Ladies and gentlemen, thank you for standing by, and welcome to the FuelCell Energy Fourth Quarter and Fiscal Year 2020 Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session [Operator Instructions]. I would now like to hand the conference over to your speaker today, Mr. Tom Gelston. Please go ahead.

Thank you, Amy. Good morning, everyone, and thank you for joining us on today’s call. As a reminder, this call is being recorded. This morning, FuelCell Energy released our financial results for the fourth quarter and fiscal year ended October 31, 2020, and the earnings press release is available on the Investor Relations section of our website at fuelcellenergy.com. Consistent with our practice, in addition to this call and press release, we have posted a slide presentation on our website. This webcast is being recorded and will be available for replay on the company’s website approximately two hours after we conclude the call. Before we begin our prepared comments, please direct your attention to the disclosure statement on Slide 2 of the presentation and the disclaimers included in the press release related to forward-looking statements. The discussion today will contain forward-looking statements, including without limitation, statements with respect to the company’s anticipated financial results and statements regarding the company’s plans and expectations regarding the continuing development, commercialization and financing of its FuelCell technology and its business plans. These forward-looking statements are intended to qualify for the Safe Harbor from the liability established by the Private Securities Litigation Reform Act of 1995. All statements made on this call today other than statements of historical facts are forward-looking statements and include statements regarding our anticipated financial and operational performance. Forward-looking statements made on this call represent management’s current expectations and are based on information available at the time such statements are made. Forward-looking statements involve numerous known and unknown risks, uncertainties and other factors that may cause our actual results to differ materially from any results predicted, assumed, or implied by the forward-looking statements. We strongly encourage you to review the information in the reports we filed with the SEC regarding these risks and uncertainties, in particular, those that are described in the Risk Factors section on our Annual Report on Form 10-K and cautionary statements on forward-looking statements in our quarterly fillings. You should also review the section entitled cautionary statements concerning forward-looking statements in this morning’s earnings press release. During this call, we will use non-GAAP financial measures when talking about the company’s performance and financial condition. And according with SEC regulations, you can find a reconciliation of these non-GAAP measures to the comparable GAAP measures in this morning’s earnings press release and reconciliation document posted on the Investor Relations portion of our website. For our call today, I’m joined by Jason Few, FuelCell Energy’s President and Chief Executive Officer; and Mike Bishop, Executive Vice President and Chief Financial Officer and Treasurer. Following our prepared remarks, we will be available to take your questions and be joined by other members of the leadership team. I would like to now hand the call over to Jason for opening remarks. Jason?

Thank you, Tom, and good morning, everyone. Thanks for joining us on our call today. We truly appreciate your interest in our company. One year ago, I hosted my first earnings call as CEO of FuelCell Energy. And today, I am very proud of what the team has accomplished and the groundwork we are laying for long-term and sustainable success. In a year in which all of us faced the serious challenges created by the COVID-19 pandemic, as well as social unrest in many parts of the world, we've made progress toward our long-term goals of profitable growth, developing and executing our backlog and advancing our clean energy platforms, all of which contribute to the global energy transition. As we begin the second year of our Powerhouse business strategy, we will continue to drive operational excellence by focusing on delivering value to our customers and stockholders, adhering to prudent capital deployment to support growth and decreasing our overall cost of capital. We are focused on delivering revenue growth by commercializing our proprietary technologies to deliver differentiated value to our customers in capturing some of the significant opportunities in the energy markets that are emerging today and that will continue to develop in the years ahead. Before delving into results for the quarter, we have included an overview of our company shown on Slide 3 for investors who may be new to our story. During fiscal year 2020, which ended on October 31, we delivered double-digit revenue growth, achieving approximately $71 million in total revenue across our three largest categories, servicing licenses, advanced technologies and generation, which together represent a diversified source of recurring revenue under multi-year contracts with investment-grade customers. While we did not have revenue from product sales in fiscal year 2020, we are refocusing our efforts on new…

