The following discussion and analysis should be read in conjunction with the
financial statements and related notes included elsewhere in this Annual Report.
This discussion may contain forward-looking statements based upon current
expectations that involve risks and uncertainties. Our actual results may differ
materially from those anticipated in these forward-looking statements as a
result of various factors, including those set forth under Part I, Item 1A.
"Risk Factors" or in other parts of this Annual Report.
Upon the completion of our IPO on November 1, 2021, Fluence Energy, Inc. became
a holding company whose sole material assets are the LLC Interests in Fluence
Energy LLC. All of our business is conducted through Fluence Energy, LLC,
together with its subsidiaries, and the financial results of Fluence Energy, LLC
will be consolidated in our financial statements. Fluence Energy LLC is taxed as
a partnership for federal income tax purposes and, as a result, its members,
including Fluence Energy, Inc. will pay income taxes with respect to their
allocable shares of its net taxable income. As of September 30, 2021, Fluence
Energy, LLC had subsidiaries including Fluence Energy GmbH in Germany, Fluence
Energy Pty Ltd. in Australia, Fluence Energy Inc. in the Philippines, and other
subsidiaries yet to commence operations. Except where the content clearly
indicates otherwise, reference to "Fluence," "we," "us," "our" or "the Company"
refers to Fluence Energy, Inc. and all of its direct and indirect subsidiaries,
including Fluence Energy, LLC. When used in a historical context that is prior
to the completion of the IPO, "we," "us," "our" or "the Company" refer to
Fluence Energy, LLC and its subsidiaries.
Our fiscal year begins on October 1 and ends on September 30. References to
"fiscal year 2020", "fiscal year 2021" and "fiscal year 2022" refer to the
fiscal years ended September 30, 2020, September 30, 2021 and September 30,
2022, respectively.
Presentation of Financial Information
Fluence Energy, LLC is the accounting predecessor of Fluence Energy, Inc. for
financial reporting purposes. Fluence Energy, Inc. will be the audited financial
reporting entity for future filings. Accordingly, this Annual Report contains
the following historical financial statements:
•Fluence Energy, Inc. The historical financial information of Fluence Energy,
Inc. has not been included in this Annual Report as it is a newly incorporated
entity, has no business transactions or activities to date and had no assets or
liabilities during the periods presented in this Annual Report.
•Fluence Energy, LLC. Because Fluence Energy, Inc. has no interest in any
operations other than those of Fluence Energy, LLC and its subsidiaries, the
historical consolidated financial information included in this Annual Report is
that of Fluence Energy, LLC and its subsidiaries.
Overview
Since our inception, we have focused on international growth and to further
develop our energy storage product and delivery services, the operational
services, and digital applications. We have incurred net operating losses each
year since our inception. As of September 30, 2021, we have financed our
operations with equity contributions from AES Grid Stability, Siemens Industry,
and QFH, cash and cash equivalents, negative working capital, and short-term
borrowings.
As of September 30, 2021, we deployed cumulative 971 MW of energy storage
products, compared to 460 MW as of September 30, 2020. New energy storage
product contracts executed during fiscal year 2021 represented total contracted
power of approximately 1,311 MW compared to 844 MW for fiscal year 2020. We
recognized total revenue of $680.8 million, representing an increase of $119.4
million, or 21.3%, in fiscal year 2021 compared to fiscal year 2020 as we
expanded our sales in terms of the number of energy storage products sold as
well as geographic footprint. Revenue generated from operations in the United
States increased from $318.9 million in fiscal year 2020 to $468.4 million in
fiscal year 2021, representing a 46.9% increase. Revenue generated from
international operations decreased from $242.4 million in fiscal year 2020 to
$212.4 million in fiscal year 2021, representing a (12.4)% decrease. Our revenue
in fiscal year 2021 has been negatively affected by impacts related to the
COVID-19 pandemic, such as delays in shipping energy storage products and
temporary closures of customer construction sites. Such delays may continue in
fiscal year 2022.
We had a gross loss of $69.1 million and gross profit margin of negative (10.2)%
in fiscal year 2021, compared to a gross profit of $7.9 million and gross profit
margin of 1.4% in fiscal year 2020. The gross loss in fiscal year 2021 has been
negatively impacted by (i) capacity constraints within the shipping industry and
increased shipping costs, both of which are caused primarily as a result of the
COVID-19 pandemic, and (ii) cost overruns and delays we are experiencing in some
projects currently under construction. Some of those costs overruns and delays
are occurring in the first Generation 6 product deliveries.
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Adjusted gross profit was $15.0 million and adjusted gross profit margin was
2.2% in fiscal year 2021, compared to adjusted gross profit of $8.9 million and
adjusted gross profit margin of 1.6% in fiscal year 2020, representing an
increase of $6.1 million, or 68.6%, in adjusted gross profit as we expanded our
sales in energy storage products in 2021.
General and administrative, research and development, sales and marketing
expenses increased $20.2 million, $11.9 million, and $6.4 million, or 112.7%,
103.1%, and 39.3%, respectively, in fiscal year 2021, compared to fiscal year
2020 as we have been investing heavily in our human capital, technology,
products and services to support significant increases in our operations and
related revenues. We expect these expenses to increase for the foreseeable
future as we experience continuing substantial growth and mature as a public
company.
We believe the proceeds received from our IPO along with cash flows from
operations, short-term borrowing, and our June 2021 investment from QFH will be
sufficient to meet our expense and capital requirements for the next twelve
months following the filing of this Annual Report.
Impact of the COVID-19 Pandemic
On March 11, 2020, the World Health Organization declared the outbreak of a
strain of novel coronavirus disease, the COVID-19 pandemic, a global pandemic.
Governments in affected areas and countries in which we operate have imposed a
number of measures designed to contain the outbreak, including business
closures, travel restrictions, quarantines, and cancellations of gatherings and
events. We have implemented operational and protective measures to ensure the
safety, health, and welfare of our employees and stakeholders. This includes
implementing work from home policies for all office employees. We have also
ensured that all employees and visitors that visit our facilities have access to
personal protective equipment, and we strictly enforce social distancing. Many
of the sites where our products and services are delivered have been declared
critical infrastructure and remained open following the respective safety
protocols. However, many of our customers' project sites have experienced
shutdowns and delays related to COVID-19. We continue to maintain these
precautions and procedures until the COVID-19 pandemic is under adequate
control. Overall, our revenue for fiscal year 2021 has been negatively affected
by impacts related to the COVID-19 pandemic, such as delays in shipping energy
storage products and temporary closures of customer construction sites. If these
situations continue or there are additional disruptions in our supply chain, it
could materially and adversely impact our operating results and financial
condition. We continue to actively manage through these temporary supply chain
disruptions.
