Earnings Call Transcript - FCEL Q4 2021

Operator, Operator

Thank you all for joining us today. Welcome to the FuelCell Energy Fourth Quarter Earnings Call. I would now like to introduce Mr. Tom Gelston, Senior Vice President of Finance and Investor Relations. The floor is yours, sir.

Tom Gelston, Senior Vice President of Finance and Investor Relations

Thank you, Ralph. Good morning, everyone, and thank you for joining us on the call today. As a reminder, this call is being recorded. This morning FuelCell Energy released our financial results for the fourth quarter and fiscal year 2021, and the earnings press release is available on our Investor Relations section of our website at fuelcellenergy.com. In line with our usual practice, we have also 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 start our prepared comments, please refer to the disclosure statement on Slide 2 of the presentation and the disclaimers included in the press release regarding forward-looking statements. The discussion today will include forward-looking statements, including, but not limited to, the company's expected financial results and plans related to the ongoing development, commercialization, and financing of its fuel cell technology and business strategies. These forward-looking statements are intended to qualify for Safe Harbor from liability as established by the Private Securities Litigation Reform Act of 1995. All statements made on this call, other than historical facts, are forward-looking statements that involve management's current expectations based on information available at the time such statements are made. These statements involve risks, uncertainties, and other factors that could lead to actual results differing materially from those predicted, assumed, or implied. We strongly recommend reviewing the information in the reports we file with the SEC concerning the risks and uncertainties, especially those mentioned in the Risk Factors section of our annual report on Form 10-K and the cautionary statement language regarding forward-looking statements. Additionally, please review the section titled Cautionary Statements regarding forward-looking statements in this morning's earnings press release. During this call, we will discuss non-GAAP financial measures related to the company's performance and financial condition. Per SEC regulations, a reconciliation of these non-GAAP measures to relevant GAAP measures can be found in this morning's earnings press release and the reconciliation document available on our Investor Relations section of our website. For today's call, I am joined by Jason Few, FuelCell Energy's President and Chief Executive Officer, and Mike Bishop, Executive Vice President, Chief Financial Officer, and Treasurer. After our prepared remarks, we will be available to take your questions and will be joined by other members of the leadership team. I will now turn the call over to Jason for his opening remarks. Jason?

