# Bloom Energy Corp (BE) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Bloom Energy Corp's 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1664703/000162828024005035/be-20231231.htm
Accession: 0001628280-24-005035
Filing date: 2024-02-15
Report date: 2023-12-31
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/fy2022/ (FY 2022)
Next year: /company/BE/mda/fy2024/ (FY 2024)

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 U.S., 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 typically 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 with our Bloom Electrolyzer. Hydrogen 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 U.S. and the Republic of Korea, with a growing presence in various international markets.

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 U.S., and we also have direct and indirect sales channels internationally. Recognizing that deploying our solutions requires a significant 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, and who may prefer to finance the acquisition using third-party financing or 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, including 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. Once the sale is completed, we have a large multi-disciplined team to facilitate the deployment of our projects in a wide variety of locations under a myriad of regulatory environments.

Strategic Investment

On October 23, 2021, we entered into a Securities Purchase Agreement (the “SPA”) with SK ecoplant in connection with our strategic partnership. Pursuant to the SPA, on December 29, 2021, we sold to SK ecoplant 10,000,000 shares of our zero coupon, non-voting redeemable convertible Series A preferred stock, par value $0.0001 per share (the “Series A RCPS”), at a purchase price of $25.50 per share for an aggregate purchase price of $255.0 million (the “Initial Investment”). On November 8, 2022, each share of Series A RCPS 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.

On March 20, 2023, SK ecoplant entered into an amendment of the SPA (the “Amended SPA”) with us, pursuant to which on March 23, 2023, we issued and sold to SK ecoplant 13,491,701 shares of non-voting Series B redeemable convertible preferred stock, par value $0.0001 per share (the “Series B RCPS”), at a purchase price of $23.05 per share for cash proceeds of $311.0 million, excluding issuance cost of $0.5 million.

On March 20, 2023, in connection with the Amended SPA, we also entered into a Shareholders’ Loan Agreement with SK ecoplant (the “Loan Agreement”), pursuant to which we had the option to draw on a loan from SK ecoplant with a

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maximum principal amount of $311.0 million, a maturity of five years and an interest rate of 4.6%, should SK ecoplant have sent a redemption notice to us under the Amended SPA.

On September 15, 2023, we entered into the Amended and Restated JVA and the Share Purchase Agreement (together, the “Amended JV Agreements”) with SK ecoplant which changed the share of our voting rights in the Korean joint venture to 40% and increased the scope of assembly done by the joint venture facility in the Republic of Korea to full assembly.

On September 23, 2023, all 13,491,701 shares of the Series B RCPS were automatically converted into shares of our Class A common stock pursuant to the Certificate of Designation, dated as of March 20, 2023, setting forth the rights, preferences, privileges, and restrictions of the Series B RCPS, as amended by the Certificate of Amendment to the Certificate of Designation, dated as of April 18, 2023. Upon conversion of all the Series B RCPS into shares of our Class A common stock, SK ecoplant became a related party to us with the beneficial ownership of 10.5% of our outstanding Class A common stock.

For additional details about the transaction with SK ecoplant, please see Part II, Item 8, Note 17 — SK ecoplant Strategic Investment, and for more information about our joint venture with SK ecoplant, please see Part II, Item 8, Note 11 — Related Party Transactions.

Certain Factors Affecting our Performance

Energy Market Conditions

The global energy transition to a zero-carbon environment has created new challenges and opportunities for utilities, suppliers of energy solutions and customers. Shifts and uncertainty in market and regulatory dynamics and corporate and governmental policies are currently impacting the selling process and extending sales cycles and timelines for our natural gas-, biogas- and hydrogen-related products. Increasing electricity rates, decreasing energy reliability, and delays in the development of transmission infrastructure and grid interconnection have led to increased customer interest in our power solutions. At the same time, natural gas supply and pricing concerns due to geopolitical stresses and resulting market changes as well as increasing focus on sustainability targets have led to increased caution from potential customers. The increased use of renewable power generation and the weather effects of climate change have exacerbated aging grid fragilities, increased the occurrence of power outages, created grid transmission shortages, and lengthened already extensively delayed interconnection cycles. Low- and zero-carbon sources of baseload energy have also been curtailed and even banned in some locations, forcing utilities, states and countries to revisit less clean sources of baseload and intermediate power in an attempt to ensure energy reliability. This supply and demand mismatch globally has threatened energy security reliability, reduced the availability of energy, and increased the cost of energy.

Bloom’s power solutions enable customers to address these energy market challenges by offering fuel flexible solutions that are designed to provide cost predictable, resilient, and reliable energy in a timely fashion. As customers and utilities navigate the energy transition and evolving landscape, the ability of our power solutions to fit their economic, regulatory, and policy needs depends on a number of factors, including natural gas availability and pricing, electrical interconnection needs and availability, redundant back up power requirements, cost requirements, and sustainability profile. Even in those situations where the time to power from the utility is years away in light of the need to build out energy transmission infrastructure, these factors still may impact a customer’s buying decision. For example, although our power generation solutions can operate as microgrids, independent from the grid, if a customer desires back up power or a “grid parallel” solution in combination with the Bloom microgrid, required interconnection studies and lengthy interconnection queues remain, eroding the time to power value proposition. According to the Lawrence Berkeley National Lab, U.S. interconnection queue delays are growing, with a forty percent year over year increase in 2022. The typical project interconnection process for large scale projects grew to five years in 2022 compared to three years in 2015 and two years in 2008. In addition, many data center customers and other large power users have signed exclusivity arrangements with their utilities, and this often creates a more complicated dynamic for them to move to a behind the meter solution. To add to this, the rising cost of natural gas, increases in gas distribution rates, limited availability of natural gas supply, as well as disruptions to the world gas markets, has increased the cost of our power solutions for customers and, in certain cases where there is a lack of fuel supply, a complete inability to operate the systems. In the U.S., the lack or slow development of pipeline infrastructure is impacting the timing of customers being able to take advantage of our power solution opportunities. In certain jurisdictions in the U.S. and Europe, natural gas bans have been enacted that prevent the use of our power solutions unless alternative fuels are available. In addition, there is a growing hesitancy among potential customers to purchase our power solutions to run on natural gas. Increasingly, customers want a zero-carbon solution for power, and, although our power solutions are designed to run on biofuels or hydrogen (in addition to natural gas) and help our customers achieve their sustainability goals, these fuels continue to have very limited availability and, for most customers, are not yet economical. This impetus by customers to use zero-carbon solutions today, combined with the current lack of availability of zero-carbon fuels, is adversely impacting our power solution selling opportunities. In addition, many of our

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potential data center and industrial customers are pursuing greenfield opportunities where the development cycle is long and laden with permitting requirements and the uncertainty of these factors is leading to a more difficult customer decision-making process and longer sales cycles. For example, in the fourth quarter of 2022, we entered into a PPA contract for the sale of electricity to a customer for three greenfield sites that were at various stages of development (the “Project”). The first site was expected to be operational with power by the third quarter of 2024. We sold 73 megawatts of the Energy Servers to a Distributor with the expectation that the Distributor would support installation on the Project and install the Energy Servers at the three Project sites. The Project is currently delayed, and we are in discussions with the end customer regarding if and how to move forward. If the Project continues to be delayed or is terminated we may work with the Distributor to deploy the Energy Servers at our future installation sites with a different customer or customers or the Distributor may decide to reduce future orders or cancel existing orders until the Energy Servers are deployed, and either action could materially and adversely affect our product revenue and the timing of the associated cash flows in 2024.

