rates and laws that are expected to be in effect when the differences reverse. We must assess the likelihood that deferred tax assets will be recovered as deductions from future taxable income. This determination is based on expected future results and the future reversals of existing taxable temporary differences. Furthermore, uncertain tax positions are evaluated by management and amounts are recorded when it is more likely than not that the position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits. Significant judgement is required throughout management’s process in evaluating each uncertain tax position including future taxable income expectations and tax-planning strategies to determine whether the more likely than not recognition threshold has been met. We have provided a full valuation allowance on our domestic deferred tax assets because we believe it is more likely than not that our deferred tax assets will not be realized.

Principles of Consolidation

Our consolidated financial statements include the operations of our subsidiaries in which we have a controlling financial interest. We use a qualitative approach in assessing the consolidation requirements for our PPA Entity that is a variable interest entity (“VIE”). This approach focuses on determining whether we have the power to direct those activities that significantly affect its 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 Entity. The considerations for VIE consolidation is a complex analysis that requires us to determine whether we are the primary beneficiary and therefore have the power to direct activities which are most significant to the PPA Entity.

Allocation of Profits and Losses of Consolidated Entities to Noncontrolling Interests and Redeemable Noncontrolling Interests

We generally allocate profits and losses to noncontrolling interests under the HLBV method. The HLBV method 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 Entity.

The determination of equity in earnings under the HLBV method requires management to determine how proceeds, upon a hypothetical liquidation of the entity at book value, would be allocated between our investors. The noncontrolling interest balance is presented as a component of permanent equity in the consolidated balance sheets.

Noncontrolling interests with redemption features, such as put options, that are not solely within our control are considered redeemable noncontrolling interests. Exercisability of put options are solely dependent upon the passage of time,

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and hence, such put options are considered to be probable of becoming exercisable. We elected to accrete changes in the redemption value over the period from the date it becomes probable that the instrument will become redeemable to the earliest redemption date of the instrument by using an interest method. The balance of redeemable noncontrolling interests on the balance sheets is reported at the greater of its carrying value or its maximum redemption value at each reporting date. The redeemable noncontrolling interests are classified as temporary equity and therefore are reported in the mezzanine section of the consolidated balance sheets as redeemable noncontrolling interests.