The full impact of the COVID-19 pandemic on our financial condition and results
of operations will depend on future developments, such as the ultimate duration
and scope of the pandemic, its impact on our employees, customers, and vendors,
in addition to how quickly normal economic conditions and operations resume and
whether the pandemic impacts other risks disclosed in Part I, Item 1A. "Risk
Factors" within this Annual Report. Even after the pandemic has subsided, we may
continue to experience adverse impacts to our business from any economic
recession or depression that may occur as a result of the pandemic. Therefore,
we cannot reasonably estimate the impact at this time. We continue to actively
monitor the pandemic and may decide to take further actions that alter our
business operations as may be required by federal, state, or local authorities
or that we determine to be in the best interests of our employees, customers,
vendors, and shareholders.
2021 Cargo Loss Incident
On April 28, 2021, the Company was notified of an emergency aboard a vessel
carrying Fluence inventory. This incident (the "Cargo Loss Incident") resulted
in damage to a portion of our cargo aboard the vessel. Our best estimate of the
net realizable value of the cargo that was destroyed is $13.0 million. In
addition to the inventory losses, we have incurred and expect to incur
incremental expenses related to the incident, primarily consisting of inspection
costs, project cost overruns due to logistical changes, legal fees, and fees to
dispose of the damaged cargo. The amount of these incremental expenses incurred
during fiscal year 2021 were approximately $9.4 million, and we expect to incur
at least an additional $2.9 million during fiscal year 2022. We expect insurance
proceeds of at least $10.0 million related to non-disputed claims, of which $7.5
million was collected in October 2021 and the remainder is probable of
collection. We recorded a net loss of $12.4 million in "Cost of goods and
services" in the Company's consolidated statements of operations and
comprehensive loss in fiscal year 2021.
The Company has notified the marine cargo insurers of the incident and also
notified each affected customer of this event, which under relevant supply
contracts, provides the Company an extension of the relevant schedule due to the
resulting battery supply delays. We believe this event qualifies as force
majeure under the contracts with our customers. However, if the incident
ultimately is determined not to constitute a force majeure event, the Company
estimates potential liquidated damages exposure of approximately $15.0 million.
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2021 Overheating Event at Customer Facility
On September 4, 2021, a 300 MW energy storage facility owned by one of our
customers experienced an overheating event. The Company served as the energy
storage technology provider and installed the facility, which was completed in
fiscal year 2021. No injuries were reported from the incident. The facility has
been taken offline as teams from Fluence, our customer, and the battery
manufacturer investigate the incident. We are currently not able to estimate the
impact, if any, that this incident may have on our reputation or financial
results, or on market adoption of our products.
Segments
The Company's chief operating decision maker ("CODM") is its Chief Executive
Officer. The Company's CODM reviews financial information on a consolidated
basis for purposes of making operating decisions, allocating resources, and
evaluating financial performance. As such, the Company has determined that it
operates in one operating segment, which corresponds to one reportable segment.
Key Factors and Trends
We believe that our performance and future success depend on several factors
that present significant opportunities for us but also pose risks and
challenges, including those discussed below and in Part I, Item 1A. "Risk
Factors" within this Annual Report.
Expected Decrease in Lithium-ion Battery Cost
Our revenue growth is directly tied to the continued adoption of energy storage
products by our customers. The cost of lithium-ion energy storage hardware has
declined significantly in the last decade and has resulted in a large
addressable market today. According to BloombergNEF, the component costs for
lithium-ion battery packs are expected to fall from $161 per kilowatt hour
("kWh") in 2020 to $73/kWh in 2030, an 8% annual reduction over this period. The
market for energy storage is rapidly evolving, and while we believe costs will
continue to decline, there is no guarantee that they will decline or decline at
the rates we expect. If costs do not continue to decline, this could adversely
affect our ability to increase our revenue or grow our business.
Increasing Deployment of Renewable Energy
Deployment of renewable energy resources has accelerated over the last decade,
and solar and wind have become a low-cost energy source. BloombergNEF estimates
that renewable energy is expected to represent 70% of all new global capacity
installations over the next 10 years. Energy storage is critical to reducing the
intermittency and volatility of solar and wind generation.
Competition
The market for our products is competitive, and we may face increased
competition as new and existing competitors introduce energy storage solutions
and components. Furthermore, as we expand our services and digital applications
in the future, we may face other competitors including software providers and
some hardware manufacturers that offer software solutions. If our market share
declines due to increased competition, our revenue and ability to generate
profits in the future may be adversely affected.
Seasonality
We experience seasonality and typically see increased order intake in our third
and fourth fiscal quarters (April - September), driven by demand in the Northern
Hemisphere to install energy storage products before the summer of the following
year. Combined third and fourth fiscal quarter order intake generally accounted
for 80% or more of our total intake each year. As a result, revenue generation
is typically significantly stronger in our third and fourth fiscal quarters as
we provide the majority of our products to customers during these periods. Cash
flows historically have been negative in our first and second fiscal quarters,
neutral to positive in our third fiscal quarter, and positive in our fourth
fiscal quarter. Our services and digital applications and solutions offerings do
not experience the same seasonality given their recurring nature.
Key Components of Our Results of Operations
The following discussion describes certain line items in our Consolidated
Statements of Operations and comprehensive loss.
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Total Revenue
We generate revenue from the sale of energy storage products, service agreements
with customers to provide operational services related to battery-based energy
storage products, and from digital application contracts after the acquisition
of AMS in fiscal year 2021. Fluence enters into contracts with utility
companies, developers, and commercial and industrial customers. We derive the
majority of our revenues from selling energy storage products. When we sell a
battery-based energy storage product, we enter into a contract with our
customers covering the price, specifications, delivery dates and warranty for
the products being purchased, among other things.
Our revenue is affected by changes in the price, volume and mix of products and
services purchased by our customers, which is driven by the demand for our
products, geographic mix of our customers, strength of competitors' product
offerings, and availability of government incentives to the end-users of our
products.
Our revenue growth is dependent on continued growth in the amount of
battery-based energy storage products projects constructed each year and our
ability to increase our share of demand in the geographies where we currently
compete and plan to compete in the future as well as our ability to continue to
develop and commercialize new and innovative products that address the changing
technology and performance requirements of our customers.
Cost of Goods and Services
Cost of goods and services consists primarily of product costs, including
purchased materials and supplies, as well as costs related to shipping, customer
support, product warranty and personnel. Personnel costs in cost of goods and
services includes both direct labor costs as well as costs attributable to any
individuals whose activities relate to the transformation of raw materials or
component parts into finished goods or the transportation of materials to the
customer.
Our product costs are affected by the underlying cost of raw materials,
including steel and aluminum supply costs, including inverters, casings, fuses,
and cable; technological innovation; economies of scale resulting in lower
supply costs; and improvements in production processes and automation. We do not
currently hedge against changes in the price of raw materials. We generally
expect the ratio of cost of goods and services to revenue to decrease as sales
volumes increase due to economies of scale, however, some of these costs,
primarily personnel related costs, are not directly affected by sales volume.
Gross Profit (Loss) and Gross Profit Margin
Gross profit (loss) and gross profit margin may vary from quarter to quarter and
is primarily affected by our sales volume, product prices, product costs,
product mix, customer mix, geographical mix, shipping method, warranty costs,
and seasonality.