Corporate procurement policies are also undergoing change that creates uncertainty; while some customers are increasingly focused on decarbonizing their own direct energy supply, including aligning the timing of their zero-carbon power generation with their energy consumption, others are shifting to prioritize overall carbon emissions from the energy system, both of which are impacting our sales.

The regulatory environment for energy solutions continues to shift. In South Korea, the government recently moved to a new, government-run bidding process for fuel cell purchases, which has impacted and may continue to impact demand for our power solutions. In the U.S., the ITC for fuel cells running on a non-zero carbon fuel currently expires at the end of 2024. In Ireland, which is a large data center market, a directive from the Minister of the Department of the Environment, Climate and Communications to restrict grid connections to data centers and other large power users, along with a halt in high-pressure gas installations has delayed our selling activities in Ireland. Delays in adoption of Renewable Fuel Standard regulations in the U.S. for the use of biogas to generate electricity for electric vehicles, and minimal governmental focus on utilization of biogas outside of its direct use by methane-fueled vehicles, have created uncertainty in prospects for broader biogas availability for industrial uses, including our power solutions. In addition, in most jurisdictions, air permits and various land use permits are required for installation of our solutions over a certain amount of mega-watts, and generally the length of time to obtain these permits increased, while the level of certainty of issuance has decreased and if issued, the cost of compliance requirements can be cost prohibitive. We have experienced a reluctance in certain states to issue permits for gas generation equipment. Even if issued, states may require a blend of costly renewable fuels or other measures to advance climate goals. This has adversely impacted our selling activities.

Significant governmental interest, investment and stimulation of clean hydrogen in the U.S., Europe and in many other regions across the globe have not yet had significant impacts on demand for hydrogen. To date, while the number of proposed hydrogen production projects has grown rapidly, only a small fraction has reached the final investment decision (FID) stage, and an even smaller fraction have been deployed. In addition, the infrastructure needed to transport hydrogen, whether through pipelines or maritime or land-based tankers, is currently only sufficient for existing uses, and has not begun to be extended for anticipated future uses, with hydrogen blending and other approaches remaining at pilot stages. It remains unclear whether regulators in some jurisdictions will allow hydrogen to be introduced into gas distribution systems, which could effectively preclude or severely limit our ability to transport hydrogen from the point of production to the point of consumption.

All of these factors have lengthened the selling cycles for our electrolyzer product and power solutions, and we have experienced delays in our anticipated bookings. Our revenue, margins, and cash flow in any given year are largely dependent on bookings during the prior year. Historically, the majority of our bookings have occurred in the second half of the year, with a significant portion occurring in the fourth quarter. That trend did not continue to the same degree in 2023. If a substantial portion of our anticipated bookings continue to be delayed, our future revenue, margins and cash flow could be materially adversely impacted.

Supply Chain Constraints

We continue to see effects from global supply chain tightness due to the current inflationary environment, war in Ukraine, and trade tensions between the U.S. and China. We are not aware of, and do not expect any significant direct impact on our business or supply chain from the Israel-Gaza Strip armed conflict. While we have not experienced any significant component shortages to date, we are facing pressures from inflation. These dynamics could worsen as a result of continued geopolitical instability. In the event we are unable to mitigate the impacts of delays and/or price increases in raw materials and components, it could delay the manufacturing and installation, and increase the costs of, our products, which would adversely impact our cash flows and results of operations, including our revenues and gross margin. We expect these supply chain challenges to continue in the short term.

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Customer Financing Constraints

Our ability to obtain financing for our Energy Servers depends partially on the creditworthiness of our customers, and deterioration of our customers’ credit ratings can impact the financing for their use of our Energy Servers. Regional banking and financial institution instability, such as the failure of Silicon Valley Bank in the first quarter of 2023, may make it more difficult for our customers to obtain financing. Rising interest rates have also increased the cost of financing for our customers. As interest rates rise, the financiers of our installations demand a higher rate of return, which puts pressure on our margins. We continue to work on obtaining the financing required for our 2024 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 U.S., the IRA and the transferability of tax credits, should make the financing market more robust in 2024, thereby easing some of these customer financing constraints, but this cannot be assured.

Manufacturing and Labor Market Constraints

As recently as 2022, we experienced impacts from labor shortages and challenges in hiring for our manufacturing facilities. While these constraints abated in 2023 and we reduced headcount as part of the Restructuring Plan adopted in September 2023, we may still experience difficulties with hiring and retention, and may face additional labor shortages in the future. The Restructuring Plan included (i) an optimization of our workforce across multiple functions, (ii) a relocation of a portion of our R&O department of our manufacturing and warehousing facility in Newark, Delaware, to Mexico, and (iii) a closure of a manufacturing, warehousing, R&D facility in Sunnyvale, California. According to the Restructuring Plan, 74 full-time employees and 48 contractors separated from the Company in September 2023. An additional 71 full-time employees and 8 contractors separated from the Company in October 2023. Also, in October 2023 we communicated to 61 full-time manufacturing employees about their forthcoming separation from the Company. These employees were sent on paid leave and left the Company in January 2024. For additional information, please see Part II, Item 8, Note 12 — Restructuring. In addition, the current inflationary environment has led to rising wages and labor costs as well as increased competition for labor. In the event these constraints return, and 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.

Installations and Maintenance of Energy Servers

In 2023, our installation projects experienced some delays relating to, among other things, permitting, utility delays, and access to customer facilities. However, these delays did not significantly impact our revenue.

If we are delayed in or unable to perform 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 incur higher costs in the future. During the year ended December 31, 2023, we experienced no significant delays in servicing our Energy Servers.

