Basis of Presentation and Summary of Significant Accounting Policies

Unaudited Interim Consolidated Financial Statements

The consolidated balance sheets as of June 30, 2018, the consolidated statements of operations and the consolidated statements of comprehensive loss for the three and six months ended June 30, 2018, and 2017, the consolidated statements of cash flows for the six months ended June 30, 2018 and 2017 and the consolidated statements of convertible redeemable preferred stock and stockholders' deficit as of June 30, 2018, as well as other information disclosed in the accompanying notes, are unaudited. The consolidated balance sheet as of December 31, 2017 and the consolidated statements of convertible redeemable preferred stock and stockholders' deficit as of December 31, 2017 was derived from the audited consolidated financial statements as of that date. The interim consolidated financial statements and the accompanying notes should be read in conjunction with the annual consolidated financial statements and the accompanying notes contained within the Company's Form S-1 filed with the Securities and Exchange Commission which was declared effective on July 24, 2018.

The Company's consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (US GAAP) for interim financial information and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for a fair statement of the results of operations for the periods presented.

Principles of Consolidation

These consolidated financial statements reflect the accounts and operations of the Company and those of its subsidiaries in which the Company has a controlling financial interest. The Company uses a qualitative approach in assessing the consolidation requirement for its variable interest entities, which the Company refers to as power purchase agreement entities (PPA Entities). This approach focuses on determining whether the Company has the power to direct the activities of the PPA Entities that most significantly affect the PPA Entities’ economic performance and whether the Company has the obligation to absorb losses, or the right to receive benefits, that could potentially be significant to the PPA Entities. For all periods presented, the Company has determined that it is the primary beneficiary in all of its operational PPA Entities. The Company evaluates its relationships with the PPA Entities on an ongoing basis to ensure that it continues to be the primary beneficiary. All intercompany transactions and balances have been eliminated in consolidation. For additional information, see Note 12 - Power Purchase Agreement Programs.

Use of Estimates

The preparation of consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the accompanying notes. Significant estimates include assumptions used to compute the best estimate of selling-prices (BESP), the fair value of lease and non-lease components such as estimated output, efficiency and residual value of the Energy Servers, estimates for inventory write-downs, estimates for future cash flows and the economic useful lives of property, plant and equipment, the valuation of other long-term assets, the valuation of certain accrued liabilities such as derivative valuations, estimates for accrued warranty and extended maintenance and estimates for recapture of U.S. Treasury grants and similar grants, income taxes and deferred tax asset valuation allowances, warrant liabilities, stock-based compensation costs and the allocation of profit and losses to the noncontrolling interests. Actual results could differ materially from these estimates under different assumptions and conditions.

Reverse Stock Split

The Company decreased the total number of outstanding shares with a 2-for-3 reverse stock split effective July 7, 2018 and subsequent to the date of these financial statements. All current and past period amounts stated herein and in the Quarterly Report on Form 10-Q attached hereto have given effect to the reverse stock split.

Revenue Recognition

The Company primarily earns revenue from the sale and installation of its Energy Servers both to direct and to lease customers, by providing services under its operations and maintenance services contracts and by selling electricity to customers under power purchase agreements. The Company offers its customers several ways to finance their purchase of a Bloom Energy Server. Customers may choose to purchase the Company’s Energy Servers outright. Customers may also lease the Company’s Energy Servers through one of the Company’s financing partners via the Company’s managed services program or as a traditional lease. Finally, customers may purchase electricity through the Company’s Power Purchase Agreement Programs.

Direct Sales - To date, the Company has never sold an Energy Server without a maintenance service agreement, or vice-versa, nor does it have plans to do so in the near future. As a result, the Company recognizes revenue from contracts with customers for the sales of products and services included within these contracts in accordance with ASC 605-25, Revenue Recognition for Multiple-Element Arrangements.

Revenue from the sale and installation of Energy Servers to direct customers is recognized when all of the following criteria are met:


•	Persuasive Evidence of an Arrangement Exists. The Company relies upon non-cancelable sales agreements and purchase orders to determine the existence of an arrangement.


•	Delivery and Acceptance has Occurred. The Company uses shipping documents and confirmation from the Company’s installations team that the deployed systems are running at full power, as defined in each contract, to verify delivery and acceptance.


•	The Fee is Fixed or Determinable. The Company assesses whether the fee is fixed or determinable based on the payment terms associated with the transaction.


•	Collectability is Reasonably Assured. The Company assesses collectability based on the customer’s credit analysis and payment history.