Thank you, Jason. Let's begin by reviewing the highlights of our results shown on Slide 7. I'll start with fourth quarter results. Total revenue increased 54% year-over-year to $17 million, primarily reflecting increases in service and license, and advanced technology contract revenues, partially offset by a decrease in generation revenues. Breaking down total revenues. Service and license revenues increased to $5.4 million from $800,000 during the fourth quarter of fiscal 2019 due to revenue recognized from module exchanges at three plant locations. Generation revenues decreased to $5.1 million due to plant maintenance activities primarily related to downtime, while upgrades were performed at our 14.9 megawatt Bridgeport Fuel Cell Park project. Advanced technology contract revenues increased 48% to $6.4 million due to revenues recognized in connection with our joint development agreement or JDA, with ExxonMobil Research and Engineering Company, or EMRE, which was executed early in fiscal year 2020. Cost of service and license revenues in the quarter increased to $8.1 million from $3.8 million in the fourth quarter of fiscal year 2019 as the company performed module exchanges for three projects. There were no module exchanges in the prior year period. Cost of generation revenues decreased to $10.3 million from $22.6 million in the prior year period due to lower impairment charges. Results for the fourth quarter of 2019 included a noncash impairment charge of $17.5 million as a result of decisions made by the company to operate the Triangle Street project under a merchant model and to use the project as a development platform for the company's advanced applications, as well as the termination of the Bolthouse Farms project due to unfavorable regulatory changes. In the fourth quarter of fiscal 2020, we took a further impairment charge on the Triangle Street project of $2.4 million as a result of…

Thanks, Mike. As mentioned previously, we made progress executing on our project backlog in 2020, including completion of our Biogas power platform in Tulare, California. Additionally, we are near completion on new power platforms at the US Navy Base in Groton, Connecticut, and at the wastewater treatment facility in San Bernardino, California. We also began early stage construction activity on projects in Yaphank, New York, Derby, Connecticut and the Toyota project in Long Beach, California. We completed value stream teamwork and made a number of improvements in our manufacturing processes and capabilities, focusing on increasing throughput and simplifying and streamlining production operations, while enhancing health and safety protocols related to COVID-19. As a result of these improvements, we have the capability to increase our annualized production rate up to 45 megawatts on a single production shift. Production process innovations, lean manufacturing and other optimization initiatives, elimination of waste, coupled with lean direct labor resource management, are just a few examples of ways in which we strive for operational excellence. Further, our production operations are well positioned for further capacity expansion and will generate operating leverage as we increase our production rate in support of future business growth. Next, on Slide 11, I want to provide an update on our Powerhouse business strategy, which we announced one year ago. Based on our initial success, we are evolving the three core pillars of transform, strengthen and grow. The first phase of our plan was to transform the company to build a durable financial foundation and enhance financial results. As we have just detailed, we have taken a number of important steps to strengthen the balance sheet and build liquidity to fund delivery of our backlog of generation projects and accelerate commercialization of advanced technologies. We are now positioned to seek low cost,…

[Operator Instructions] Your first question today comes from the line of Jed Dorsheimer with Canaccord Genuity. Please proceed with your question.

Hi, thanks for taking my question. I have a couple, if you don't mind. I guess, first, regarding the kind of reengagement with the South Korean market. I'm just curious, is that going to be in the form of product sales is historically that’s – how that was booked or does that change in terms of this new effort?

Jed, thanks for the question and thanks for joining our call today. No, we expect that, that will continue to be a product sale market opportunity for the company.

And did you give any timeframe or expectations around that? Or is it still too early in terms of that geography?

Yes. No, we haven't given any specific timeframe. As I said in my prepared remarks, it's generally an RFP process. Those RFPs can go on for some time, six months or longer. But - so we've not given any specific time about when we expect to see the product sales hit the market.

Got it. Thanks. And you provided a lot of detail, so I apologize if you addressed this. But maybe just in simplistic terms, if I look at the quarter-over-quarter in terms of generation and backlog, backlog ticked up only 100 kilowatts, it looks like with Toyota. So I'm just wondering why is that flat and we're not seeing that either the backlog grow or the generation pull down?

Good morning, Jed, it’s Mike. Thanks for joining the call. So on backlog, we've recognized, obviously, revenue this year as we executed on the business plan. We did not add, obviously, any product sales. Product sales is zero, as Jason just said. Korea is a big market for that. We would expect to see product sales in Europe as we continue activities there in the future as well as the U.S. You did see increases in the backlog year-over-year related to advanced technology as we brought in the ExxonMobil joint development agreement. And you would expect to see increases in generation backlog in the future as we convert our sales pipeline into backlog. But where we sit today, yes, it's down a little bit over the prior year.

Okay. And then, I guess, just with respect to product, the Biden administration, President Biden signed as an executive order, one of the Clean Air Act or that's -- an amendment to the Clean Air Act that has a methane component, which it would seem as if you had the advanced technology ready that that would be able to capture that value proposition. Do we need to see a milestone that hit in terms of the availability of the advanced technology before you're able to participate in this effort? So I guess I'm coming back to that product, which it seems like you have a couple of different irons in the fire in terms of that, but it also seems like that's a year or two out there. Is that the right way to think about that?