Jason Few, President and CEO

Thank you, Tom. Good morning, everyone. I appreciate you joining our call today. We just concluded a significant year where we made progress on our Powerhouse Business Strategy. Fiscal year 2021 was marked by our improved execution on our backlog, investments in our global team, and our efforts to transition technology innovations from research to real-world applications. Today, I will update you on our Powerhouse Strategy, which is on track to lead us into our next phase of long-term growth due to the milestones we achieved throughout 2021, supporting our overall growth prospects. In our quarterly calls, I like to start with a brief overview of the company, as shown on Slide 3, before discussing this quarter's business results. FuelCell Energy reported nearly $70 million in annual revenue for fiscal year 2021 across three revenue categories: service and license, Advanced Technologies, and generation, which all represent diversified sources of recurring revenue under multi-year contracts. Our noteworthy customers, many of whom are utilizing our advanced fuel cell platforms, are highlighted on the chart. Over the past two fiscal years, we have seen virtually no revenues from product sales. However, as we recently indicated, we anticipate orders for at least 20 replacement modules in 2022 to service existing installations in South Korea, which represents approximately 86% of our expected 2022 revenues. We are hopeful for meaningful sales from products in Korea moving forward and are looking to expand into other Asian markets and selective countries in Europe, the Middle East, and Africa, where product sales are a priority. Turning to Slide 4, our company is dedicated to enabling a world powered by clean energy. During my recent travels in Korea and the Middle East, where I've connected with potential customers, government officials, regulators, and investors, our mission is resonating, and interest in clean energy is growing—a significant trend for our company. Our adaptable systems can integrate heat and power, achieving high energy efficiency, while other installations can enable microgrids that enhance grid reliability. Some applications utilize biofuels, yielding carbon-neutral to carbon-negative power. We anticipate accelerated advancements in biofuels, renewable natural gas, and hydrogen blending—all compatible with our multi-fuel platforms—ensuring that adopting our technology today leads to a clear path for customers towards carbon-neutral and carbon-negative power using the same platform. We refer to this as forward-compatible sustainability. The demand for reliable power, generated in an environmentally responsible way, remains critical. Grid reliability is increasingly important globally, and we are reminded that 24/7 power cannot be assumed. With our extensive product portfolio, FuelCell Energy is uniquely situated to support our customers in their decarbonization efforts while producing hydrogen, addressing the challenges surrounding grid reliability. We believe it’s possible to achieve decarbonization without negatively impacting industry or the economy, and it is crucial that developing nations participate in economic growth alongside industrialized countries. Solutions like carbon offsets, in our view, do not adequately address local environmental issues or air quality where pollution originates. FuelCell Energy's technologies offer authentic local clean energy solutions that provide real-time benefits to the communities where our platforms operate while supporting high living standards and economic growth while protecting the environment. Next, I will discuss the results and business development during the quarter, summarized on Slide 5. I am very pleased with the progress our team has made in advancing our long-term goals by executing our existing backlog, which will lead to growing recurring revenues over time as projects come online. For the 7.4-megawatt project at the U.S. Navy Submarine Base in Groton, Connecticut, we have resumed commissioning after addressing some necessary repairs and expect to complete this by mid-January. Once operational, this platform will be incorporated into a microgrid, demonstrating how FuelCell Energy's platforms enhance grid stability while supporting the U.S. military's clean energy goals. In Yaphank, Long Island, we have completed the on-site construction of our 7.4-megawatt utility-scale project, reaching mechanical completion, and expect it to be operational by December 31, 2021. At our 14-megawatt project in Derby, Connecticut, foundational construction is largely finished, and the balance of plant components have been installed. This utility-scale platform will include five SureSource 3000 fuel cell systems alongside the Housatonic River, and we are working on electrical interconnection with the local utility, a requirement for the project's commercial operation date. For the Toyota Project at the Port of Long Beach, our 2.3-megawatt tri-generation platform will produce electricity, hydrogen, and water from a single unit. Equipment has been delivered, and civil construction is underway. Once operational, this plant will provide carbon-neutral electricity, green hydrogen, and water, allowing the customer to reduce water consumption in a drought-affected area. Secondly, we reached a favorable settlement with POSCO Energy and its subsidiary, Korean Fuel Cell, securing our right to market our technology for new projects in Asia, including South Korea, while resolving the litigation that hindered our product sales. This agreement also includes a commitment for 20 replacement modules in 2022, generating $60 million in revenue for the company. My third key point is that our Powerhouse Business Strategy is evolving. Over the past two years, we've built a strong financial foundation