Most of the Company’s arrangements are multiple-element arrangements with a combination of Energy Servers, installation and maintenance services. Products, including installation, and services generally qualify as separate units of accounting. For multiple-element arrangements, the Company allocates revenue to each unit of accounting based on an estimated selling price at the arrangement inception. The estimated selling price for each element is based upon the following hierarchy: vendor-specific objective evidence (VSOE) of selling price, if available; third-party evidence (TPE) of selling price, if VSOE of selling price is not available; or best estimate of selling price (BESP), if neither VSOE of selling price nor TPE of selling price are available. The total arrangement consideration is allocated to each separate unit of accounting using the relative estimated selling prices of each unit based on the aforementioned selling price hierarchy. The Company limits the amount of revenue recognized for delivered elements to an amount that is not contingent upon future delivery of additional products or services or upon meeting any specified performance conditions.

The Company has not been able to obtain reliable evidence of the selling price of the standalone Energy Server. Given that the Company has never sold an Energy Server without a maintenance service agreement, and vice-versa, the Company has no evidence of selling prices for either and virtually no customers have elected to cancel their maintenance agreements while continuing to operate the Energy Servers. The Company’s objective is to determine the price at which it would transact business if the items were being sold separately. As a result, the Company estimates its selling price driven primarily by its expected margin on both the Energy Server and maintenance service agreement based on their respective costs or, in the case of maintenance service agreements, the estimated costs to be incurred during the service period.

Costs for Energy Servers include all direct and indirect manufacturing costs, applicable overhead costs and costs for normal production inefficiencies (i.e., variances). The Company then applies a margin to the Energy Servers to determine the selling price to be used in its BESP model. Costs for maintenance service arrangements are estimated over the life of the maintenance contracts and include estimated future service costs and future product costs. Product costs over the period of the service arrangement are impacted significantly by the longevity of the fuel cells themselves. After considering the total service costs, the Company applies a slightly lower margin to its service costs than to its Energy Servers because this best reflects the Company’s long-term service margin expectations.

As the Company’s business offerings and eligibility for the ITC evolve over time, the Company may be required to modify its estimated selling prices in subsequent periods and the Company’s revenue could be adversely affected.

The Company does not offer extended payment terms or rights of return for its products. Upon shipment of the product, the Company defers the product’s revenue until the acceptance criteria have been met. Such amounts are recorded within deferred revenue in the consolidated balance sheets. The related cost of such product is also deferred as a component of deferred cost in the consolidated balance sheets until customer acceptance. Prior to shipment of the product, any prepayment made by the customer is recorded as customer deposits. Customer deposits were $21.3 million and $10.2 million as of June 30, 2018 and December 31, 2017, respectively, and were included in deferred revenue and customer deposits in the consolidated balance sheets.

Traditional Leases - Under this financing option, the Company sells its Energy Servers through a direct sale to a financing partner who, in turn, leases the Energy Servers to the customer under a lease agreement between the customer and the financing partner. In addition, the Company contracts with the customer to provide extended maintenance services from the end of the standard one-year warranty period until the remaining duration of the lease term.

Payments received are recorded within deferred revenue in the consolidated balance sheets until the acceptance criteria as defined within the customer contract are met. The related cost of such product is also deferred as a component of deferred cost in the consolidated balance sheets, until acceptance.

The Company also sells extended maintenance services to its customers that effectively extend the standard warranty coverage. Payments from customers for the extended maintenance contracts are received at the beginning of each service year. Accordingly, the customer payment received is recorded as deferred revenue, and revenue is recognized ratably over the extended maintenance contract.

As discussed within the Direct Sales section above, the Company’s arrangements with its traditional lease customers are multiple-element arrangements as they include a combination of Energy Servers, installation and extended maintenance services. Accordingly, the Company recognizes revenue from contracts with customers for the sales of products and services included within these contracts in accordance with ASC 605-25, Revenue Recognition - Multiple-Element Arrangements.

Extended Maintenance Services - The Company typically provides to its direct sales customers a standard one-year warranty against manufacturing or performance defects. The Company also sells to these customers extended maintenance services that effectively extend the standard one-year warranty coverage at the customer’s option. These customers generally have an option to renew or cancel the extended maintenance services on an annual basis. Revenue is recognized from extended maintenance services ratably over the term of the service (or annual renewal period) using the estimates of value, as discussed above.

Sale-Leaseback (Managed Services) - The Company is a party to master lease agreements that provide for the sale of Energy Servers to third-parties and the simultaneous leaseback of the systems, which the Company then subleases to its customers. In sale-leaseback sublease arrangements (also referred to as managed services), the Company first determines whether the Energy Servers under the sale-leaseback arrangement are “integral equipment.” An Energy Server is determined to be integral equipment when the cost to remove the system from its existing location, including the shipping costs of the Energy Server at the new site including any diminution in fair value, exceeds 10% of the fair value of the Energy Server at the time of its original installation. As the Energy Servers are determined not to be integral equipment, the Company determines if the leaseback is classified as a capital lease or an operating lease.