Operating Expenses
Operating expenses consist of research and development, sales and marketing and
general and administrative expenses as well as depreciation and amortization.
Personnel-related expenses are the most significant component of our operating
expenses and include salaries, benefits, sales commissions, and payroll taxes.
We expect to invest in additional resources to support our growth which will
increase our operating expenses in the near future.
Research and Development Expenses
Research and development expenses consist primarily of personnel-related
expenses, including salaries, benefits, and payroll taxes, for engineers engaged
in the design and development of products and technologies, as well as products,
materials, and third-party services used in our research and development
process. We expect research and development expenses to increase in future
periods to support our growth and as we continue to invest in research and
development activities that are necessary to achieve our technology and product
roadmap goals. These expenses may vary from period to period as a percentage of
revenue, depending primarily upon when we choose to make more significant
investments.
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of personnel-related expenses,
including salaries, benefits, amortization of sales commissions, and payroll
taxes, for our sales and marketing organization, consultants and other
third-party vendors. We expect to increase our sales and marketing personnel as
we expand into new geographic markets. We intend to expand our sales presence
and marketing efforts to additional countries in the future.
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General and Administrative Expenses
General and administrative expenses consist primarily of personnel-related
expenses, including salaries, benefits, and payroll taxes, for our executives,
sales, finance, human resources, information technology, engineering and legal
organizations that do not relate directly to the sales or research and
development functions, as well as travel expenses, facilities costs, bad debt
expense and fees for professional services. Professional services consist of
audit, legal, tax, insurance, information technology and other costs. We expect
general and administrative expenses to increase in the future as we scale our
headcount with the growth of our business. We also expect that we will incur
additional audit, tax, accounting, legal and other costs related to compliance
with applicable securities and other regulations, as well as additional
insurance, investor relations and other costs associated with being a public
company.
Depreciation and Amortization
Depreciation consists of costs associated with property, plant and equipment
("PP&E") and amortization of intangibles consisting of patents, licenses, and
developed technology over their expected period of use. We expect that as we
increase both our revenues and the number of our general and administrative
personnel, we will invest in additional PP&E to support our growth resulting in
additional depreciation and amortization.
Interest Expense
Interest expense consists primarily of interest incurred on our Line of Credit
and Promissory Notes.
Other Income, Net
Other income, net consists of income (expense) from foreign currency exchange
adjustments for monetary assets and liabilities.

Tax Expense
Historically, Fluence Energy, LLC was not subject to U.S. federal or state
income tax. As such, Fluence Energy, LLC did not pay U.S. federal or state
income tax, as taxable income or loss will be included in the U.S. tax returns
of its members. Fluence Energy LLC is subject to income taxes, including
withholding taxes, outside the U.S. and our income tax expense (benefit) on the
consolidated statements of operations primarily relates to income taxes from
foreign operations, withholding taxes on intercompany royalties and changes in
valuation allowances related to deferred tax assets of certain foreign
subsidiaries. After our IPO, we are now subject to U.S. federal and state income
taxes with respect to our allocable share of any taxable income or loss of
Fluence Energy, LLC, and we will be taxed at the prevailing corporate tax rates.
We will continue to be subject to foreign income taxes with respect to our
foreign subsidiaries and our expectations are valuation allowances will be
needed in certain tax jurisdictions. In addition to tax expenses, we also will
incur expenses related to our operations, as well as payments under the Tax
Receivable Agreement, which we expect could be significant over time. We will
receive a portion of any distributions made by Fluence Energy, LLC. Any cash
received from such distributions from our subsidiaries will be first used by us
to satisfy any tax liability and then to make payments required under the Tax
Receivable Agreement.
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Key Operating Metrics

The following tables present our main operating indicators at September 30, 2021
and 2020, and for the closed financial years September 30, 2021 and 2020.

                                      September 30,
(amounts in MW)                  2021                2020         Change       Change %
Energy Storage Products
Deployed                          971                  460         511          111.1  %
Contracted Backlog              2,679                1,879         800           42.6  %
Pipeline                       14,161               11,320       2,841           25.1  %
Service Contracts
Asset under Management            772                  276         496          179.7  %
Contracted Backlog              1,918                  455       1,463          321.5  %
Pipeline                       10,930                7,889       3,041           38.5  %
Digital Contracts
Asset under Management          3,108                    -       3,108               N/A
Contracted Backlog              1,629                    -       1,629               N/A
Pipeline                        3,301                    -       3,301               N/A


                                  Fiscal Year Ended September 30,
(amounts in MW)                    2021                        2020         Change       Change %
Energy Storage Products
Contracted                       1,311                           844         467           55.3  %
Service Contracts
Contracted                       1,959                           232       1,727          744.4  %
Digital Contracts
Contracted                       2,744                             -       2,744               N/A


Deployed or Asset Under Management
Deployed represents cumulative energy storage products that have achieved
substantial completion and are not decommissioned.
Asset under management for service contracts represents our long-term service
contracts with customers associated with our completed energy storage system
products. We start providing maintenance, monitoring, or other operational
services after the storage product projects are completed.
Asset under management for digital software contracts represents the amount of
MWs under signed digital application contracts, including Fluence Trading
Platform after the acquisition of AMS in fiscal year 2021.
Contracted Backlog and Contracted
For our energy storage products contracts, contracted backlog includes signed
customer orders or contracts under execution prior to when substantial
completion is achieved. For service contracts, contracted backlog includes
signed service agreements associated with our storage product projects that have
not been completed and the associated service has not started. For digital
applications contracts, contracted backlog includes signed agreements where the
associated subscription has not started.
Contracted represents new energy storage product contracts, new service
contracts and new digital contracts signed during each fiscal year presented.
Pipeline
Pipeline represents our uncontracted, potential revenue from energy storage
products, service, and digital software contracts currently in process, which
have a reasonable likelihood of contract execution within 24 months. Pipeline is
monitored by management to understand the growth of our Company and our
estimated future revenue related to customer contracts for our battery-based
energy storage products and services.
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We cannot guarantee that our contracted backlog or pipeline will result in
actual revenue in the originally anticipated period or at all. Contracted
backlog and pipeline may not generate margins equal to our historical operating
results. We have only recently begun to track our contracted backlog and
pipelines on a consistent basis as performance measures, and as a result, we do
not have significant experience in determining the level of realization that we
will achieve on these contracts. Our customers may experience project delays or
cancel orders as a result of external market factors and economic or other
factors beyond our control. If our contracted backlog and pipeline fail to
result in revenue at all or in a timely manner, we could experience a reduction
in revenue, profitability, and liquidity. Pipeline is an internal management
metric that we construct from market information reported by our global sales
force. We monitor and track our pipeline, but it is not audited.
Non-GAAP Financial Measures
This section contains references to certain non-GAAP financial measures,
including Adjusted EBITDA, Adjusted Gross Profit (Loss), Adjusted Gross Profit
Margin, Adjusted Net Loss, and Free Cash Flow.