to support our growth plans and made significant strides in enhancing our production capacity while continually striving for operational excellence. In the fourth quarter, we successfully increased the annualized production rate at our Torrington facility to 45 megawatts per year using one manufacturing shift. These improvements have benefited our generation output and uptime across our fleet. Looking ahead, we are focused on growing, scaling, and innovating to realize our vision of achieving a world empowered by clean energy. For example, SAGAT Spa at the Torino Airport and Snam Group have signed a term sheet for a hydrogen-ready fuel cell platform to operate in cogeneration mode, with a capacity of 1.2 megawatts. Once finalized, this contract will introduce an innovative solution to Italy that can utilize varying hydrogen blends with natural gas for combined heat and power generation. Fourth, we are enhancing our sustainability initiatives to assist customers in addressing climate challenges and achieving sustainability goals through our commitment to R&D for commercializing our solid oxide power generation and hydrogen electrolysis platform, while also expanding our commercial capabilities. We are focused on developing solutions that address global climate, reliability, and resilience challenges. FuelCell Energy remains committed to advancing our distributed decarbonized product portfolio for major global energy opportunities. Lastly, we continue to bolster our balance sheet, which supports our growth and lowers our overall cost of capital. In November 2021, we closed a tax equity financing transaction for the Yaphank project with Franklin Park, totaling $12.4 million, with approximately $3.2 million received. In August 2021, we finalized a $15 million tax equity agreement for the Groton project, drawing $3 million from this commitment. Earlier this year, we closed a $10.2 million tax equity sale-leaseback transaction for the San Bernardino biofuel project. We have increased our generation assets, expected to drive top-line revenue growth. These transactions reflect ongoing support and interest from financial markets in FuelCell Energy's distinctive technologies, showcasing the strength of our recurring revenue from generation assets. We remain committed to disciplined capital allocation for future growth and market penetration. Now, on Slide 6, I will give some insights regarding our settlement with POSCO Energy. Key aspects of the agreement include our clarified exclusive right to market our technology for new fuel cell projects throughout Asia. This resolution opens doors for FuelCell Energy, allowing customers in South Korea and Asia to assess our technologies without legal concerns. It also provides a clear route for us to engage in the fuel cell market during the ongoing energy transition in South Korea and Asia. Given our technology's high-quality thermal attributes, it is notably preferred for utility-scale projects in South Korea. The government there has announced an aggressive hydrogen economy roadmap, creating promising opportunities. Similarly, Japan aims to expand its hydrogen usage and supply. We look forward to deploying our distributed generation and hydrogen platforms to the Asian market as it leads the hydrogen transition. Additionally, under our agreement, POSCO Energy has no rights to new market opportunities using our proprietary technology, ensuring that the licenses they held are now limited to servicing current customers who purchased our technology. This aspect is essential for us to meet the service needs of existing POSCO Energy customers under their long-term agreements. In conclusion, this settlement fully resolves legal disputes between FuelCell Energy and POSCO Energy except for minor issues being addressed, which do not affect our intellectual property or market access. POSCO Energy is also required to release its Korean court attachments, and we expect approximately $11.2 million upon completion. The result is that FuelCell Energy can now compete fairly to offer our decarbonized power solutions in the Korean and broader Asian markets, and we are pleased to have reached this agreement that ensures full access to the Asian market for FuelCell Energy while meeting the needs of existing customers. We are eager to engage in the market now that legal uncertainties are resolved and look forward to expanding our reach throughout Asia. While I highlighted the Asian market, we believe growth is possible across all the regions we serve, including North America and Europe, for our four major technologies: distributed power, distributed hydrogen, electrolysis, and long-duration energy storage and carbon capture. As you will see on Slide 7, we continue to advance our R&D for our existing carbon and fuel cell platforms. Our proprietary carbon capture solution is unique in that it captures carbon from external sources while producing power rather than consuming it. We can also capture carbon from our SureSource power platform, and when operating in carbon separation mode, our platform offers one of the lowest emission profiles among baseload generation platforms. We have increased our R&D efforts focused on commercializing solid oxide power generation, electrolysis, and hydrogen storage platforms while enhancing our commercial capabilities. We are also working on developing reversible solid oxide systems for long-duration energy storage and high-efficiency solid oxide power generation systems. We believe a hydrogen-based energy storage solution is more environmentally favorable than mineral-based options like lithium-ion batteries. Each of these areas presents a significant market opportunity that we are positioning the company to capitalize on. I will now turn the call over to Mike to further discuss our financial results. Mike?