Environmental, Social and Governance (“ESG”)

We are committed to a goal of providing consistent returns to our stockholders 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 ESG related risks, opportunities, and programs help us to better create long-term value for our investors.

In April 2023, we released our 2022 Sustainability Report, Advancing the Mission of Decarbonization (the “Sustainability Report”), using generally 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 Sustainability Report also utilized certain Global Reporting Initiative standards and was mapped against the United Nations Sustainable Development Goals. We plan to issue a sustainability 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 solutions for decarbonization.

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The Sustainability 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

On August 16, 2022, President Biden signed into law the IRA. It contains provisions which have a significant impact on the development and financing of clean energy projects in the U.S. The IRA includes the extension and expansion of the ITC and the Production Tax Credit (the “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 – the 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 the 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 U.S.; 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 IRA authorized a competitive process to apply for credits to expand or enhance manufacturing capacity under IRC 48C, and we have applied for a credit under this provision; at this time, we cannot be assured our application will ultimately be accepted or result in our receipt of credits. Also, the new PTC 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 Servers.

New Foreign Tax Rules

In 2021 the OECD announced an Inclusive Framework on Base Erosion and Profit Shifting including Pillar Two Model Rules defining the global minimum tax, which calls for the taxation of large multinational corporations at a minimum rate of 15%. Subsequently multiple sets of administrative guidance have been issued. Many non-US tax jurisdictions have either recently enacted legislation to adopt certain components of the Pillar Two Model Rules beginning in 2024 (including the European Union Member States) with the adoption of additional components in later years or announced their plans to enact legislation in future years. We are continuing to evaluate the impacts of enacted legislation and pending legislation to enact Pillar Two Model Rules in the non-US tax jurisdictions we operate in. However, no material impact to our financial statements is expected due to the relatively small operations outside the U.S.

Liquidity and Capital Resources

We raised cash and supplemented liquidity through financing activities with SK ecoplant in the first quarter of 2023 and issuing the 3% Green Convertible Senior Notes due June 2028 (the “3% Green Notes”) in the second quarter of 2023. At the same time, we increased our working capital spent. In addition, we expanded our warehouse space in Delaware and California to store more inventory to meet the anticipated increase in demand. If this increase in demand does not materialize to the degree we anticipated, our liquidity and financial condition may be adversely impacted.

On March 20, 2023, we entered into the Amended SPA, with SK ecoplant, pursuant to which we issued and sold to SK ecoplant 13,491,701 shares of Series B RCPS for cash proceeds of $311.0 million, excluding issuance cost of $0.5 million.

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On March 20, 2023, in connection with the Amended SPA, we also entered into the Loan Agreement, pursuant to which we were entitled to draw down on a loan from SK ecoplant with a maximum principal amount of $311.0 million, if SK ecoplant sent a redemption notice to us under the Amended SPA or otherwise had reduced any portion of its current holdings of our Class A common stock. On September 23, 2023, all 13,491,701 shares of the Series B RCPS were automatically converted into shares of our Class A common stock. For further information on the strategic investment with SK ecoplant, see Part II, Item 8, Note 17 — SK ecoplant Strategic Investment.

On May 16, 2023, we issued the 3% Green Notes with an aggregate principal amount of $632.5 million due June 2028, unless earlier repurchased, redeemed, or converted, resulting in net cash proceeds of $612.8 million. On June 1, 2023, we used approximately $60.9 million of the net proceeds from this offering to redeem all of the outstanding principal amount of our 10.25% Senior Secured Notes due March 2027. The redemption price equaled 104% of the principal amount redeemed plus accrued and unpaid interest. We also used approximately $54.5 million of the net proceeds from the offering to purchase the privately negotiated capped call options (the “Capped Calls”). The remaining portion of the 3% Green Notes was planned to be used for working capital investment and general corporate purposes.

On August 24, 2023, as part of the PPA V Upgrade, we paid off the outstanding balance and related accrued interest of $118.5 million and $0.5 million, respectively, of our 3.04% Senior Secured Notes due June 30, 2031.

For further information on issuance of 3% Green Notes, redemption of our 10.25% Senior Secured Notes, and repayment of 3.04% Senior Secured Notes, please see Part II, Item 8, Note 7 — Outstanding Loans and Security Agreements.

As of December 31, 2023, we had cash and cash equivalents of $664.6 million. Our cash and cash equivalents consist of highly liquid investments with maturities of three months or less, including money market funds of $601.1 million. We maintain these balances with high credit quality counterparties, regularly 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, 2023, we had $842.0 million of recourse debt, $4.6 million of non-recourse debt and $9.0 million of other long-term liabilities. As of December 31, 2023, all of our debt was classified as long-term liabilities. For a complete description of our outstanding debt, please see Part II, Item 8, Note 7 — Outstanding Loans and Security Agreements.

The combination of our cash and cash equivalents and cash flow to be generated by our operations 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 or are not received in a timely manner to satisfy our near-term or future cash needs, we may require additional capital from equity or debt financings to fund our operations, our manufacturing capacity, product development, and market expansion requirements and to timely respond to competitive market pressures or strategic opportunities, among other things. We may, from time to time, engage in a variety of financing transactions for such purposes, including factoring our accounts receivable. During the year ended December 31, 2023, we factored $291.4 million of accounts receivable. However, 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. Although currently we do not have any floating-rate notes on the balance sheet, rising interest rates may increase our overall cost of capital, if and when we refinance our fixed-rate convertible notes. 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 depends on many factors, including our rate of revenue growth, the timing and extent of spending on research and development efforts and other business initiatives, the rate of growth in the volume of system builds and the need for additional manufacturing space, the expansion of sales and marketing activities both in domestic and international markets, market acceptance of our products, our ability to secure financing for customer use of our Energy Servers, the timing of installations and of inventory build in anticipation of future sales and 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 equity or debt financing. Failure to obtain this financing in future quarters may affect our results of operations, including our revenues and cash flows.

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

[[GREPCENT_TABLE]]
[["","","Years Ended December 31,"],["","","2023","","2022"],["Net cash (used in) provided by:"],["Operating activities","","$","(372,531)","","","$","(191,723)"],["Investing activities","","(83,725)","","","(116,823)"],["Financing activities","","683,349","","","211,364"]]
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Net cash provided by (used in) our PPA Entities (as defined below), which are incorporated into the consolidated statements of cash flows, was as follows (in thousands):

[[GREPCENT_TABLE]]
[["","","Years Ended December 31,"],["","","2023","","2022"],["PPA Entities1"],["Net cash provided by PPA operating activities","","$","10,036","","","$","245,557"],["Net cash used in PPA financing activities","","(23,594)","","","(259,854)"]]
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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 on consolidated cash flows of the PPA Entities in which we had only a minority interest. In fiscal 2022 we sold PPA IIIa and PPA IV entities. In August 2023, we sold our last consolidated PPA entity — PPA V. For more details, please see Part II, Item 8, Note 10 — Portfolio Financings.