So Jed, as we are – as most people probably are absorbing all of the things that are going on with the new administration right now. But as I talked about, with our product portfolio, we have the ability to deliver a – through the use of biofuels, carbon neutral to carbon negative power production today. In the Toyota case, for example, we're going to be delivering green hydrogen. So as we look across our product portfolio and what we have commercial today with our carbonate platform, we will look to see how we apply our technology to fit the new rules or things that the current administration is going to do. And then as it relates to our ability to deliver electrolysis at hydrogen generation with our solid oxide platform, we announced earlier plans around a demonstration project that we'll execute on. But in terms of commercialization of that, we'll see that happen outside of our demonstration efforts.

Yes. So thank you for that. I guess, just more specifically, if I am a utility or a PPA right now and I've just had imposed methane cap on my generation and I've got at – it’s a combined cycle or a peaker, and I want to look at strategies of addressing that, are you able to sell that technology? Or is there a milestone that needs to be hit for your solid oxide, or the - which I think falls under your advanced technology? So maybe I asked the first question wrong. But or you need to achieve something?

Well, I'll give you an example. So you could take an example where you could take our Trigen platform today and use Trigen generate hydrogen to blend down the carbon intensity in the natural gas as one way in which you could leverage our technology today to address that if you're a utility. Tony, I don't know if you would add anything else to that in terms of existing technology and how we would apply that.

No, I think that's exactly right. The TriGeneration technology can produce clean hydrogen to decarbonize natural gas. And when you say they're running up against methane caps, you're perhaps talking about carbon dioxide emission caps. And so efficient power plants that produce less carbon dioxide, as well as our current platforms that can be modified to extract the carbon dioxide from their emissions, that's a technology we have today that doesn't require a special milestone. So we do have technologies today that can address these decarbonization requirements.

Right. I’ll jump back in the queue. Thanks, guys.

Thanks, Jed.

Your next question comes from the line of Paul Coster with JP0Morgan. Please proceed with your question.

Yes, thanks very much, Jason, there's a lot going on, and it's quite big. And you've alluded to a few of the opportunities you're pursuing, that includes Korea and Europe. And you've obviously seen one of your competitors land partnerships to go into those regions quickly. Can you talk to us about your strategy for moving into those regions?

So in Europe, Paul, we already have a presence there. We have customers in Europe today. And what we're doing there is really continuing to expand the work that we're doing with EON and other partners that we’re working with from a channel development standpoint and market opportunity in addition to adding additional resources to the region. And Asia, or across Asia, including Korea, we have an existing team in Korea today that supports our existing platforms that operate in the market. And we're adding additional resources from a channel development standpoint to help us drive sales in that market and exploring opportunities for various channel partners in different markets in Asia where we have a focus. So we'll have both a direct sales effort as well as channel partnership efforts in those markets.

Do you think there's an opportunity to enter into JVs or partnerships where you get some additional capital and maybe just really big heft from a large partner in pursuing these opportunities, it feels like a way to get there faster and pace seems important at the moment?

Paul, that's a good point. I mean we are not foreclosed on opportunities to work with other partners in a more strategic relationship or a way of doing that, and that also including attracting capital from those partners. But things that I look for that are not only just capital from the partners, although, that's important, that's not for [effort] I would look toward in determining a strategic partner, I really want to look at strategic partnerships or relationships that create expanded opportunity for the company from a market perspective and/or brings something unique to the relationship that allows us to extend our platform in a new and a compelling way to create differentiation in the market. So although capital is an important factor, it's not the only factor that we'll look at in terms of evaluating a partnership.

Just turning to long duration storage for a moment and particularly that which relates to wind and solar, not to [net] gas. It seems like solid oxide fuel cell is the way that you're pursuing that particular opportunity, but those are intermittent resources which stop and start. And of course solid outside fuel cells seem poorly positioned for that despite their merits in terms of efficiency. Can you just talk to us about how solid oxide fuel cells play in wind and solar intermittent power as long duration storage solutions?

Yes. I'll let Tony jump in and provide some more color on that. But just in general rate, electrolysis is -- I mean our solar oxide platform gives us the ability to implement electrolysis. And the one thing or the biggest problem that intermittent technology has is that no one's figured out how to control mother nature yet. So the wind often blows, I mean, you don't need the power or the sun shines when you don't need it or the reverse, right? When you need it, the wind's not blowing or the sun is not shining. So with all that excess electricity that is often on the grid when you talk about it just in terms of green hydrogen for long duration energy storage, it's electrolysis that will leverage to create that hydrogen storage in our platform, which is a closed-loop platform, which then will have the ability in a reverse mode to use that same hydrogen in an on demand basis to actually generate power. But I'll let Tony speaking to that.