Mike Bishop, Executive Vice President and CFO

Thank you, Jason, and thanks to all that have joined our call today. You have now had the opportunity to hear from Jason about our strength and foundation and a product portfolio that is well positioned for future growth with a significant market opportunity. I'm now going to walk through our financial results for this quarter. Please turn to the financial highlights shown on Slide 9. In the fourth quarter of fiscal year 2021, we reported revenues of $13.9 million compared to $17 million in the fourth quarter of fiscal year 2020. Looking at revenue drivers by category. Service and license revenues decreased to a loss of $100,000 from $5.4 million in the comparable prior year quarter. The decrease in revenue is primarily due to the fact there were no module exchanges in the fourth quarter of fiscal 2021. The company also recorded a $1 million reduction in service revenues as a result of higher future cost estimates related to future module exchanges compared to the company's prior estimates, which more than offset revenue recognized in the quarter. Generation revenues increased 31% to $6.7 million from $5.1 million primarily due to higher operating output of the generation fleet portfolio as a result of investments in maintenance activities and an increase in the size of the fleet. Advanced Technology contract revenues increased 14% to $7.3 million from $6.4 million, revenues recognized under the joint development agreement with ExxonMobil Research and Engineering Company, or EMRE, increased by approximately $0.4 million, reflecting continued performance under our carbon capture research Joint Development Agreement with EMRE during the quarter. The increase in Advanced Technology contract revenues also reflects an increase in revenue recognized under government contracts of $0.5 million. Gross loss for the fourth quarter of fiscal year 2021 totaled $8.4 million compared to a gross loss of $8 million in the comparable prior year quarter. The higher gross loss was a result of impairment charges of $2.8 million related to the Toyota Project, $1.8 million related to development costs of 2 projects no longer being pursued, and $400,000 related to the company's Triangle Street project. We also incurred cost estimate adjustments related to future module replacements, which resulted in a negative margin impact of approximately $2.6 million. Partially offsetting these charges and adjustments were improved generation gross margin primarily related to an increase in revenues, a decrease in depreciation expense, and higher Advanced Technologies gross margin, primarily related to the mix of funded contracts in the quarter. Operating expenses for the fourth quarter of fiscal 2021 increased to $14.2 million from $9.1 million in the fourth quarter of fiscal 2020. Administrative and selling expenses in the fourth quarter of 2021 included higher legal expenses associated with tax equity financings and additional share-based compensation expense due to grants made under our long-term incentive plan. Research and development expenses of $3.5 million in the fourth quarter of 2021 reflect increased spending on the company's hydrogen commercialization initiatives compared to the prior year period. The net loss from operations totaled $22.6 million in the fourth quarter of 2021 compared to $17.1 million in the comparable prior year period. Net loss was $24.2 million in the fourth fiscal quarter of 2021 compared to a net loss of $18.9 million in Q4 2020 due to higher operating expenses and a higher gross loss for the fourth quarter of 2021 compared to the fourth quarter of 2020. The fourth quarter of 2020 included a $2.2 million favorable adjustment for the fair value of common stock warrants issued to the lenders under the company's now extinguished credit facility with Orion Energy Partners Investment agent and its affiliated lenders in the fourth quarter of 2021 included lower interest expense as a result of the early repayment of all amounts owed under the Orion credit facility. The net loss per share attributable to common stockholders in the fourth quarter of 2021 was $0.07 compared to $0.08 in the comparable prior year quarter. The lower net loss per common share was primarily due to higher weighted average shares outstanding due to share issuances since October 31, 2020, partially offset by the higher net loss attributable to common stockholders. Adjusted EBITDA totaled negative $11.9 million in the fourth quarter of 2021 compared to adjusted EBITDA of negative $8.6 million in the fourth quarter of 2020. Please see the discussion of non-GAAP financial measures, including EBITDA and adjusted EBITDA as well as applicable reconciliations in the appendix at the end of our earnings release. Now turning to the full fiscal year. Revenues decreased 2% to $69.6 million, primarily as a result of lower service revenues which were partially offset by higher generation revenues. Service and license revenues decreased 21% to $19.8 million. In fiscal year 2020, it included $4 million of license revenues associated with the EMRE joint development agreement and license revenues of $0.7 million related to the now amended POSCO Energy license agreements, while there was no comparable license revenues recognized in this fiscal year 2021. Generation revenues increased 20% to $24 million, reflecting a larger operating portfolio improved operating output of the generation fleet and sales of renewable energy credits. Advanced Technology contract revenues of $25.8 million were consistent with the revenues of the prior fiscal year. Loss from operations in fiscal 2021 totaled $64.9 million compared to a loss of $39.2 million in fiscal year 2020. Net loss in fiscal '21 totaled $101 million compared to a net loss of $89.1 million in fiscal year 2020. Adjusted EBITDA in fiscal '21 was negative $35.7 million compared to negative $17.7 million in fiscal 2020. Net loss per basic and diluted share attributable to common stockholders for 2021 was $0.31 compared to $0.42 in fiscal 2020. Next, please turn to Slide 10 for additional details on our financial performance and backlog. The chart on the left-hand side of the slide graphically shows the numbers we just reviewed for the fourth quarters of fiscal years '20 and '21. Looking at the right-hand side of the slide, we finished the quarter with a backlog that was largely unchanged year-over-year at approximately $1.29 billion, reflecting continued execution and adjustments to our generation backlog, primarily resulting from module exchanges with higher future output and expected revenues and the inclusion of the 2.8-megawatt Derby, Connecticut project, which was awarded in fiscal '21. Advanced Technology backlog reflects new contracts from the U.S. Department of Energy, partially offset by work performed under our joint development agreement with EMRE. Turning to Slide 11. I will build upon Jason's comments on our enhanced liquidity. In the fourth fiscal quarter of 2021, we closed a tax equity sale-leaseback financing transaction with Crestmark Equipment Financing for the San Bernardino project, and a tax equity partnership flip transaction with East West Bancorp for the U.S. Navy Submarine Base project in Groton, Connecticut. Subsequent to the end of the fourth fiscal quarter, we also announced a tax equity financing transaction with Franklin Park for our LIPA-Yaphank project. These financings further enhance our liquidity position. Also as discussed last quarter, we had at the market sales of our common stock in the third and fourth fiscal quarters of 2021, which resulted in net proceeds of approximately $369.7 million. All of these actions are consistent with our Powerhouse Business Strategy to strengthen liquidity with the goal of enabling us to focus on executing our business plan. As of October 31, 2021, we had total cash and cash equivalents of approximately $460.2 million. This total includes approximately $432.2 million of unrestricted cash and cash equivalents, represented by the blue bar on the chart in the center of the slide and $28 million of restricted cash and cash equivalents represented by the green bar. On the right-hand side of the slide is a chart illustrating our total project assets, which make up our company-owned generation portfolio. We intend to continue to develop, construct, and grow our portfolio of project assets. Investments to date reflect capital spent on completed operating projects represented by the gray bar and capital spent on projects currently in development and construction represented by the blue bar. At the end of the fourth quarter of fiscal year 2021, our gross project assets totaled approximately $243.1 million, which excludes accumulated depreciation. As detailed on Slide 21 in the appendix of this presentation, our generation portfolio totaled 75.3 megawatts as of October 31, 2021. This includes 34 megawatts of operating assets and 41.3 megawatts of projects in process. As projects in process begin commercial operation, they are expected to contribute higher revenue and adjusted EBITDA. Additionally, as these future projects come online, we expect to seek additional long-term tax equity financing, such as the examples I previously discussed, as well as back leverage debt transactions to further recycle capital back into the business. We are pleased with the progress we have made this past quarter. And from a financial perspective, we believe we are well positioned to invest in capabilities to support the near-term growth and product commercialization opportunities. I will now turn the call back over to Jason to further discuss these initiatives. Jason?