Adjusted EBITDA is calculated from the consolidated statements of operations
using net income (loss) adjusted for (i) interest income (expense), net,
(ii) income taxes, (iii) depreciation and amortization, (iv) equity-based
compensation, and (v) other non-recurring income or expenses. Adjusted EBITDA
may in the future also be adjusted for amounts impacting net income related to
the Tax Receivable Agreement liability.
Adjusted Gross Profit (Loss) is calculated using gross profit (loss), adjusted
to exclude certain non-recurring income or expenses. Adjusted Gross Profit
Margin is calculated using Adjusted Gross Profit (Loss) divided by total
revenue.
Adjusted Net Loss is calculated using net loss, adjusted to exclude
(i) amortization of intangibles, (ii) equity-based compensation, (iii) other
non-recurring income or expenses, and (iv) tax impact of these adjustments.
Free Cash Flow is calculated from the consolidated statements of cash flows and
is defined as net cash provided by operating activities, less purchase of
property and equipment made in the period. We expect our Free Cash Flow to
fluctuate in future periods as we invest in our business to support our plans
for growth. Limitations on the use of Free Cash Flow include (i) it should not
be inferred that the entire Free Cash Flow amount is available for discretionary
expenditures. For example, cash is still required to satisfy other working
capital needs, including short-term investment policy, restricted cash, and
intangible assets; (ii) Free Cash Flow has limitations as an analytical tool,
and it should not be considered in isolation or as a substitute for analysis of
other GAAP financial measures, such as net cash provided by operating
activities; and (iii) this metric does not reflect our future contractual
commitments.
These non-GAAP measures are intended as supplemental measures of performance
and/or liquidity that are neither required by, nor presented in accordance with,
GAAP. We present these non-GAAP measures because we believe they assist
investors and analysts in comparing our performance across reporting periods on
a consistent basis by excluding items that we do not believe are indicative of
our core operating performance. In addition, we use certain of these non-GAAP
measures (i) as factors in evaluating management's performance when determining
incentive compensation and (ii) to evaluate the effectiveness of our business
strategies.
These non-GAAP measures should not be considered in isolation or as substitutes
for performance measures calculated in accordance with GAAP and may not be
comparable to similar measures presented by other entities. Readers are
cautioned that these non-GAAP measures should not be construed as alternatives
to other measures of financial performance calculated in accordance with GAAP.
These non-GAAP measures and their reconciliation to GAAP financial measures are
shown below.
The following tables present our non-GAAP measures for the periods indicated.
                                                     Fiscal Year Ended September 30,
($ in thousands)                                         2021                   2020               Change                Change %
Net loss                                         $        (162,003)         $  (46,710)         $ (115,293)                  (246.8) %
Add (deduct):
Interest expense (income), net                               1,429                (379)              1,808                    477.0
Income tax expense                                           1,829               6,421              (4,592)                   (71.5)
Depreciation and amortization                                5,112               3,018               2,094                     69.4
Non-recurring expenses(a)                                   88,959               1,767              87,192                  4,934.5
Adjusted EBITDA                                  $         (64,674)         $  (35,883)         $  (28,791)                   (80.2) %


(a) Amount in 2021 included $23.6 million related to non-recurring excess
shipping costs and $48.2 million of project charges which are compounding
effects of the COVID-19 pandemic, $12.4 million related to the 2021 cargo loss
incident, and $4.8 million non-recurring IPO-related expenses which did not
qualify for capitalization. Amount in 2020 included $0.8 million of costs
associated with the AMS acquisition and a $1.0 million expense associated with a
safety incident in 2019.
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                                                    Fiscal Year Ended September 30,
($ in thousands)                                        2021                   2020              Change              Change %
Total Revenue                                    $       680,766           $ 561,323            119,443                    21.3  %
Cost of goods and services                               749,910             553,400            196,510                    35.5
Gross profit (loss)                                      (69,144)              7,923            (77,067)                 (972.7)
Add (deduct):
Non-recurring expenses(a)                                 84,153                 978             83,175                  8504.6
Adjusted Gross Profit                            $        15,009           $   8,901          $   6,108                    68.6  %
Adjusted Gross Profit Margin %                               2.2   %        

1.6%

(a) Amount in 2021 included $23.6 million related to non-recurring excess
shipping costs and $48.2 million of project charges which are compounding
effects of the COVID-19 pandemic, and $12.4 million related to the 2021 cargo
loss incident. Amount in 2020 included a $1.0 million expense associated with a
safety incident in 2019.
                                                         Fiscal Year Ended September 30,
($ in thousands)                                             2021                2020               Change               Change %
Net loss                                                $  (162,003)         $  (46,710)         $ (115,293)                 (246.8) %
Add (deduct):
Amortization of intangible                              $     3,552          $    2,484               1,068                    43.0
Non-recurring expenses(a)                                    88,959               1,767              87,192                  4934.5
Adjusted Net Loss                                       $   (69,492)         $  (42,459)         $  (27,033)                  (63.7) %


(a) Amount in 2021 included $23.6 million related to non-recurring excess
shipping costs and $48.2 million of project charges which are compounding
effects of the COVID-19 pandemic, $12.4 million related to the 2021 cargo loss
incident, and $4.8 million non-recurring IPO-related expenses which did not
qualify for capitalization. Amount in 2020 included $0.8 million of costs
associated with the AMS acquisition and a $1.0 million expense associated with a
safety incident in 2019.
                                                 Fiscal Year Ended September 30,
($ in thousands)                                     2021                2020              Change                Change %
Net cash (used in) provided by operating
activities                                      $  (265,269)         $ (14,016)         $ (251,253)                 (1792.6) %
Less: Purchase of property and equipment             (4,292)            (1,780)             (2,512)                   141.1
Free Cash Flows                                 $  (269,561)         $ (15,796)         $ (253,765)                 (1606.5) %


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Results of Operations
Comparison of the Fiscal Year Ended September 30, 2021 to the Fiscal Year Ended
September 30, 2020
The following table sets forth our operating results for the periods indicated.
                                                             Fiscal Year Ended September 30,
($ in thousands)                                                 2021                   2020              Change               Change %
Total revenue                                            $        680,766           $ 561,323          $  119,443                    21.3  %
Costs of goods and services                                       749,910             553,400             196,510                    35.5
Gross profit (loss)                                               (69,144)              7,923             (77,067)                 (972.7)
Gross Profit %                                                      (10.2)  %             1.4  %
Operating expenses
Research and development                                           23,427              11,535              11,892                   103.1
Sales and marketing                                                22,624              16,239               6,385                    39.3
General and administrative                                         38,162              17,940              20,222                   112.7
Depreciation and amortization                                       5,112               3,018               2,094                    69.4
Interest expense                                                    1,435                 128               1,307                  1021.1
Other (expense) income, net                                          (270)                648                (918)                 (141.7)
Loss before income taxes                                         (160,174)            (40,289)           (119,885)                 (297.6)
Income tax expense (benefit)                                        1,829               6,421              (4,592)                  (71.5)
Net loss                                                 $       (162,003)          $ (46,710)         $ (115,293)                 (246.8) %


Total Revenue
Total revenue increased from $561.3 million in fiscal year 2020 to $680.8
million in fiscal year 2021. The $119.4 million or 21.3% increase was mainly
from the sales of our battery energy storage products as we expanded our
business, particularly in the Americas and EMEA regions. While we continued our
growth in fiscal year 2021, our revenue in fiscal year 2021 has been negatively
affected by impacts related to the COVID-19 pandemic, such as delays in shipping
energy storage products and temporary closures of customer construction sites.