I mean what solid oxide brings to this application specifically is it's a really, really high efficient way to do electrolysis compared to the conventional electrolysis that’s here today. So that's one thing. The other thing is the solid oxide cells that we developed can -- the same cell can be an electrolysis cell and then can be switched in [indiscernible] operation to be a fuel cell. So if you can create hydrogen, store the hydrogen and then send it back to that stack to make more power, because you've got one stack doing both things, you're reducing the capital cost of the application. So that's what’s unique about solid oxide, the ability to be reversible and a very, very high efficiency.

So I just want to make sure I understand them, because it sounds like you've made a big breakthrough. It's the ability to -- and do that immediate switch from electrolysis to fuel cell mode without any loss of heat, because -- and I understand that the solid oxide fuel cells otherwise take a day to heat up and cool down. Have I got that right?

Well, it's a high temperature system. So it does take some time to heat up. But our solid oxide stacks are extremely [wet light], so they don't take all that much to heat up. Plus -- and it would -- probably it’s easy to keep the things warm, so that they can be ready to be -- to spring into action whenever they're needed.

And one of the -- maybe, Tony, you could speak to a little bit about the demonstration project where we announced with the DOE and…

And you mentioned a breakthrough. I mean, we've actually been working with this for a long time, making a lot of successes leading up to this, and we're moving from that core R&D activity into the demonstration phase for this technology. We have a system that's running here in Danbury now. We just announced an award from the US Department of Energy, to do a 250 kilowatt electrolysis demonstration at Idaho National Laboratory. We have some additional DOE funding to a test in our Danbury lab in this reversible concept in addition to what we've done in the past. So it's a steady progression from the R&D phase, comfortable that the technology works, going into the demonstration phase and marching this toward commercialization.

Last question, just CapEx associated with ramping up the solid oxide fuel cell business. Do you have a handle on that yet?

So as far as CapEx, what we put out there in our 10-K and our remarks, there's really kind of two things here, right? So what we're doing this year is, as Tony mentioned, is working on funded advanced technology projects and those are funded with the DOE. The company is also making additional investments in company funded R&D. So last year, our company funded R&D was about $4.8 million. This year, we'll be in the range of $18 million to $20 million. We are, in addition to that, making capital expenditures in our factories, laboratories and business systems across the company that will be in the range of $5 million to $10 million for fiscal '21 compared to less than $1 million last year.

Your next question comes from the line of Laurence Alexander with Jefferies.

Just three quick ones. Can you talk a little bit about your bandwidth for managing projects, I mean, how many projects, if you're really flex, could you manage at the same time? And secondly, how are you thinking about grant revenue, if any, in 2021 and 2022? And finally, the new run rate for R&D, should we think of this as a kind of steady run rate from here, or is it reasonable to expect it to continue to increase over the next several years to sort of keep up with the range of opportunities that are opening up?

I want to make sure I got all three. The first question was around bandwidth around projects. I didn't quite get the second question. I know it’s something to do with revenue.

How do you think about branch revenue from DOE or other [Technical Difficulty] other through the P&L?

And then in R&D spending, do we expect that to be kind of the new normal, if you will. So maybe on the first one on bandwidth and projects, I'll ask Mike Lisowski to speak a little bit about how we manage projects, our project management process and how we deploy those resources against those efforts.

So really, we're well positioned to scale to concurrently manage many ongoing in-flight projects. We leverage qualified EPC firms and partners that we work with to execute on the projects. We have a foundational deep supply chain that we leverage for all of the direct equipment. And as projects become active, we engage the EPC firms and can very effectively concurrently manage multiple projects at one time. So to be straight away, we really don't have a limit, I would say, as we sit here today on the number of projects that we can concurrently manage and we plan to scale our resources in kind with our project backlog to support that business.

And then, Mike, maybe you could talk about how we think about grant revenues and the R&D go forward?

Really when you look at our revenues, our revenues come in the form of kind of, as we sit here today, three elements, right? You have advanced technology contract revenue, which does have an element of government funded R&D in it. We have generation revenue. In generation revenue, there's an element of renewable energy credits that flows through that. And from time to time, there is some grant revenue that flows through that. And then you have service and license revenues. So from a grant revenue perspective, it's kind of nominal. But what I would say, advanced technology contract revenue, you've seen backlog for that increase year-over-year as we brought in these additional DOE projects, as well as the ExxonMobil contract. So you'll continue to see high advanced technology contract revenue, kind of, if you go back fiscal 2019, we were in the $20 million range, this past year, in the $25 million range. So with a strong and growing backlog. In addition, you will see our generation revenue continued to increase as these projects come online and we get the benefit of electricity sales and renewable energy credit sales as we continue to bring that into an operating portfolio, and that's what drives our targets for fiscal '22 as we bring the company to EBITDA positive. As far as R&D spending, I mentioned that as an answer to the last question, you will see that increase this year as we execute our commercialization plans around our advanced technologies, including distributed hydrogen, hydrogen based long duration energy storage. And the spending targets that we put out is that will be between $18 million to $20 million compared to about $4.8 million in fiscal 2020.

