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Revenue Recognition
 3 Months Ended
Jan. 31, 2022
Revenue Recognition  
Revenue Recognition

Note 4. Revenue Recognition

Contract Balances

Contract assets as of January 31, 2022 and October 31, 2021 were $24.9 million and $20.5 million, respectively. The contract assets relate to the Company’s rights to consideration for work performed but not billed. These amounts are included on a separate line item as Unbilled receivables for amounts expected to be billed within one year from the balance sheet date, and balances expected to be billed later than one year from the balance sheet date are included within Other assets on the accompanying Consolidated Balance Sheets. The net change in contract assets represents amounts recognized as revenue offset by customer billings.

Contract liabilities as of January 31, 2022 and October 31, 2021 were $34.5 million and $36.7 million, respectively. The contract liabilities relate to the advance billings to customers for services that will be recognized over time and in some instances for deferred revenue relating to license performance obligations that will be recognized at a future point in time. The Company discontinued revenue recognition of the deferred license revenue related to the POSCO Energy License Agreements in July 2020 given the then pending arbitrations. As of January 31, 2022, $22.2 million related to the POSCO Energy License Agreements has been reclassified from deferred revenue to customer deposits within Long-term deferred revenue and customer deposits on the accompanying Consolidated Balance Sheets.

The net change in contract liabilities represents customer billings offset by revenue recognized.

Contract modification

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As a result of the settlement reached with POSCO Energy Co., Ltd. (“POSCO Energy”) (see Note 19. “Commitments and Contingencies” for further background), the Company evaluated the license agreements with POSCO Energy as well as all of the terms of the settlement agreement, which was effective December 20, 2021 (the “Settlement Agreement”).  As part of this analysis, the Company considered the accounting surrounding the execution of the Settlement Agreement, reviewed all elements related to the license agreements with POSCO Energy and the Settlement Agreement and considered any potential contingencies in the license agreements and whether any proceeds were related to the litigation settlement.

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Under the terms of the Settlement Agreement, the Company agreed that the license agreements are not terminated, but instead are deemed to be amended such that POSCO Energy and its subsidiary, Korea Fuel Cell Co., Ltd. (“KFC”, and with POSCO Energy, collectively, “PE Group”), only have the right (i) to provide maintenance and repair services to PE Group’s existing customers on existing molten carbonate power generation and thermal projects under long-term service agreements currently in force as well as long-term service agreements that have expired and are pending renewal as of the settlement date (collectively, “Existing LTSAs”), (ii) to supply replacement modules purchased from the Company only for their existing customers for existing molten carbonate power generation and thermal projects under Existing LTSAs and (iii) to own, operate and maintain all facilities and factories solely for the purposes set forth in (i) and (ii) above (collectively, the “Right to Service License”) and further agreed to sell modules with a service warranty pursuant to a module sales agreement to be negotiated by the parties after execution of the Settlement Agreement. As such, the Company has considered the execution of the Settlement Agreement to be a contract modification as it results in a change in both the scope and price of a contract with a customer.  Therefore, the Company will account for such modification under the contract modification guidance included within ASC 606 (Revenue from Contracts with Customers).  Further, the Company noted that none of the parties to the Settlement Agreement specifically acknowledged any payment of damages or reimbursement of any costs related to the matters settled under the Settlement Agreement, which supports the conclusion that the overall settlement is a form of contract modification. Additionally, the transaction price allocated to the modified contract does not exceed the stand-alone selling prices (“SSP”) of the performance obligations under the modified contract (i.e., there is no indication of a premium that would indicate that a portion of the transaction price relates to something other than the promised goods or services).

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The Company has identified two revenue elements of the Settlement Agreement related to module sales which include the sale of the module and an extended warranty. The Company assessed the SSP of the modules utilizing a cost-plus margin approach to arrive at $3.0 million per module which will be recognized upon title transfer consistent with the Company’s established revenue recognition policies.  The Company is also providing an extended warranty for up to seven years with each module. This SSP was separately evaluated and determined to be $0.67 million per module. This revenue recognition will be recognized over time as the modules perform. In its analysis, the Company determined that it is probable that PE Group will exercise its option to purchase an additional 14 modules (with an extended warranty) beyond the firm order of 20 modules, to which it is contractually committed. Given that the license rights for which the Company was previously recognizing revenue are no longer in place and the Company now has a new revenue stream from the enhanced warranty, the $22.2 million of deferred license revenue has been recharacterized to customer deposit. The Company will monitor the value of this deferred revenue (and related cost obligations) based on the performance of the modules and make adjustments as necessary.

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EMRE Joint Development Agreement

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Effective as of October 31, 2019, the Company entered into a Joint Development Agreement (as amended, the “EMRE Joint Development Agreement”) with ExxonMobil Research and Engineering Company (“EMRE”), pursuant to which the Company has engaged in exclusive research and development efforts with EMRE to evaluate and develop new and/or improved carbonate fuel cells to reduce carbon dioxide emissions from industrial and power sources, in exchange for (i) payment by EMRE of certain fees and costs as well as certain milestone-based payments to be paid only if certain technological milestones are met, and (ii) certain licenses.

Effective as of October 31, 2021, the Company and EMRE entered into in Amendment No. 1 to the EMRE Joint Development Agreement and agreed, among other things, to extend the term of the EMRE Joint Development Agreement for an additional six months, ending on April 30, 2022 (unless terminated earlier). This extension allows for the continuation of research that would enable incorporation of design improvements to the Company’s current fuel cell design in order to support a decision to use the improvements in a potential future demonstration of the technology for capturing carbon at ExxonMobil’s Rotterdam refinery in The Netherlands (such demonstration, the “Rotterdam Project”) and provided additional time to achieve the first milestone under the EMRE Joint Development Agreement.

In a related letter agreement between the Company and EMRE dated as of October 28, 2021 and executed on October 29, 2021(the “Letter Agreement”), the Company agreed to invest with EMRE in the Rotterdam Project, should EMRE move forward with the Rotterdam Project. In the Letter Agreement, the Company agreed that, if (i) the Company achieves the first milestone and (ii) EMRE and the Company execute a contractual agreement to proceed with the Rotterdam Project, then at EMRE’s option, the Company will either make an investment in the amount of $5.0 million in the Rotterdam Project or discount EMRE’s purchase of the Company’s fuel cell module and detailed engineering design, as agreed to by the parties, required for the Rotterdam Project by said amount.

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During the three months ended January 31, 2022, the Company achieved the first technical milestone under the EMRE Joint Development Agreement and expects to receive payment of $5.0 million. The Company has not recognized revenue in connection with this milestone achievement as a result of its agreement, in the Letter Agreement described above, to either make a $5.0 million investment in the Rotterdam Project or discount EMRE’s purchase of the Company’s fuel cell module and detailed engineering design for the Rotterdam Project by $5.0 million, should the Company enter into a contract with EMRE to proceed with the Rotterdam Project. The Company will continue to evaluate revenue recognition of this milestone achievement as project negotiations with ExxonMobil (or a subsidiary thereof) evolve.

Remaining Performance Obligations

Remaining performance obligations are the aggregate amount of total contract transaction price that is unsatisfied or partially unsatisfied. As of January 31, 2022, the Company’s total remaining performance obligations were: $60.2 million for product revenue, $123.7 million for service agreements, and $31.7 million for Advanced Technologies contracts in the aggregate. Service revenue in periods in which there are no module exchanges is expected to be relatively consistent from period to period, whereas module exchanges will result in an increase in revenue when exchanges occur.