Costs of Goods and Services
Cost of goods and services increased from $553.4 million in fiscal year 2020 to
$749.9 million in fiscal year 2021. The $196.5 million, or 35.5%, increase was
primarily from materials and supplies associated with the sale of our battery
energy storage products due to increased sales volume, as well as $23.6 million
of increased shipping costs primarily attributable to the COVID-19 pandemic.
Furthermore, our cost of goods and services for fiscal year 2021 includes $12.4
million related to the Cargo Loss Incident.
Gross Profit (Loss) and Gross Profit Margin
Gross loss was $69.1 million, and gross profit margin was negative (10.2)%, in
fiscal year 2021, compared to a gross profit of $7.9 million, and a gross profit
margin of 1.4%, in fiscal year 2020. The gross loss in fiscal year 2021 has been
negatively impacted by (i) capacity constraints within the shipping industry and
increased shipping costs, both of which are caused primarily as a result of the
COVID-19 pandemic, (ii) cost overruns, delays and other project charges we are
experiencing in some projects currently under construction, and (iii) the Cargo
Loss Incident. Some of those costs overruns and delays are occurring in the
first Generation 6 product deliveries.
Research and Development Expenses
Research and development expenses increased from $11.5 million in fiscal year
2020 to $23.4 million in fiscal year 2021. The $11.9 million, or 103.1%,
increase in fiscal year 2021 compared to fiscal year 2020 was mainly related to
increased salaries and personnel-related costs due to higher headcount to
support the growth of the Company.
Sales and Marketing Expenses
Sales and marketing expenses increased from $16.2 million in fiscal year 2020 to
$22.6 million in fiscal year 2021. The increase of $6.4 million, or 39.3%, is
related to increased personnel-related expenses for our sales and marketing
organization, consultants and other third-party vendors, including the increase
in sales and marketing expense in global markets.
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General and Administrative Expenses
General and administrative expenses increased from $17.9 million in fiscal year
2020 to $38.2 million in fiscal year 2021. The increase of $20.2 million, or
112.7%, was mainly related to increases in personnel-related expenses including
corporate, executive, finance, and other administrative functions, as well as
expenses for outside professional services as we have been expanding our
personnel headcount rapidly to support our growth.
Depreciation and Amortization
Depreciation and amortization increased from $3.0 million in fiscal year 2020 to
$5.1 million in fiscal year 2021. The increase was attributable to $1.2 million
amortization related to intangible assets from the AMS acquisition and $0.9
million depreciation from increased fixed assets.
Interest expense
Interest expense was $1.4 million in fiscal year 2021, compared to $0.1 million
in fiscal year 2020. The increase was due to the increased short-term borrowings
from the Promissory Notes and Line of Credit in fiscal year 2021.
Other (Expense) Income, Net
Other expense was $0.3 million in fiscal year 2021, compared to other income of
$0.6 million in fiscal year 2020. The change was mainly a result of foreign
currency exchange adjustments for monetary assets and liabilities.
Income Tax Expense
Income tax expense decreased from $6.4 million in fiscal year 2020 to $1.8
million in fiscal year 2021. The effective income tax rate was (1.1)% and
(15.9)% for fiscal year 2021 and fiscal year 2020, respectively. The decrease in
income tax expense and change in effective tax rate were primarily due to an
increase in global pre-tax loss in fiscal year 2021 compared to fiscal year
2020. Furthermore, the income tax expense in fiscal year 2020 included an
increase in the valuation allowance recorded on deferred tax assets.
Net Loss
Net loss increased from $46.7 million in fiscal year 2020 to $162.0 million in
fiscal year 2021. The increase in net loss was mainly driven by (i) capacity
constraints within the shipping industry and increased shipping costs, both of
which are caused primarily as a result of the COVID-19 pandemic, (ii) cost
overruns and delays we are experiencing in some projects currently under
construction, (iii) the Cargo Loss Incident, and (iv) increased expenses in
general and administrative, sales and marketing and research and development due
to the expansion of our business and the build out of our corporate functions.
Comparison of the Fiscal Year Ended September 30, 2020 to the Fiscal Year Ended
September 30, 2019
For a discussion of our results of operations for the fiscal year ended
September 30, 2020 compared to the fiscal year ended September 30, 2019, see the
section entitled "Management Discussion and Analysis of Financial Condition and
Results of Operations" in our Registration Statement on Form S-1 (Registration
No. 333-259839). The registration statement was filed in connection with the IPO
and was declared effective by the SEC on October 27, 2021.
Liquidity and Capital Resources
Since inception and through September 30, 2021, our principal sources of
liquidity were our cash and cash equivalents, short-term borrowings, capital
contributions from AES Grid Stability and Siemens Industry, proceeds from the
QFH investment and supply chain financing.
We received a $6.3 million capital contribution from Siemens Industry and a $2.5
million capital contribution from AES Grid Stability in fiscal years 2021 and
2020, respectively.
On December 27, 2020, we entered into an agreement with QFH for a $125.0 million
investment. The transaction completed on June 9, 2021, with the proceeds used to
accelerate our growth.
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The Company entered into an Uncommitted Line of Credit Agreement ("Line of
Credit') with Citibank, N.A. ("Citibank") on January 29, 2019, which allowed us
to borrow an amount in aggregate not to exceed $2.0 million, from time to time,
until January 29, 2021 ("Expiration Date"). The Line of Credit was further
amended to increase the aggregate borrowing amount to $10.0 million, $30.0
million, and $50.0 million on May 13, 2020, August 7, 2020, and December 23,
2020, respectively. The Expiration Date for the Line of Credit was extended to
March 31, 2023, on June 2, 2021. The Company had $50.0 million outstanding under
the Line of Credit as of September 30, 2021. Borrowings under the Line of Credit
were repaid on November 1, 2021 using proceeds from the IPO.
Additionally, we funded our liquidity through borrowings from AES Grid Stability
and Siemens Industry. On August 11, 2021, Fluence Energy, LLC entered into a
promissory note with each of Siemens Industry and AES Grid Stability, under
which Fluence Energy, LLC received a bridge financing of an aggregate of $50.0
million. In connection with the bridge financing, Fluence Energy, LLC issued a
$25.0 million promissory note to each of Siemens Industry and AES Grid Stability
(together, the "Promissory Notes"). The Promissory Notes bear interest at a rate
of 2.86%. The Promissory Notes were repaid on November 1, 2021 using proceeds
from the IPO.
We have provided certain of our suppliers with access to a supply chain
financing program through a third-party financing institution (the "SCF Bank").