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. Net cash used in operating activities during the year ended December 31, 2023, was $372.5 million, an increase of $180.8 million compared to the prior year period. The increase in cash used in operating activities during the year ended December 31, 2023, as compared to the prior year period, was primarily a result of an increase in working capital of $379.4 million due to (1) an increase in inventory levels of $231.7 million to support future demand, (2) an increase in accounts receivable of $89.8 million, which was primarily due to the timing of revenue transactions and corresponding collections, and (3) 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 during the year ended December 31, 2023, was $83.7 million, a decrease of $33.1 million compared to the prior year period and was primarily due to the decrease in expenditures on tenant improvements for a newly leased engineering and manufacturing building in Fremont, California, which opened in July 2022. We expect to continue to make capital expenditures over the next few quarters to expand production capacity at our new manufacturing facility in Fremont, California, 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 consisted of borrowings and repayments of debt, proceeds and repayments of financing obligations, distributions paid to noncontrolling interests, contributions from noncontrolling interests, and proceeds from the issuances of our common stock. Net cash provided by financing activities during the year ended December 31, 2023, was $683.3 million, an increase of $472.0 million compared to the prior year period. The increase was primarily due to (1) proceeds from the issuance of the 3% Green Notes of $612.8 million, net of paid issuance costs of $19.7 million, (2) proceeds from the issuance of redeemable convertible preferred stock of $310.6 million, net of paid issuance costs of $0.4 million, as a

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result of SK ecoplant Second Tranche Closing, (3) proceeds from the issuance of common stock of $16.9 million, (4) a contribution from noncontrolling interest of $7.0 million, (5) proceeds from financing obligations of $5.0 million, and (6) proceeds from issuance of non-recourse debt of $4.6 million. This was partially offset by (1) a settlement of the 3.04% Senior Secured Notes due June 30, 2031 of $127.4 million, (2) repayment of 10.25% Senior Secured Notes due March 2027 of $64.0 million, (3) purchases of Capped Calls of $54.5 million, (4) repayment of financing obligations of $18.4 million, and (5) the acquisition of all interest in the PPA V for $6.9 million net of distributions to Intel’s noncontrolling interest of $2.3 million.

We believe we have sufficient capital to operate our business over the next 12 months. Our working capital was strengthened with the supplemented liquidity through financing activities with SK ecoplant in the first quarter of 2023 and issuing the 3% Green Notes in the second quarter of 2023. In addition, we may still enter the equity or debt market as needed to support the expansion of our business. Please refer to Part II, Item 8, Note 7 — Outstanding Loans and Security Agreements, and Part I, Item 1A, Risk Factors — Risks Related to Our Liquidity — Our indebtedness, and restrictions imposed by the agreements governing our outstanding indebtedness, may limit our financial and operating activities and may adversely affect our ability to incur additional debt to fund future needs, 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 them. Both in the U.S. and abroad, we sell the Energy Servers directly to customers. In the U.S., we also enable customers’ use of the Energy Servers through a power purchase arrangement or a managed services financing (whereby we sell and lease back the Energy Servers in order to supply energy to our customers), both made possible through third-party financing arrangements.

Often our offerings take advantage of local incentives. In the U.S., 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 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 in the U.S. to generate transactions.

Whichever option is selected by a customer in the U.S. or internationally, the contract structure will include obligations (“O&M 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 U.S., 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 the Energy Servers and electricity, performance of the O&M Obligations, and performance of the Installation Obligations.

In addition to customary workmanship and materials warranties offered with the sale of Energy Servers, 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 the Energy Servers 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 Servers 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 the 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 the O&M Obligations.

Customer Financing Options

With respect to the third-party financing options in the U.S., a customer may choose to contract 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”), or the use of our Energy Servers owned by a financing party in exchange for a capacity-based payment and, in some cases, an output-based payment based on kw/hour (each, a “Managed Services Agreement”).

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

In the U.S., 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 the Energy Servers, such as the ITC or accelerated depreciation. Interest rate fluctuations, and internationally, currency exchange rate fluctuations, may also impact the attractiveness of any financing offerings for our customers. Our ability to finance a PPA or a Managed Services Agreement is also related to, and may be limited by, the creditworthiness of the customer. Additionally, a 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.

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 the Energy Servers to a limited liability project company (such portfolio owner, a “Portfolio Company”) of which the PPA Entity was the sole member. 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. In fiscal 2023 we completed the process of restructuring our PPA Entities by (i) acquiring the outstanding equity interests of our previous investors and tax equity partners, (ii) selling 100% of the equity interests in the PPA Entities or the Portfolio Companies to new investors or tax equity partnerships in which we do not have an equity interest, and (iii) entering into new equipment supply and installation agreements and related agreements to upgrade and/or replace the Energy Servers. In August 2023, we sold our last consolidated PPA Entity, 2015 ESA Project Company, LLC (“PPA V”), in connection with the repowering of its portfolio of Energy Servers. For further discussion, see Part II, Item 8, Note 10 — Portfolio Financings.

Moving forward, we plan to finance PPAs by selling a portfolio of Energy Servers or a Portfolio Company 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”). 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.

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When we finance a portfolio of the Energy Servers and the 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 an O&M Agreement, including the provision of performance warranties and guaranties. As owner of the portfolio of the 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 delivery, when the Energy Servers are physically ready for startup and commissioning (i.e., “Mechanical Completion”), and upon substantial completion (i.e., “Commencement of Operations”, “COO”).

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 Agreements and O&M Agreements, 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.

The O&M Agreement grants the Equity Investor the right to obligate us to repurchase the Energy Servers in the event the Energy Servers fail to comply with the performance warranties and guaranties in the O&M Agreement and we do not cure such failure in the applicable 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.

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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 August 2023, we sold our last consolidated PPA Entity, PPA V. Before the sale, as we had determined that we were the primary beneficiary of this VIE, we consolidated 100% of the assets, liabilities, and operating results of PPA V, including the Energy Servers and lease income, in our consolidated financial statements. We recognized the Equity Investors’ share of the net assets of the investment entity as noncontrolling interests in the subsidiary in our consolidated balance sheets. We recognized 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). PPA V contained debt that was non-recourse to us.

Our consolidated statements of cash flows reflect cash received from the Equity Investors in PPA V 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 PPA V as distributions payable to noncontrolling interests in the subsidiary on our consolidated balance sheets.