[Operator Instructions] Your next question comes from the line of Colin Rusch with Oppenheimer.

Can you give us a sense of what inventory levels you're going to be carrying on a go forward basis? It sounds like you've got a bunch of finished goods inventory. I love to understand how that flows through the balance sheet over the next year or so.

So when you think about inventory, we've obviously had some transition during fiscal 2020 where we came into the fiscal year, we're operating at around 20 megawatts. We actually brought the factory back down to zero during the COVID shutdown. And as Jason said in his remarks, we have now -- obviously, the factory came back online in the June, July time frame and we're now ramping the factory up to 50 megawatts. So what you'll see from an inventory position -- up to 45 megawatts during fiscal year 2021. So what you'll see from an inventory position, you'll see inventory start to grow a little bit as we bring in additional raw materials, work in process from that ramp activity [Technical Difficulty] it’s really a function of deploying assets into our generation portfolio. So as assets are finished, we'll deploy those into the generation portfolio. They will become project assets on the balance sheet. So as projects get closer to COD and as we're in construction, you'll see finished goods come down. But I would say that will more than likely be replaced by raw materials and work in process, and inventory probably be consistent or higher from where we sit today given the production ramp.

Your next question comes from the line of Eric Stine with Craig-Hallum.

I guess for me, I'll keep it brief. But just could you give a little more color on the product sale opportunities, given -- I mean, I know that's been an objective, but you've had some headwinds there. And I would just love to know, when you think about your fiscal '22 objectives, I mean, what kind of contribution are you anticipating or baking into that to reach those objectives?

Eric, we've not traditionally given projections to that level. What I will say, though, is as we think about some core markets where we're seeing strong activity in our pipeline, for example, like Europe, we expect a significant number of those opportunities will be product sales as opposed to PPAs. And if you look at the relationship we have with EON, that relationship is effectively set up to drive that type of business model. And as a company, we had a pretty focused effort on winning project opportunities and developing those projects is on balance sheet projects, largely because of our integrated business model and the decision that we’ve made corporately to continue to have engineering, manufacturing, sales and marketing all as an integrated company. And so now that we've built a backlog and a set of opportunities for the company that will get us to a point to where we'll get to adjusted positive EBITDA through 2022. It gives us a lot more flexibility in terms of how we think about the product development opportunity, whether it’d be a PPA or a product sale. And so we expect that to become a bigger part of our mix as we move forward.

And your last question for today comes from the line of Noel Parks with Tuohy Brothers.

Just wondering, as far as the expenses that you recognized for module exchanges, as you have more projects implemented over time. Do you have any visibility into or modeling for sort of the expected timing of likely module exchanges?

And just to provide a little bit of background on how revenue and cost is recognized for our service portfolio, and our service portfolio is assets owned by third parties but we have long term service agreements where the company essentially operates the assets for the owners of the projects, that revenue is bifurcated into two streams. Routine maintenance is essentially amortized over the life of the agreement and these are typically 20 year agreements. The major maintenance activity is a module exchange. Today, our modules are seven year life. So the company defers revenue recognition and cost recognition until those modules are actually deployed into the platform. So if you're thinking about modeling these out, you would essentially model every seven years, there's going to be a major revenue element. When you look at our service agreements, generally, the major maintenance piece is about half and the routine maintenance is the other half. So that's how you would think about modeling this out.

And I'll now turn the call back to Jason Few for closing remarks.

Amy, thank you. Thank you, again, for joining us today. We continue to execute on our Powerhouse business strategy, working to strengthen FuelCell Energy with the goal of delivering profitable growth and optimizing returns. I am encouraged by the teamwork I see on display in our organization day in and day out. And I'm excited about our work and the opportunity we have to deliver on our purpose to enable the world to live a life empowered by clean energy. We are committed to delivering long term shareholder value and appreciate your continued interest in FuelCell Energy. In closing, I want to wish God's Blessing on President, Joe Biden; Vice President, Kamala Haris and the United States. Please stay safe and healthy. Thank you for joining, and have a great day.

And this concludes today's conference call. Thank you for your participation. You may now disconnect.