Jason Few, President and CEO

Thanks, Mike. Next on Slide 12 is our Powerhouse Business Strategy that we introduced in January of 2020 when I was relatively new to the position of CEO. This strategy was originally developed to provide guideposts for our turnaround as we reposition FuelCell Energy to capitalize on the energy transition. And I think it has served us well. Because we have made substantial progress in achieving the key initiatives reflected in the transformed and strengthened phase of our strategy, it is time for the Powerhouse Business Strategy to evolve. On Slide 13, allow me to present the next iteration of Powerhouse. Our strategy to use the next phase of the company's journey toward long-term growth. Grow: we want to pursue growth in markets and customer segments where we see significant opportunities and where we expect to win. Scale: to achieve growth, we plan to scale our existing platforms by investing, extending, and deepening our leadership and total human capital across the organization. Innovate: over our 50-year history, we have never stopped innovating. We plan to continue to innovate for the future to enable our participation in the growth of the hydrogen economy and carbon capture. Slide 14. Hopefully, we have been clear today and over the past several quarters about the importance of directing some of our improved liquidity toward investments to achieve future growth. The key areas for investment include continuing to execute against our project backlog as we complete projects and expand our generation portfolio, we expect to generate higher revenue. We are also keenly focused on making investments toward advancing our solid oxide platform and carbon capture solutions for commercial deployment. In order to be ready for expected demand, including the product orders discussed during our call today, we met our annualized production rate target of 45 megawatts, up from 17 megawatts at the end of fiscal year 2020. With our focus on manufacturing excellence, we have made strides in continued adoption of lean manufacturing principles and implementation of advanced automation technologies where feasible. Talent and expertise or what makes success possible. Therefore, across all areas of the business, we have recruited for key capabilities, including engineering, manufacturing, and sales, support, and marketing, just to name a few. Next, on Slide 15, we are providing estimates of the investments required to achieve our goal. While our expected CapEx and R&D expense represent a significant increase, I think I have made clear our position that we are at a unique point in time as the world shifts away from traditional energy resources towards lower carbon solutions, hydrogen, carbon capture, and distributed generation, improving grid resiliency and reliability and providing commercial and industrial customers with authentic decarbonization solutions that address Scope 1, 2, and 3 emissions while improving overall air quality. We think our solid oxide technology can also play an important role facilitating the adoption of alternative energy sources, such as wind and solar. Given their inherent intermittency, and our carbon capture solutions are focused on addressing the hardest to electrify industries. We believe that large-scale investments should enable FuelCell Energy to meet the market's need in the medium and long term. Thus, we have determined in connection with the evolution of our business strategy that we will focus on continued investments to achieve long-term growth rather than focusing on shorter-term financial metrics such as revenue growth and adjusted EBITDA. In fiscal year 2022, we expect to invest $40 million to $50 million in capital expenditures to enhance our manufacturing and business systems. We also expect to invest $45 million to $55 million to accelerate commercialization of our Advanced Technology solutions. When we established our Powerhouse Business Strategy, a core focus of the transform pillar was to pay off debt and strengthen the balance sheet. As our Powerhouse Business Strategy evolves, we are pivoting to focus on growth, and we intend to focus on continuing investment in the company to achieve long-term growth. The energy transition is happening at an accelerated pace, and we believe our platform technologies will play a role in helping the global society achieve our collective sustainability goals. Thus, we are moving forward with these investments in fiscal year 2022 because we believe it enhances the company's ability to capture more of the total available market growth opportunity in the future. Looking at Slide 16. We are focused on commercializing new technologies during this very unique period of time, which we believe presents an opportunity to invest in the hydrogen economy transition. We believe that making investments today will deliver stronger long-term results to our shareholders and create a more reputable company. I'm very pleased to announce that in March of 2022, we will host a virtual Investor Day to give a much deeper explanation of our strategy to bring new technologies to market. At that time, we will be able to share more details on our overall strategy. In the meantime, we will continue working every day to accomplish the things necessary for success, serving our customers, retaining and recruiting world-class human capital, executing on project backlog, further expanding and improving manufacturing capacity, winning new business around the world, recycling project funding to reduce our cost of capital, thoughtfully deploying capital in support of future growth, working toward product commercialization and innovation to improve manufacturing costs and product performance and overall levelized cost of energy, delivering differentiated decarbonization solutions and hydrogen platforms and investing in our marketing presence and capabilities. Finally, to conclude my remarks on Slide 17, we have executed several strategic actions to strengthen our balance sheet, enhance liquidity, and reduce our cost of borrowing, which we believe have positioned the company well to execute on our growth strategy. I am backed by an exceptional team, and we continue to add talent across the company. We are focused on taking care of our customers, achieving our financial goals, and continually building upon our operational excellence while adhering to our core purpose. Our technologies have a key role to play in our collective global goal of decarbonizing the grid, developing the hydrogen economy, and supporting existing energy and industrial infrastructure investments with differentiated carbon capture solutions. Taken all together, our solutions are attacking Scope 1, 2, and 3 emissions. Our Powerhouse Strategy has evolved to focus on long-term growth, achieving scale, and innovating for the future. Finally, we intend to be a leader in sustainability and environmental stewardship by delivering on sustainability through our technology and the full circular life of our platforms. I will now turn it over to the operator to begin Q&A.

Operator, Operator

Your first question is from Colin Rusch from Oppenheimer.

Joe Beninati, Analyst

This is Joe Beninati on for Colin. So, given the change in R&D and CapEx spending, could you detail which of the newer products are going to be a primary focus, how we should think about time to market, and then finally plans for reaching EBITDA breakeven?