For further information about our Portfolio Financings, see Part II, Item 8, Note 11 — Portfolio Financings.

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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. We sell the Energy Servers to the financier who then leases it back to us pursuant to a sale-leaseback transaction. In the past, certain sale-leaseback transactions failed to achieve all of the criteria for sale accounting and consequently the proceeds from the transaction were recognized as financing obligations within our consolidated balance sheets. For successful sale-and-leaseback transactions, the financier of the Managed Services Agreement typically pays the purchase price for the Energy Servers at or around acceptance, and we recognize the fair market value of the Energy Servers sold and respective installation services provided to the financier within product and install revenue, respectively, and recognize an operating lease right-of-use (“ROU”) asset and an operating lease liability on our consolidated balance sheets. Any proceeds in excess of the fair value of the Energy Servers are recognized as financing obligations.

The duration of our current Managed Services Agreement offerings is between five and ten years. Under some Managed Services Agreements, we agree to provide remarketing assistance in the event a customer does not renew its agreement. Our Managed Services Agreements typically provide for performance warranties of both the efficiency and output of the Energy Servers and may include other warranties depending on the type of deployment. We often structure payments from the

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customer as a dollar per kilowatt flat payment. In some cases, the structure may also include a variable payment based on the Energy Servers’ performance or a performance-related set-off. As of December 31, 2023, we had incurred no liabilities due to failure to repair or replace our Energy Servers pursuant to these performance warranties.

Delivery and Installation

Installation is required in order for our Energy Servers to reach full power. Our role in the installation process varies based on the terms of the contract and/or the country of installation which can include, but is not limited to, design, engineering, permitting, procurement, construction, installation, start-up, performance testing, and commissioning of the systems. Bloom may contract with subcontractors to provide all or any part of the work. Depending on the acceptance milestones, we recognize installation revenue once the project has reached full power, or mechanical completion or on a percentage of completion basis.

Performance Guarantees

As of December 31, 2023, we had incurred no liabilities due to failure to repair or replace the Energy Servers pursuant to any performance warranties made under the O&M Agreements.

For the 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 $564.0 million (including $438.3 million related to portfolio financing entities and $125.7 million related to all other transactions, and include payments for both low output and low efficiency) and our aggregate remaining potential payment related to these underperformance obligations was approximately $491.9 million as of December 31, 2023. For the year ended December 31, 2023, we made performance guarantee payments of $25.9 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 activities are currently conducted by Bloom Energy Japan Limited, our wholly owned subsidiary.

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 (“PDA”) 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 500 megawatts of power for our Energy Servers between 2022 and 2024 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. In December 2023, we further expanded our business partnership with SK ecoplant through the increase of SK ecoplant’s purchase commitments for Bloom Energy products of 250 megawatts through 2027 and extended the timing of delivery of the remaining take-or-pay commitment under the original agreement. For additional information, please see Part II, Item 8, 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 is our primary customer for the products assembled by the joint venture. In October 2021, as part of our expanded strategic

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partnership with SK ecoplant, the parties agreed to amend the joint venture agreement (“JVA”) to increase the scope of assembly work done in the joint venture facility. The joint venture was further developed in 2022 and 2023.

On September 15, 2023, we entered into the Amended and Restated JVA and the Share Purchase Agreement (together, the “Amended JV Agreements”) with SK ecoplant which changed the share of our voting rights in the Korean joint venture to 40% and increased the scope of assembly done by the joint venture facility in the Republic of Korea to full assembly. Neither the Amended JV Agreements, nor the fact that SK ecoplant is considered to be our related party after the conversion of Series B RCPS into shares of our Class A common stock (for additional information, please see Part II, Item 8, Note 11 — Related Party Transactions) changed our status as the primary beneficiary of the Korean joint venture. Therefore, we continue to consolidate this VIE in our financial statements as of December 31, 2023.

Comparison of the Years Ended December 31, 2023 and 2022

A discussion regarding our results of operations for 2023 compared to 2022 is presented in this section. A discussion of our results of operations for 2022 compared to 2021 can be found under Item 7 of Part II of our Annual Report on Form 10-K for the year ended December 31, 2022.

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 related expenses not included in product costs — the manufacturing and related operating costs that are incurred to procure parts and manufacture the 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 into inventory and therefore, expensed to our consolidated statements of operations in the period that they are incurred.

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

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 (i.e., “Mechanical Completion”), or when the system is shipped and delivered and is turned on and producing power (i.e., “Commencement of Operations”, “COO”).

The product acceptances in the years ended December 31, 2023 and 2022 were as follows:

[[GREPCENT_TABLE]]
[["","","Years Ended December 31,","","Change"],["","","2023","","2022","","Amount","","%"],["Product accepted","","2,682","","","2,281","","","401","","","17.6","%"],["Megawatts accepted, net","","268","","","228","","","40","","","17.6","%"]]
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Product accepted increased approximately by 401 systems, or 17.6%, for the year ended December 31, 2023, as compared to the prior year period, which is the equivalent of 40 megawatts. Acceptance volume increased as demand increased for the Energy Servers.

The increase in acceptances of 268 megawatts achieved for the year ended December 31, 2023 was added to our installed base and, therefore, increased our total megawatts accepted, net, from 973 megawatts to 1,241 megawatts.

Purchase Alternatives

Our customers have several purchase alternatives for our Energy Servers. The portion of acceptances attributable to each purchase alternative in the years ended December 31, 2023 and 2022 was as follows:

[[GREPCENT_TABLE]]
[["","","","","Years EndedDecember 31,"],["","","","","","","2023","","2022"],["Direct purchase (including third-party PPAs and international channels)","","","","","","98","%","","98","%"],["Managed services","","","","","","2","%","","2","%"],["","","","","","","100","%","","100","%"]]
[[/GREPCENT_TABLE]]

The portion of total revenue attributable to each purchase option in the years ended December 31, 2023 and 2022 was as follows:

[[GREPCENT_TABLE]]
[["","","","","Years EndedDecember 31,"],["","","","","","","2023","","2022"],["Direct purchase (including third-party PPAs and international channels)","","","","","","90","%","","91","%"],["Traditional lease","","","","","","1","%","","1","%"],["Managed services","","","","","","7","%","","5","%"],["Portfolio financings","","","","","","2","%","","3","%"],["","","","","","","100","%","","100","%"]]
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Costs Related to Our Products

Total product related costs for the years ended December 31, 2023 and 2022 was as follows:

[[GREPCENT_TABLE]]
[["","","","","","","Years Ended December 31,","","Change"],["","","","","","","","","","","2023","","2022","","Amount","","%"],["Product costs of product accepted in the period","","","","","","","","","","$2,108/kW","","$2,453/kW","","$(345)/kW","","(14.1)","%"],["Period costs of manufacturing related expenses not included in product costs (in thousands)","","","","","","","","","","$","64,892","","","$","56,630","","","$","8,262","","","14.6","%"],["Installation costs on product accepted in the period","","","","","","","","","","$394/kW","","$456/kW","","($62/kW)","","(13.6)","%"]]
[[/GREPCENT_TABLE]]

Product costs of product accepted decreased by $345 per kilowatt, or 14.1%, for the year ended December 31, 2023, as compared to the prior year period. The decrease in costs was primarily driven by our continued efforts to reduce material costs, implement cost reduction programs with our vendors, and reduce our labor and overhead costs through increased volume, improved processes, and automation at our manufacturing facilities.