This program allows us to seek extended payment terms with our suppliers and
allows our suppliers to monetize their receivables prior to the payment due
date, subject to a discount. Once a supplier elects to participate in the
program and reaches an agreement with the SCF Bank, the supplier elects which
individual invoices to sell to the SCF Bank. We then pay the SCF Bank on the
invoice due date. We have no economic interest in a supplier's decision to sell
a receivable to the SCF Bank. The agreements between our suppliers and the SCF
Bank are solely at their discretion and are negotiated directly between them.
Our suppliers' ability to continue using such agreements is primarily dependent
upon the strength of our financial condition and guarantees issued by AES and
Siemens. As of September 30, 2021, AES and Siemens issued guarantees of $30.0
million each, for a total of $60.0 million, to the SCF Bank on our behalf. As of
September 30, 2021, one supplier was actively participating in the supply chain
financing program, and we had $58.4 million of payables outstanding subject to
the program. All outstanding payments owed under the program are recorded within
Accounts payable in our Consolidated Balance Sheets.
Initial Public Offering
On November 1, 2021, the Company completed the IPO in which it issued and sold
35,650,000 shares of its Class A common stock at the public offering price of
$28.00 per share. The net proceeds to the Company from the IPO were $948.0
million, after deducting underwriting discounts and commissions and offering
expenses payable by the Company. The net proceeds from the IPO have been used to
purchase 35,650,000 newly issued LLC Interests directly from Fluence Energy, LLC
at a price per unit equal to the IPO price per share of Class A common stock
less the underwriting discount and estimated offering expenses payable by us.
Fluence Energy, LLC used the net proceeds from the sale of LLC Interests to
Fluence Energy, Inc. to repay all outstanding borrowings under our existing Line
of Credit and the Promissory Notes, and the remainder will be used for working
capital and other general corporate purposes.
Revolving Credit Facility
We entered into a Revolving Credit Facility (the "Revolver") on November 1,
2021, by and among Fluence Energy, LLC, as the borrower, Fluence Energy Inc., as
a parent guarantor, the subsidiary guarantors party thereto, the lenders party
thereto and JP Morgan Chase Bank, N.A., as administrative agent and collateral
agent. The Revolver is secured by a (i) first priority pledge of the equity
securities of Fluence Energy, LLC and its subsidiaries and (ii) first priority
security interests in, and mortgages on, substantially all tangible and
intangible personal property and material fee-owned real property of Fluence
Energy, LLC, the parent guarantor and each subsidiary guarantor party thereto,
in each case, subject to customary exceptions and limitations. The initial
aggregate amount of commitments is $190.0 million from the lenders party
including JP Morgan Chase Bank, N.A., Morgan Stanley Senior Funding, Inc., Bank
of America, N.A., Barclays Bank PLC, and five other banks. The maturity date of
the Revolver is November 1, 2025.
The interest rate is either (i) the Adjusted LIBOR or Adjusted EURIBO Rate (each
as defined in the Revolver) plus 3.0 % or (ii) the Alternate Base Rate (as
defined in the Revolver) plus 2.0 % (subject to customary LIBOR replacement
provisions and alternative benchmark rates including customary spread
adjustments with respect to borrowings in foreign currency), at the option of
Fluence Energy, LLC. Fluence Energy, LLC is required to pay to the lenders a
commitment fee of 0.55 % per annum on the average daily unused portion of the
revolving commitments through maturity, which will be the four-year anniversary
of the closing date of the Revolver. The Revolver also provides for up to
$190.0 million in letter of credit issuances, which will require customary
issuance and administration fees, as well as a fronting fee payable to each
issuer thereof and a letter of credit participation fee of 2.75 % per annum
payable to the lenders.
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The Revolver contains covenants that, among other things, will restrict our
ability to incur additional indebtedness; incur liens; sell, transfer, or
dispose of property and assets; make investments or acquisitions; make
dividends, distributions, or other restricted payments; and engage in affiliate
transactions. The Revolver limits our ability to make certain payments,
including dividends and distributions on Fluence Energy, LLC's equity, Fluence
Energy, Inc.'s equity and other restricted payments. In addition, we are
required to maintain (i) minimum liquidity and gross revenue requirements, in
each case, until consolidated EBITDA reaches $150.0 million for the most recent
four fiscal quarters and we make an election, and (ii) thereafter, a maximum
total leverage ratio and a minimum interest coverage ratio. Such covenants will
be tested on a quarterly basis.
Tax Receivable Agreement
In connection with the IPO, we entered into the Tax Receivable Agreement with
Fluence Energy, LLC and the Founders which obligates the Company to make
payments to the Founders of 85% of the amount of certain tax benefits that
Fluence Energy, Inc. actually realizes, or in some circumstances is deemed to
realize, arising from the Basis Adjustments (as defined below) and certain other
tax benefits arising from payments made under the Tax Receivable Agreement.
Fluence Energy, LLC will have in effect an election under Section 754 of the
Code effective for each taxable year in which a redemption or exchange
(including deemed exchange) of LLC Interests for Class A common stock or cash
occurs or when Fluence Energy, LLC makes (or is deemed to make) certain
distributions. These Tax Receivable Agreement payments are not conditioned upon
one or more of the Founders maintaining a continued ownership interest in
Fluence Energy, LLC. If a Founder transfers LLC Interests but does not assign to
the transferee of such units its rights under the Tax Receivable Agreement, such
Founder generally will continue to be entitled to receive payments under the Tax
Receivable Agreement arising in respect of a subsequent exchange of such LLC
Interests. In general, the Founders' rights under the Tax Receivable Agreement
may not be assigned, sold, pledged, or otherwise alienated or transferred to any
person, other than certain permitted transferees, without our prior written
consent (not to be unreasonably withheld) and such person's becoming a party to
the Tax Receivable Agreement and agreeing to succeed to the applicable Founder's
interest therein.