Jason Few, President and CEO

Yes. So, as we look to commercialize technologies, there's a huge focus on our solid oxide platform. That solid oxide platform is a high-temperature fuel cell platform and gives us a number of different capabilities to take to market. We will have the ability to do electrolysis, which is, as you know, has become an important factor in not only how we're going to use hydrogen as a fuel source, but as a way to really create a different path for firming up intermittent capacity for wind and solar. That same platform will give us storage capabilities for that hydrogen and reversibility to be able to use that hydrogen to produce carbon-free power assuming that we've produced green hydrogen through the electrolysis process. That also gives us a pure hydrogen generation platform that will be a new capability for the company as well. In addition to that, we'll make investment around our carbon capture solution. And there, that's the work that we continue to move forward in advance in our work with EMRE, which is part of Exxon, but we'll make investments there to help accelerate that technology. We believe that we will deliver demonstration projects this year, showing our capabilities in solid oxide. We did some of that in 2021 showing the high electrical efficiency that we have with that platform, and so we are aggressively working to commercialize those products. With respect to getting to EBITDA positive or adjusted EBITDA positive, we intend to talk about that some more in our March Analyst Day call. So, we'll lay out more strategies around that and provide some more detail.

Joe Beninati, Analyst

That's great color. And then switching gears a bit. Can you give a sense of when you'll begin closing the product sales in Asia now that the agreement with POSCO has been settled?

Jason Few, President and CEO

Our sales team is currently active, and we hope to have updates soon. As we previously mentioned in our settlement with POSCO, we will secure 20 module orders this year, which translates to approximately $60 million in potential revenue for the company. We believe that by clarifying the market and alleviating confusion, we can now compete effectively in what is the largest fuel cell market globally. As GENCOs and other customers issue RFPs and seek generation capacity—whether through our carbonate platform for combined heat and power or through their plans to implement hydrogen platforms, which they have committed to pursuing vigorously—we anticipate participating fully in those opportunities and competing vigorously.

Operator, Operator

Your next question is from the line of Jed Dorsheimer from Canaccord.

Jed Dorsheimer, Analyst

I have a question. It seems that the largest difference from consensus in this quarter was the negative revenue from service and licensing. I was wondering if you could clarify whether this is related to maintenance or warranty issues in Groton and what contributed to that negative figure. Additionally, how should we view this moving forward?

Mike Bishop, Executive Vice President and CFO

Good morning, Jed. This is Mike. Thank you for joining our call. As I mentioned in my remarks, we experienced a loss of $100,000 this quarter compared to revenue of $5.4 million in the previous year. Our service and license revenue is variable, which means that revenue increases during quarters when we have module exchanges. This quarter, we did not have any module exchanges. Additionally, last year, we recognized about $4 million in license revenue from the EMRE agreement, which did not happen this year. When you look at the year-over-year comparison, our total service revenue for this fiscal year was $24 million, up from around $20 million last year. The main difference year-over-year was the drop in license revenue, which, as I mentioned, can vary quarterly. This quarter, we also recorded a $1 million reduction in service revenue due to increased estimates for future costs related to upcoming module exchanges, which deviated from our previous estimates. That’s what primarily caused the negative outcome this quarter.

Jed Dorsheimer, Analyst

Got it. Sorry, I misspoke. I have a follow-up. So, looking ahead for '22, is it correct that the $4 million will not be recorded, meaning the proper comparison should be with the ‘21 number rather than the ‘20? Is that the right way to interpret that?

Mike Bishop, Executive Vice President and CFO

Yes. So yes, again, service revenue is variable quarter-to-quarter, but if you look at the last 2 years, we've averaged on average, excluding the license revenue, we've been in that $20 million range, which is representative of the current fleet. Certainly, as we add additional units through product sales, the opportunity for service will increase but there is going to be quarterly variability depending on when we do module exchanges.

Operator, Operator

Your next question is from the line of Jeff Osborne from Cowen & Company.

Jeffrey Osborne, Analyst

I had 2 questions. One on the CapEx of $40 million to $50 million. I was wondering if you could give us an update of where you are today on carbonate capacity and then how much of that CapEx is being added from molten carbonates relative to capitalized R&D or other initiatives for the solid oxide side. It's just a big number. So I was a bit surprised by that.

Mike Bishop, Executive Vice President and CFO

Jeff, good morning. This is Mike. So yes, so on capacity today for our carbonate technology, recall, we expanded our factory several years ago. So the footprint of our factory in Torrington today has capability to go up to 200 megawatts. We currently have machinery and equipment in the factory capable of supporting about 100 megawatts of annual production. So, as we think about expanding carbonate manufacturing, we do need to add additional capital into the factory to support that. Then the question would be, well, why do that? When you look at the size of the opportunities that we're pursuing with megawatt scale, carbonate installations, and Korea is a great example, our project in Korea with POSCO was a 20-megawatt project. And then you also look at the size of potential carbon capture opportunities, which are going to be megawatt scale, it makes sense to add additional equipment to be able to realize that 200 megawatts of volume over time. Now obviously, we're not going to do all of that this coming year. The additional CapEx would be around capacity for solid oxide. As we sit here today, we have a small capacity for solid oxide in our Calgary facility in Canada. But as Jason mentioned, solid oxide and electrolysis is a significant market opportunity and to be able to capture product sales there, we are going to need additional capacity over time. So that's where some of the spending is coming from as well.