Period costs of manufacturing related expenses increased by $8.3 million, or 14.6%, for the year ended December 31, 2023, as compared to the prior year period. Our period costs of manufacturing related expenses increased primarily as a result

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of costs incurred to support capacity expansion efforts, which are expected to be brought online in future periods, partially offset by a $5.3 million release from one-time benefit related to a grant from the Delaware Economic Development Authority.

Installation costs on product accepted decreased by $62 per kilowatt, or 13.6%, for the year ended December 31, 2023, as compared to the prior year period. Each customer site is unique 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. For the year ended December 31, 2023, this decrease in cost was primarily driven by the change in the mix of sites requiring Bloom installation.

Results of Operations

A discussion regarding the comparison of our financial condition and results of operations for the years ended December 31, 2023 and 2022 is presented below.

Revenue

[[GREPCENT_TABLE]]
[["","","","","","","Years Ended December 31,","","Change"],["","","","","","","","","","","2023","","2022","","Amount","","%"],["","","","","(dollars in thousands)"],["Product","","","","","","","","","","$","975,245","","$","880,664","","$","94,581","","10.7","%"],["Installation","","","","","","","","","","92,796","","92,120","","676","","0.7","%"],["Service","","","","","","","","","","183,065","","150,954","","32,111","","21.3","%"],["Electricity","","","","","","","","","","82,364","","75,387","","6,977","","9.3","%"],["Total revenue","","","","","","","","","","$","1,333,470","","$","1,199,125","","$","134,345","","11.2","%"]]
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Total Revenue

Total revenue increased by $134.3 million, or 11.2%, for the year ended December 31, 2023, as compared to the prior year period. This increase was driven by a $94.6 million increase in product revenue, a $32.1 million increase in service revenue, a $7.0 million increase in electricity revenue, and a $0.7 million increase in installation revenue.

Product Revenue

Product revenue increased by $94.6 million, or 10.7%, for the year ended December 31, 2023, as compared to the prior year period. This increase was primarily driven by higher product acceptances of 17.6%, offset by the lower average selling price. Upgrades of our PPA portfolios contributed $20.7 million net increase in revenue recognized compared to the prior year.

Installation Revenue

Installation revenue increased by $0.7 million, or 0.7%, for the year ended December 31, 2023, as compared to the prior year period. This increase was primarily driven by the timing of key project milestones on sites requiring installations by us in the year ended December 31, 2023.

Service Revenue

Service revenue increased by $32.1 million, or 21.3%, for the year ended December 31, 2023, as compared to the prior year period. This increase was primarily driven by 223 megawatts of the Energy Servers reaching full power in fiscal 2023, which contributed to a $42.5 million increase in revenue from maintenance contracts associated with our fleet of the Energy Servers, partially offset by the impact of product performance guarantees of $8.5 million and a $0.7 million decrease in state incentives.

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 9.3%, for the year ended December 31, 2023, as compared to the prior year period, primarily due to an accelerated amortization of incentive related deferred revenue of $5.0 million resulting from the PPA V Upgrade.

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Cost of Revenue

[[GREPCENT_TABLE]]
[["","","","","","","Years Ended December 31,","","Change"],["","","","","","","","","","","2023","","2022","","Amount","","%"],["","","","","(dollars in thousands)"],["Product","","","","","","","","","","$","630,105","","","$","616,178","","","$","13,927","","","2.3","%"],["Installation","","","","","","","","","","105,735","","","104,111","","","1,624","","","1.6","%"],["Service","","","","","","","","","","220,927","","","168,491","","","52,436","","","31.1","%"],["Electricity","","","","","","","","","","178,909","","","162,057","","","16,852","","","10.4","%"],["Total cost of revenue","","","","","","","","","","$","1,135,676","","","$","1,050,837","","","$","84,839","","","8.1","%"]]
[[/GREPCENT_TABLE]]

Total Cost of Revenue

Total cost of revenue increased by $84.8 million, or 8.1%, for the year ended December 31, 2023, as compared to the prior year period. The increase was driven by a $52.4 million increase in cost of service revenue, a $16.9 million increase in cost of electricity revenue, a $13.9 million increase in cost of product revenue, and a $1.6 million increase in cost of installation revenue.

Cost of Product Revenue

Cost of product revenue increased by $13.9 million, or 2.3%, for the year ended December 31, 2023, as compared to the prior year period. The increase in cost of product revenue was primarily driven by a 17.6% increase in product acceptances, including the net effect of $16.2 million from the upgrades of our PPA portfolios. This increase was partially offset by (1) a lower cost per unit attributable to our ongoing efforts to reduce material costs, (2) cost reduction programs with our vendors and a reduction in labor and overhead costs due to increased volume, (3) improved processes and automation at our manufacturing facilities, and (4) one-time benefit of $5.3 million related to a grant from the Delaware Economic Development Authority recognized against payroll related costs in the third quarter of fiscal 2023.

Cost of Installation Revenue

Cost of installation revenue increased by $1.6 million, or 1.6%, for the year ended December 31, 2023, as compared to the prior year period. This increase was primarily driven by the timing of key project milestones on sites requiring installations by us in the year ended December 31, 2023.

Cost of Service Revenue

Cost of service revenue increased by $52.4 million, or 31.1%, for the year ended December 31, 2023, as compared to the prior year period. This increase was primarily due to the deployment of field replacement units, contributing an increase of $43.6 million, and an increase in maintenance material costs of $6.6 million. This increase was partially offset by cost reductions and our actions to proactively manage fleet optimizations and a portion of released grant liability of $2.9 million recognized against payroll related costs incurred in the third quarter of fiscal 2023.

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 $16.9 million, or 10.4%, for the year ended December 31, 2023, as compared to the prior year period. This increase was primarily driven by a $14.9 million net increase in the impairment of the Energy Servers as a result of the upgrades of our PPA portfolios.