Subsequent redemptions or exchanges of LLC Interests are expected to result in
increases in the tax basis of the assets of Fluence Energy, LLC and certain of
its subsidiaries. Increases in tax basis and tax basis adjustments generated
over time may increase (for tax purposes) the depreciation and amortization
deductions available to Fluence Energy, Inc. and, therefore, may reduce the
amount of U.S. federal, state, and local tax that Fluence Energy, Inc. would
otherwise be required to pay in the future, although the IRS may challenge all
or part of the validity of that tax basis, and a court could sustain such a
challenge. Fluence Energy, Inc.'s allocable share of tax basis and the
anticipated tax basis adjustments upon redemptions or exchanges of LLC Interests
may also decrease gains (or increase losses) on future dispositions of certain
assets to the extent tax basis is allocated to those assets. Actual tax benefits
realized by Fluence Energy, Inc. may differ from tax benefits calculated under
the Tax Receivable Agreement as a result of the use of certain assumptions in
the Tax Receivable Agreement, including the use of an assumed state and local
income tax rate to calculate tax benefits. The payment obligation under the Tax
Receivable Agreement is an obligation of Fluence Energy, Inc. and not of Fluence
Energy, LLC. We expect to use distributions from Fluence Energy, LLC to fund any
payments that we will be required to make under the Tax Receivable Agreement. To
the extent we are unable to make timely payments under the Tax Receivable
Agreement for any reason, such payments generally will be deferred and will
accrue interest until paid; provided, however, that nonpayment for a specified
period may constitute a material breach of a material obligation under the Tax
Receivable Agreement resulting in the acceleration of payments due under the Tax
Receivable Agreement. Fluence Energy, Inc. expects to benefit from the remaining
15% of cash tax benefits, if any, it realizes from such tax benefits. For
purposes of the Tax Receivable Agreement, the cash tax benefits will be computed
by comparing the actual income tax liability of Fluence Energy, Inc. to the
amount of such taxes that Fluence Energy, Inc. would have been required to pay
had there been no such tax basis adjustments of the assets of Fluence Energy,
LLC or its subsidiaries as a result of redemptions or exchanges and had Fluence
Energy, Inc. not entered into the Tax Receivable Agreement. The actual and
hypothetical tax liabilities determined in the Tax Receivable Agreement will be
calculated using the actual U.S. federal income tax rate in effect for the
applicable period and an assumed state and local income tax rate (along with the
use of certain other assumptions). The term of the Tax Receivable Agreement will
continue until all such tax benefits have been utilized or expired, unless
Fluence Energy, Inc. exercises its right to terminate the Tax Receivable
Agreement early, certain changes of control occur or Fluence Energy, Inc.
breaches any of its material obligations under the Tax Receivable Agreement, in
which case, all obligations generally (and in the case of such a change of
control or such breach, only if the Founders elect) will be accelerated and due
as if Fluence Energy, Inc. had exercised its right to terminate the Tax
Receivable Agreement. The payment to be made upon an early termination of the
Tax Receivable Agreement will generally equal the present value of payments to
be made under the Tax Receivable Agreement using certain assumptions. Estimating
the amount of payments that may be made under the Tax Receivable Agreement is by
its nature imprecise, insofar as the calculation of amounts payable depends on a
variety of factors. The tax basis adjustments upon the redemption or exchange of
LLC Interests, as well as the amount and timing of any payments under the Tax
Receivable Agreement, will vary depending upon a number of factors, including
the timing of purchases or exchanges, the price of shares of our Class A common
stock at the time of the purchase or exchange, the extent to which such
purchases or exchanges do not result in a basis adjustment, the amount of tax
attributes, changes in tax rates and the amount and timing of our income.
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We expect that as a result of the anticipated tax basis adjustment of the assets
of Fluence Energy, LLC and its subsidiaries upon the redemption or exchange of
LLC Interests and our possible utilization of certain tax attributes, the
payments that we may make under the Tax Receivable Agreement will be
substantial. If all of the Founders were to exchange or redeem their LLC
Interests for Class A common stock pursuant to the terms of the Fluence Energy
LLC Agreement, we estimate our Founders will be entitled to receive payments
under the Tax Receivable Agreement totaling approximately $681.3 million;
assuming, among other factors, (i) all exchanges occurred on the same day; (ii)
a price of $28.00 per share of Class A common stock; (iii) a constant corporate
tax rate of 27%; (iv) we will have sufficient taxable income to fully utilize
the tax benefits; (v) Fluence Energy, LLC is able to fully depreciate or
amortize its assets; and (vi) no material changes in applicable tax law. The
payments under the Tax Receivable Agreement are not conditioned upon continued
ownership of us by the Founders. Although the timing and extent of future
payments could vary significantly under the Tax Receivable Agreement for the
factors discussed above, we anticipate funding payments from the Tax Receivable
Agreement from cash flow from operations of our subsidiaries, available cash or
available borrowings under any future debt agreements, and such payments are not
anticipated to be dependent upon the availability of proceeds of the IPO.
We believe that our current cash and cash equivalents, cash flows from
operations, short-term borrowing, and recent investments from QIA through QFH,
combined with the proceeds of our IPO, will be sufficient to meet our capital
expenditure and working capital requirements for the foreseeable future.
Historical Cash Flows
The following table summarizes our cash flows from operating, investing, and
financing activities for the periods presented.
                                                  Fiscal Year Ended September 30,
($ in thousands)                                      2021                   2020                Change                 Change %

Net cash used in operating activities $ (265,269) $ (14,016)

             (251,253)                  (1792.6) %
Net cash (used in) provided by
investing activities                          $         (22,292)         $  18,220               (40,512)                   (222.3) %
Net cash provided by financing
activities                                    $         231,126          $   2,500               228,626                    9145.0  %


Net cash flows used in operating activities were $265.3 million in fiscal year
2021 compared $14.0 million in fiscal year 2020. The increase in net operating
cash outflows was mainly due to increased purchases of inventory for our energy
storage products, partially offset by increased accounts payables.
Net cash flows used in investing activities was $22.3 million in fiscal year
2021, which included $18.0 million related to the business acquisition and $4.3
million of purchases of property and equipment. Net cash flows provided by
investing activities was $18.2 million in fiscal year 2020, which included $20.0
million cash inflows from the release of bank deposits that were collateralized
for outstanding bank guarantees, net of $1.8 million purchases of property and
equipment.
Cash flows provided by financing activities of $231.1 million in fiscal year
2021 was primarily due to $125.0 million proceeds from issuance of Class B
membership units to QFH, $6.3 million capital contribution from Siemens
Industry, $50.0 million net borrowings under the Line of Credit, and $50.0
million net borrowings from the Promissory Notes. Cash flows provided by
financing activities of $2.5 million in fiscal year 2020 was from a capital
contribution from AES Grid Stability.
Credit Support and Reimbursement Agreement
We are party to an Amended and Restated Credit Support and Reimbursement
Agreement with AES and Siemens Industry whereby they may, from time to time,
agree to furnish credit support to us in the form of direct issuances of credit
support to our lenders or other beneficiaries or through their lenders'
provision of letters of credit to backstop our own facilities or obligations.
Pursuant to the Credit Support and Reimbursement Agreement, if AES or Siemens
Industry agree to provide a particular credit support (which they are permitted
to grant or deny in their sole discretion), they are entitled to receipt of a
credit support fee and reimbursement for all amounts paid to our lenders or
other counterparties, payable upon demand. The Credit Support and Reimbursement
Agreement will not provide any credit support from September 30, 2026, provided
that either AES or Siemens Industry will be permitted to terminate the agreement
upon six months prior notice.
Critical Accounting Policies and Use of Estimates
Our financial statements have been prepared in accordance with GAAP. In the
preparation of these financial statements, we consider an accounting judgment,
estimate or assumption to be critical when (1) the estimate or assumption is
complex in nature or requires a high degree of judgment and (2) the use of
different judgments, estimates, and assumptions could have a material impact on
the consolidated financial statements. We believe that the accounting policies
discussed below are critical to understanding our historical and future
performance, as these policies relate to the more significant areas involving
management's judgments and estimates.