Jeffrey Osborne, Analyst

Got it. My second question, the last one is on the House Bill 6524 in Connecticut that you had highlighted a quarter or 2 ago. Can you just give us an update on how to handicap that progress of that bill and what your opportunities are for wins here in 2022?

Jason Few, President and CEO

Yes. Regarding that bill, the utilities ended up implementing it as a rec-only program. As we assessed the opportunities and risks associated with fuel, we adopted a very cautious approach to that project. We are still analyzing the results of that initiative, but the bill's implementation did not unfold as we anticipated, and we believe this will affect our performance in the overall process.

Operator, Operator

Next question is from the line of Eric Stine from Craig-Hallum.

Eric Stine, Analyst

In light of everything happening with POSCO, could you provide any insight on the expected timing of orders? More importantly, I would like to know about the timing of revenues in fiscal '22 regarding potential module replacements in that market.

Jason Few, President and CEO

Sure, Eric. As we mentioned in our 8-K filing, we expect those 20 orders to occur in fiscal year 2022. Since these are product sales, we also anticipate that revenue will be recognized in 2022. We foresee an initial order of 12 modules shortly, followed by another 8 modules around mid-year, based on the agreement we have reached.

Eric Stine, Analyst

Got you. Okay. That helps in terms of the revenue timing. And just curious, I mean, beyond fiscal '22, any thoughts on what this looks like? Obviously, you want to service the customers or the installed base in that market. Maybe what that pipeline because you've obviously got pretty good visibility into when those were installed and when those module replacements going forward are timed.

Jason Few, President and CEO

Yes. In the actual settlement agreement there is an assumption or the ability for another 14 modules to be ordered by POSCO as part of this overall settlement. But if I kind of ladder up from that just for a moment, and you look at the overall implications of the settlement and the fact that the go-forward agreement does not provide a provision for manufacturing of modules by POSCO. So you should assume or could assume as there are needs to replace modules in that market against the existing customer base that is being served by POSCO that those likely represent opportunities for module sales for us as we go forward.

Eric Stine, Analyst

Got it. No, that helps. Maybe just last 1 for me, just on the product sales. I mean, obviously, you talked about Asia and how this POSCO agreement now removes that cloud and hopefully starts to open up that market in terms of product sales. But you also mentioned globally, just wondering maybe some of the gating factors or the outlook you have that some of that optimism that you've had over the last year plus that, that starts to come to fruition.

Jason Few, President and CEO

Yes, as we mentioned during the call today, our announcement with Snam and SAGAT at the Torino Airport in Italy highlights our potential in global markets. We are well-positioned to leverage our technology, particularly with fuel flexibility. This includes the use of a hydrogen blend with natural gas, which we believe offers significant opportunities. Additionally, we see strong prospects in the biofuels sector worldwide. With the recent expansion of our sales team and our investments in various markets, we are beginning to see positive outcomes. As the hydrogen economy grows, we anticipate real opportunities ahead, especially through our carbonate platform and the Tri-Gen platform we are developing in Long Beach, California. Our solid oxide platform enhances our ability to engage in electrolysis opportunities, where we believe our technology stands out significantly compared to existing solutions like PEM and alkaline, particularly in terms of efficiency in converting electricity to hydrogen. We expect this advantage will benefit us in the market as we commercialize our technology.

Operator, Operator

Your next question is from the line of Chris Souther from B. Riley.

Christopher Souther, Analyst

Could you provide more details about the EMRE timeline? We have extended the joint agreement through April 2022. What key milestones should we focus on over the next few months before receiving a decision on Rotterdam? Should we anticipate that decision in the spring, or is it expected to take longer?

Jason Few, President and CEO

Yes, Chris, thank you for your question. As we continue our collaboration with EMRE, we are demonstrating that the technology can function under the operating conditions at the Rotterdam facility. Essentially, we are working on our capacity to effectively capture carbon and generate power at the desired power density while also ensuring carbon capture. Preparing for that demonstration project is part of our technology and development efforts. As we achieve specific milestones that Exxon requires for technical capability, they will decide on moving forward with the Rotterdam trial. We anticipate that, barring any changes from their side, they will make their final decision regarding the demonstration project in late spring or early summer.

Christopher Souther, Analyst

Okay. Got it. That's helpful. And then just to put a little bit more color on the R&D uptick here. Should we think about $45 million, $55 million in R&D as a good run rate beyond fiscal year 2022 as basically to get some of the hydrogen pieces to commercialization? Or are there some one-time items related to R&D in there that are pretty lumpy? I'm kind of curious if you could kind of break down how we should think about that?

Mike Bishop, Executive Vice President and CFO

Yes, this is Mike. We have released a forecast for this year, as you indicated, but we will not be providing any spending forecasts beyond fiscal 2022. Additionally, we plan to offer more details on our long-term targets during our Analyst Day. Our focus is on commercializing our solid oxide technology, as Jason mentioned, and we see a significant market opportunity in electrolysis. The company-funded R&D is directed towards the commercialization of solid oxide technology, which we aim to achieve in the near term. We will evaluate spending levels for future years as we progress.