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Gross Profit (Loss) and Gross Margin

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

Total Gross Profit

Gross profit increased by $49.5 million in the year ended December 31, 2023, as compared to the prior year period. This change was mostly due to an $80.7 million increase in product gross profit, primarily driven by a 17.6% increase in product acceptances resulting from higher demand, lower cost per unit attributable to our ongoing efforts to reduce product costs. This increase was offset by a $20.3 million increase in service gross loss, primarily due to the deployment of field replacement units, and a $9.9 million increase in electricity gross loss, predominantly driven by a $14.9 million net increase in impairment charges of the old Energy Servers resulting from the upgrades of our PPA portfolios.

Product Gross Profit

Product gross profit increased by $80.7 million in the year ended December 31, 2023, as compared to the prior year period. The increase was primarily driven by a 17.6% increase in product acceptances due to higher demand for our products, one-time benefit of $5.3 million related to a grant from the Delaware Economic Development Authority recognized against payroll related costs in the third quarter of fiscal 2023, and our ongoing cost reduction efforts to reduce material costs and our reduction in labor and overhead unit cost due to increased volume, improved processes and automation at our manufacturing facilities.

Installation Gross Loss

Installation gross loss worsened by $0.9 million in the year ended December 31, 2023, as compared to the prior year period. This change was primarily driven by the timing of key project milestones on sites requiring installations by us in the year ended December 31, 2023 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 worsened by $20.3 million in the year ended December 31, 2023, as compared to the prior year period. This was primarily due to deployments of field replacement units contributing to an increase in service gross loss of $43.6 million, an increase in maintenance material costs of $6.6 million, and the impact of product performance guarantees of $8.5 million, partially offset by 223 megawatts of the Energy Servers reaching full power in fiscal 2023, which contributed to a $42.5 million increase in revenue from maintenance contracts associated with our fleet of the Energy Servers, the release of $2.9 million of grant liability recognized against payroll related costs incurred in the third quarter of fiscal 2023, and cost reductions and our actions to proactively manage fleet optimizations.

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Electricity Gross Loss

Electricity gross loss worsened by $9.9 million in the year ended December 31, 2023, as compared to the prior year period. The change was primarily driven by a $14.9 million increase in the impairment charges of the old Energy Servers resulting from the upgrades of our PPA portfolios, partially offset by a $5.0 million accelerated amortization of incentive related deferred revenue as a result of PPA V Upgrade.

Operating Expenses

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[[/GREPCENT_TABLE]]

Total Operating Expenses

Total operating expenses decreased by $2.6 million in the year ended December 31, 2023, as compared to the prior year period. This decrease was primarily attributable to (1) a decrease in employee compensation and benefits expenses of $17.5 million, predominantly related to a decrease in stock-based compensation expenses, (2) a decrease in professional services and consulting and advisory costs of $2.3 million, and (3) a decrease in other operating expenses of $4.3 million. The decrease was partially offset by (i) our continued investment in R&D capabilities to support our technology roadmap, (ii) our investment in business development, as well as (iii) increases in facility costs, depreciation costs, office expenses, and travel expenses of $10.7 million, $5.1 million, $3.4 million, and $1.7 million, respectively.

Research and Development

Research and development expenses increased by $5.3 million in the year ended December 31, 2023, as compared to the prior year period. This increase was primarily driven by (1) an increase in employee compensation and benefits of $2.0 million, (2) an increase in travel expenses of $0.5 million, (3) an increase in professional services costs of $0.6 million, (4) an increase in depreciation expenses of $0.5 million, and (5) an increase in other research and development costs of $3.7 million, partially offset by a decrease in consumable laboratory supplies and other laboratory related costs of $2.2 million.

Sales and Marketing

Sales and marketing expenses decreased by $1.0 million in the year ended December 31, 2023, as compared to the prior year period. This decrease was primarily driven by a decrease in employee compensation and benefits of $5.6 million, partially offset by an increase in consulting, advisory, and outside professional services expenses of $4.5 million, and an increase in travel expenses of $0.3 million.

General and Administrative

General and administrative expenses decreased by $6.9 million in the year ended December 31, 2023, as compared to the prior year period. This decrease was primarily driven by (1) a decrease in employee compensation and benefits of $13.9 million, predominantly related to a decrease in stock-based compensation expenses, (2) a decrease in professional services costs of $7.4 million, and (3) a decrease in other general and administrative expenses of $7.8 million. The increase was partially offset by (i) an increase in facility costs of $10.7 million, primarily due to rent expenses and utility costs, (ii) an increase in office and other expenses of $3.5 million, primarily driven by the impairment of non-recoverable production insurance of $6.4 million as a result of the PPA V Upgrade, offset by $4.5 million of prepaid insurance impairment per the PPA IV Upgrade in fiscal 2022, and factoring and financing fees of $2.1 million, (iii) an increase in depreciation expenses of $4.6 million, (iv) an increase in computer equipment expenses of $2.3 million, and (v) an increase in travel expenses of $1.0 million.

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Stock-Based Compensation

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[[/GREPCENT_TABLE]]

Total stock-based compensation for the year ended December 31, 2023 compared to the prior year period decreased by $26.9 million. The decrease was primarily driven by (1) a decrease in compensation expense for stock awards of $18.2 million, (2) a decrease in option expense of $6.7 million compared to the year ended December 31, 2023, as existing options were either exercised, expired, or cancelled, (3) the separation of full-time employees holding equity awards as a result of the restructuring, (4) the voluntary resignation of our Executive Vice President and Chief Business Development and Marketing Officer on September 1, 2023, and (5) a decrease in ESPP expense of $0.7 million.

Other Income and Expense

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

Interest Income

Interest income is derived from investment earnings on our cash balances primarily from money market funds. The increase in interest income of $16.0 million was due to a $309.2 million increase in cash balance in our money market funds for the year ended December 31, 2023, as compared to the prior year period.

Interest Expense

Interest expense is primarily due to our debt held by third parties.

Interest expense for the year ended December 31, 2023, as compared to the prior year period, increased by $54.8 million. The increase was primarily driven by the expensing of loan commitment assets of $52.8 million immediately upon the automatic conversion on September 23, 2023, of Series B RCPS to Class A common stock as a result of the Second Tranche Closing with SK ecoplant, and an increase in interest expense related to the 3% Green Convertible Senior Notes due June 2028, issued on May 16, 2023. The increase was offset by a decrease in interest expense as a result of the redemption on June 1, 2023 of 10.25% Senior Secured Notes due March 2027, and the repayment of the 7.5% Term Loan due September 2028, the 6.07% Senior Secured Notes due March 2030, and the 3.04% Senior Secured Notes due June 2031 on June 14, 2022, November 22, 2022, and August 24, 2023, respectively.