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Revenue Recognition
We determine our revenue recognition through the following steps:
(i) identification of the contract or contracts with a customer,
(ii) identification of the performance obligations within the contract,
(iii) determination of the transaction price, (iv) allocation of the transaction
price to the performance obligations within the contract, and (v) recognition of
revenue as the performance obligation has been satisfied.
Our revenue was generated primarily from sale of battery-based energy storage
products, providing operational services related to energy storage products, and
providing digital applications and solutions.
Sale of Energy Storage Products
The Company enters into contracts with utility companies, developers, and C&I
customers to design and build battery-based energy storage products. Each
storage product is customized depending on the customer's energy needs. Customer
payments are due upon meeting certain milestones that are consistent with
contract-specific phases of a project. We determine the transaction price based
on the consideration expected to be received which includes estimates for
project execution risks and other variable considerations, including liquidated
damages. The transaction price identified is allocated to each distinct
performance obligation to deliver a good or service based on the relative
standalone selling prices. Generally, our contracts to design and build
battery-based storage solutions are determined to have one performance
obligation. We believe that the prices negotiated with each individual customer
are representative of the stand-alone selling price of the energy storage
products.
We recognize revenue over time as a result of the continuous transfer of control
of our energy storage products to the customer. This continuous transfer of
control to the customer is supported by clauses in the contracts that provide
enforceable rights to payment of the transaction price associated with work
performed to date and is for products that do not have an alternative use to us
and/or the project is built on the customer's land that is under the customer's
control.
Revenue from the contracts is recognized using the percentage of completion
method based on cost incurred as a percentage of total estimated contract costs.
Contract costs include all direct material and labor costs related to contract
performance. Pre-contract costs with no future benefit are expensed in the
period in which they are incurred. Since the revenue recognition of these
contracts depends on estimates, which are assessed continually during the term
of the contract, recognized revenues and profit are subject to revisions as the
contract progresses to completion. The cumulative effects of revisions of
estimated total contract costs and revenues, together with any contract reserves
which may be deemed appropriate, are recorded in the period in which the facts
and changes in circumstance become known. Due to the uncertainties inherent in
the estimation process, it is reasonably possible that these estimates will be
revised in a different period. When a loss is forecasted for a contract, the
full amount of the anticipated loss is recognized in the period in which it is
determined that a loss will occur.
Our contracts generally provide our customers the right to liquidated damages
("LDs") against Fluence in the event specified milestones are not met on time,
or equipment is not delivered according to contract specifications. LDs are
accounted for as variable consideration, and the contract price is reduced by
the expected penalty or LD amount when recognizing revenue. Variable
consideration is included in the transaction price only to the extent that it is
improbable that a significant reversal in the amount of cumulative revenue
recognized will occur when the uncertainty is resolved. Estimating variable
consideration requires certain estimates and assumptions, including whether and
by how much a project will be delayed and/or will not meet performance
contractual specifications. The existence and measurement of liquidated damages
may also be impacted by our judgements about the probability of favorable
outcomes of customer disputes involving whether certain events qualify as force
majeure or the reason for the events that caused project delays. Variable
consideration for liquidated damages is estimated using the expected value of
the consideration to be received. If Fluence has a claim against the customer
for amount not specified in the contract, such claim is recognized as an
increase to contract price when it is legally enforceable, which is usually upon
signing a respective change order or equivalent document confirming the claim
acceptance by customer.
Services
The Company also enters into long-term service agreements with customers to
provide operational services related to purchased battery-based energy storage
products. The services include maintenance, monitoring, and other minor
services. We account for the services as a single performance obligation as the
services are substantially the same and have the same pattern of transfer to the
customers. We recognize revenue over time using a straight-line recognition
method for these types of services. We believe using a time-based method to
measure progress is appropriate as the performance obligations are satisfied
evenly over time based on the fact that customers receive the services evenly
and the cost pattern does not change significantly over the service period.
Revenue is recognized by dividing the total transaction price over the service
period.
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Some of the agreements also provide capacity guarantees which stand for a
commitment to perform certain augmentation activities to maintain the level of
battery capacity specified in the agreement. Augmentation activities would
typically be represented by installation of additional batteries, and other
components as needed, to compensate for partially lost capacity due to
degradation of batteries over time. These services are treated as service-type
warranties and are accounted for as separate performance obligations from other
services discussed above. Performance obligations of the services are satisfied
over time. Percentage of completion revenue recognition method is applied for
service type warranties as the cost pattern changes significantly with little to
no operating costs incurred in the earlier years and larger costs incurred in
later years when augmentation is required to restore the required capacity, for
example, adding more batteries or changing some existing modules with declined
capacity.
For both products and service contracts where there are multiple performance
obligations in a single contract, we allocate the consideration to the various
obligations in the contract based on the relative standalone selling price
method. Standalone selling prices are estimated based on estimated costs plus
margin or using market data for comparable products when estimated costs are not
imputable.
Digital Applications and Solutions
In October 2020, Fluence Energy, LLC acquired the AMS software and digital
intelligence platform, which became the Fluence Trading Platform. Contracts
involving the Fluence Trading Platform are generally entered into with
commercial entities that control utility-scale storage and renewable generation
assets. Fluence Trading Platform arrangements consist of a promise to provide
access to proprietary cloud-based Software-as-a-Service ("SaaS") to promote
enhanced financial returns on the utility-scale storage and renewable generation
assets. The Fluence Trading Platform is a hosted service that delivers
automated, market-compliant bids to local electricity market operators.
Customers do not receive legal title or ownership of the software as a result of
these arrangements. The term of Fluence's contracts with Trading Platform
customers is generally five years, which may include certain renewal options to
extend the initial contract term or certain termination options to reduce the
initial contract term.
The Fluence Trading Platform is technology- and vendor-agnostic (i.e. it can be
utilized for wind and solar assets as well as non-Fluence systems). The Fluence
Trading Platform is separately identifiable from other promises that the Company
offers to its customers (i.e. it is not highly interrelated or integrated with
other solutions). As such, we determined that the Fluence Trading Platform
should be accounted for as a separate performance obligation. Revenue from the
Fluence Trading Platform includes an integration fee and a monthly subscription
fee. We consider the access to the Fluence Trading Platform and related support
services in a customer contract to be a series of distinct services which
comprise a single performance obligation because they are substantially the same
and have the same pattern of transfer. We recognized revenue overtime using a
straight-line recognition method.
Refer to Note 2-Summary of Significant Accounting Policies and Estimates for
further discussion of other critical accounting policies and estimates including
income taxes, goodwill, and loss contracts.
Emerging Growth Company Status
We are an "emerging growth company" as defined in the Jumpstart Our Business
Startups Act of 2012. As an emerging growth company, we may take advantage of
certain reduced reporting requirements that are otherwise applicable generally
to public companies. We currently intend to take advantage of several of these
reduced reporting requirements, including the extended transition periods for
complying with new or revised accounting standards. See "Risk Factors- Risks
related to Ownership of our Class A Common Stock" for certain risks related to
our status as an emerging growth company.
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