Operator, Operator

Your next question is from the line of Laurence Alexander from Jeffries.

Laurence Alexander, Analyst

I would like to start with a question about capital expenditures. Can you differentiate between the capital expenditures that yield a positive return on capital and those that are aimed at expanding capabilities? Additionally, could you provide some guidance on the average return on capital for the projects that you consider positive return initiatives, especially as you prepare for the significant changes related to the energy transition? What are the indicators for the types of projects you are open to pursuing or not?

Mike Bishop, Executive Vice President and CFO

Good morning, Laurence, this is Mike, and thank you for joining the call, and thanks for the question. So really, as you asked, the guideposts that are driving the increase in spending both around CapEx and around research and development is the addressable market opportunity that's right in front of us around the markets that Jason discussed. We talked about electrolysis with our solid oxide technology. As I mentioned earlier, we're spending both research and development dollars to bring that technology to commercialization as well as CapEx dollars to have the capacity to be able to produce that technology. As I mentioned, in our Calgary facility today, we have a very small capacity to be able to produce those. And this is a very large market opportunity. So the investment dollars that we're making today will generate capacity that will allow us to deploy this technology into the marketplace.

Laurence Alexander, Analyst

Okay. Great. And then secondly, for the discussion about opening up the Asian market with the POSCO agreement, what would you see as a reasonable lag between this agreement and having your first new commercial projects up and running? Are we talking 3 to 5 years? Or can you have a faster sales cycle?

Jason Few, President and CEO

Yes. So with respect to opportunities outside of the orders that we will get from POSCO as part of the settlement, the market, if I just take Korea for a moment, is largely a market that's driven by a lot of RFP activity. So we will certainly compete for those opportunities. And given the position we've been in with POSCO over the last, call it, 5-plus years, our technology hasn't really been offered in those opportunities. We now have an opportunity to do that. So we certainly think that there's a shorter sales cycle than 3 to 5 years. We think that we will actively participate in opportunities as those RFPs start to happen. And so we expect that to be sometime later in 2022, we should start seeing RFP activity that we'll be able to participate in. In addition to that, right, we will obviously try to originate opportunities in that market and across Asia, leveraging our different technology platforms. And then certainly, as we get to our solid oxide platform, given the significant amount of investments that have been announced in places like Korea and Japan around hydrogen. We think that also gives us an opportunity to compete there. And then if you just take our Tri-Gen platform, which is a distributed generation hydrogen platform that's a technology we can deploy in those markets today as an example. And so we think that opportunity presents itself. And then certainly, working with Toyota in the U.S. gives us an opportunity to certainly position that in terms of as we look at markets like Japan, as an example.

Operator, Operator

Your last question is from the line of Leo Mariani from KeyBanc.

Leo Mariani, Analyst

A question on the $60 million of revenue that you're expecting from the South Korean module exchanges in fiscal '22. Would you guys expect to receive 100% of that to your top-line? Or is there some shared interest with POSCO on that revenue? Or are you guys just getting a royalty from it? Just want to get a sense of that $60 million.

Jason Few, President and CEO

Yes. No, the $60 million is revenue. It is for paying for the modules. There's no shared interest in that revenue. So that's top line revenue growth for FuelCell Energy.

Leo Mariani, Analyst

Okay. And then just on the product sales, I know always a tough question to answer, but would you guys expect to have some of those in fiscal '22?

Jason Few, President and CEO

We do expect to have some product sales in fiscal '22 beyond just the orders we've talked about today, right? There's 20 module orders that we fully expect as a result of the settlement with POSCO, and that will be all 2022 revenue opportunity for the company. And we have other opportunities in the pipeline that we certainly anticipate being successful with in 2022.

Leo Mariani, Analyst

Okay. And I know you guys mentioned $1.8 million, I think, was the number of impairments on 2 projects that were canceled, can you give a little bit more clarity? What were those 2 projects that were canceled?

Mike Bishop, Executive Vice President and CFO

Hi, Leo, this is Mike, and thank you for joining the call. So the $1.8 million, and we had put out an 8-K on this a couple of months ago, that was related to development projects that we had in New York through LIPA. They were prior project awards that the company had invested in. We never got to a commercial agreement with LIPA and given the passage of time, decided to impair those assets. Conversely, we did get to a commercial agreement with LIPA on our Yaphank project. And as we discussed in our release and on the call, commercial operation of that project is imminent. So we're very excited about that project coming online.

Operator, Operator

There are no further questions. I would like to hand it over to Mr. Jason Few.

Jason Few, President and CEO

Thank you. Thank you again for joining us today. We will continue to execute on our Powerhouse Business Strategy working to deliver growth and optimize returns. The FuelCell Energy team is excited about our work to deliver on our purpose to enable the world to live a life empowered by clean energy and we are committed to delivering long-term shareholder value. I wish everyone a very happy, safe, and prosperous New Year. Thank you for joining, and have a great day.

Operator, Operator

And with that, this concludes today's conference call. Thank you for attending. You may now disconnect.