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Other (Expense) Income, net

Other (expense) income, net is primarily derived from investments in joint ventures, the impact of foreign currency transactions, and adjustments to fair value for derivatives.

Other income, net for the year ended December 31, 2023, as compared to the prior year period, decreased by $7.8 million primarily as a result of the gain on the revaluation of the Option to purchase Class A common stock of $9.0 million upon receipt of the notice of exercise from SK ecoplant on August 10, 2022 for the year ended December 31, 2022, and an increase in unrealized and realized foreign exchange loss of $1.3 million. The decrease was partially offset by the loss on remeasurement of our equity investments of $3.5 million recorded for the year ended December 31, 2022.

Loss on Extinguishment of Debt

Loss on extinguishment of debt for the year ended December 31, 2023 was $4.3 million, which was recognized as a result of the redemption on June 1, 2023 of the 10.25% Senior Secured Notes due March 2027, and the repayment on August 24, 2023 of the 3.04% Senior Secured Notes due June 2031 as part of the PPA V Upgrade, and included the repayment of the 4% premium upon redemption of the 10.25% Senior Secured Notes due March 2027 of $2.3 million and derecognition of debt issuance costs of $2.0 million.

(Loss) Gain on Revaluation of Embedded Derivatives

(Loss) gain 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 on revaluation of embedded derivatives for the year ended December 31, 2023, as compared to the prior year period, decreased by $2.2 million due to an increase in the fair value of our embedded EPP derivatives in our sales contracts, offset by a payment of $3.2 million to one of our customers in the second quarter of fiscal 2023.

Provision for Income Taxes

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[[/GREPCENT_TABLE]]

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, 2023 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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[[/GREPCENT_TABLE]]

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 for the year ended December 31, 2023, as compared to the prior year period, improved by $7.9 million primarily due to changes in loss in PPA V, PPA IV and PPA IIIa of $4.9 million, $2.5 million, and $0.3 million, respectively, partly offset by a decrease in gain in the joint venture in the Republic of Korea of $0.1 million.

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Critical Accounting Policies and Estimates

The consolidated financial statements have been prepared in accordance with generally accepted accounting principles as applied in the U.S. (“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 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 (“ASC 606”). 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 (“Mechanical Completion”), or when the system is shipped and delivered and is turned on and producing power (“COO”).

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 Servers. 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 the Energy Servers with a maintenance service agreement and have not provided maintenance services to a customer who does not have use of the Energy Servers, standalone selling prices are estimated using a cost-plus approach. Costs relating to the 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 Servers deployment. Costs relating to installation include all direct and indirect installation costs. The margin we apply reflects our profit objectives relating to

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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 Servers 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 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 Servers 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 an operating lease ROU asset and an operating 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

On March 20, 2023, the Company amended its SPA (the “Amended SPA”) with SK ecoplant and simultaneously entered into the Loan Agreement (collectively “the Agreements.”) On March 23, 2023, pursuant to the Amended SPA, we issued and sold to SK ecoplant shares of non-voting Series B RCPS. The Amended SPA triggered the modification of the equity-classified forward contract on Class A common stock, which resulted in the derecognition of the pre-modified fair value of the forward contract given to SK ecoplant. The Series B RCPS was accounted for as a stock award with liability and equity components. The liability component of the Series B RCPS was recognized at the redemption value net of issuance costs, and the equity component was recognized at its fair value on March 20, 2023 and represented the option of SK ecoplant to convert the Series B RCPS to Class A common stock (the “Conversion Option”). Pursuant to the Loan Agreement we had the option to draw on a loan from SK ecoplant, should SK ecoplant have sent a redemption notice to us under the Amended SPA. The Agreements provided us with a loan commitment asset from SK ecoplant.

The liability component of the Series B RCPS, the Conversion Option, and the loan commitment asset were accounted for under the guidance of Topic 718, Compensation – Stock Compensation (“ASC 718”), and applicable subsections of ASC 480, Distinguishing Liabilities from Equity (“ASC 480”). We used third-party valuation experts to provide us with (i) the pre-modified fair value of the forward contract given to SK ecoplant, (ii) the fair value of the issued Series B RCPS equity component, and (iii) the fair value of the loan commitment asset from SK ecoplant.

Pre-modified forward contract. We valued the forward contract as the difference between (i) our Class A common stock trading price adjusted by a discount for lack of marketability (“DLOM”) as of the date of Amended SPA (the “Valuation Date”) and (ii) the present value of the strike price, with further reduction associated with the expected outcome of the Second Tranche Closing.

Series B RCPS equity component (the Conversion Option). We valued the conversion feature of the Series B RCPS as a European-type call option under the guidance of ASC 718 by applying the Black-Scholes valuation model using inputs of the strike price, maturity, risk-free rate, and volatility. In addition, DLOM was applied to the Class A common stock price.

Loan commitment asset from SK ecoplant. We concluded that the loan commitment was a freestanding financial instrument as of the Valuation Date. We valued the loan commitment asset based on the difference between the present value of cash flows associated with a loan with a market-participant based interest rate (i.e., the rate for which the value of the hypothetical loan agreement equals the face value of the Loan Agreement) and the cash flows associated with the loan committed to by SK ecoplant, and applied a redemption probability to the difference. The Series B RCPS redemption probability was obtained from a lattice model used to value the Series B preferred stock. As of December 31, 2023, the loan

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commitment asset from SK ecoplant was derecognized as a result of automatic conversion of all shares of the Series B RCPS into shares of our Class A common stock.

We determined our final estimates of fair values 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 and underlying assumptions and reviewed the mathematical accuracy of the calculations before recording in our consolidated statements of operations and consolidated balance sheets.

For additional details about the transaction with SK ecoplant, please refer to Part II, Item 8, Note 17 — SK ecoplant Strategic Investment.

Income Taxes

We account for income taxes using the liability method under ASC 740, Income Taxes (“ASC 740”). Under this method, deferred tax assets and liabilities are determined based on net operating loss carryforwards, research and development credit carryforwards and temporary differences resulting from the different treatment of items for tax and financial reporting purposes. Deferred items are measured using the enacted tax rates and laws that are expected to be in effect when the differences reverse. 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 VIEs. This approach focuses on determining whether we have the power to direct those activities that significantly affect their economic performance and whether we have the obligation to absorb losses, or the right to receive benefits that could potentially be significant to the VIEs. The consideration 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 VIEs.