The Company’s managed services arrangements are classified as operating leases. As operating leases, the Company recognizes a portion of the net revenue, net of any commitments made to the customer to cover liabilities associated with insurance, property taxes and/or incentives recorded as managed service liabilities, and the associated cost of sale and then defers the portion of net revenue and cost of sale that represents the gross profit that is equal to the present value of the future minimum lease payments over the master leaseback term. For both capital and operating leasebacks, the Company records the net deferred gross profit in its consolidated balance sheet as deferred income and amortizes the deferred income over the leaseback term as a reduction to the leaseback rental expense included in operating leases.

In connection with the Company’s common stock award agreement with a managed services customer, the share issuances are recorded as a reduction of product revenue when the installation milestones are achieved and are recorded as additional paid-in capital when the shares are issued.

Revenue Recognized from Power Purchase Agreement Programs (See Note 12)

In 2010, the Company began offering its Energy Servers through its Bloom Electrons financing program. This program is financed via special purpose Investment Company and Operating Company, referred to as a PPA Entity, and are owned partly by the Company and partly by third-party investors. The investors contribute cash to the PPA Entity in exchange for their equity interest, which then allows the PPA Entity to purchase the Energy Server from the Company. The cash contributions are classified as short-term or long-term restricted cash according to the terms of each power purchase agreement (PPA). As the Company identifies end customers, the PPA Entity enters into a PPA with the end customer pursuant to which the customer agrees to purchase the power generated by the Energy Server at a specified rate per kilowatt hour for a specified term, which can range from 10 to 21 years. The PPA Entity typically enters into a maintenance services agreement with the Company following the first year of service to extend the warranty service and performance guarantees. This intercompany arrangement is eliminated in consolidation. Those power purchase agreements that qualify as leases are classified as either sales-type leases or operating leases and those that do not qualify as leases are classified as tariff agreements. For both operating leases and tariff agreements, income is recognized as contractual amounts are due when the electricity is generated.

Sales-Type Leases - Certain arrangements entered into by certain Operating Companies, including Bloom Energy 2009 PPA Project Company, LLC (PPA I), 2012 ESA Project Company, LLC (PPA Company IIIa) and 2013B ESA Project Company, LLC (PPA Company IIIb), qualify as sales-type leases in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 840, Leases (ASC 840). The Company is responsible for the installation, operation and maintenance of the Energy Servers at the customers' sites, including running the Energy Servers during the term of the PPA which ranges from 10 to 15 years. Based on the terms of the customer contracts, the Company may also be obligated to supply fuel for the Energy Servers. The amount billed for the delivery of the electricity to PPA I’s customers primarily consists of returns on the amounts financed, including interest revenue, service revenue and fuel revenue for certain arrangements.

The Company is obligated to supply fuel to the Energy Servers that deliver electricity under the PPA I agreements. Based on the customer offtake agreements, the customers pay an all-inclusive rate per kWh of electricity produced by the Energy Servers. The consideration received under the PPA I agreements primarily consists of returns on the amounts financed including interest revenue, service revenue and fuel revenue.

As the Power Purchase Agreement Programs contain a lease, the consideration received is allocated between the lease elements (lease of property and related executory costs) and non-lease elements (other products and services, excluding any derivatives) based on relative fair value in accordance with ASC 605-25-13A (b). Lease elements include the leased system and the related executory costs (i.e. installation of the system, electricity generated by the system, maintenance costs). Non-lease elements include service, fuel, and interest related to the leased systems.

Service revenue and fuel revenue are recognized over the term of the PPA as electricity is generated. The interest component related to the leased system is recognized as interest revenue over the life of the lease term. The customer has the option to purchase the Energy Servers at the then fair market value at the end of the PPA contract term.

Service revenue related to sales-type leases of $0.9 million and $1.0 million for the three months ended June 30, 2018 and 2017, respectively, and service revenue of $1.8 million and $2.1 million for the six months ended June 30, 2018 and 2017, respectively, is included in electricity revenue in the consolidated statements of operations. Fuel revenue of $0.1 million and $0.3 million for the three months ended June 30, 2018 and 2017, respectively, and fuel revenue of $0.3 million and $0.5 million for the six months ended June 30, 2018 and 2017, respectively, is included in electricity revenue in the consolidated statements of operations. Interest revenue of $0.4 million and $0.5 million for the three months ended June 30, 2018 and 2017, respectively, and interest revenue of $0.8 million and $1.0 million for the six months ended June 30, 2018 and 2017, respectively, is included in electricity revenue in the consolidated statements of operations.

Product revenue associated with the sale of the Energy Servers under the PPAs that qualify as sales-type leases is recognized at the present value of the minimum lease payments, which approximates fair value, assuming all other conditions for revenue recognition noted above have also been met. A sale is typically recognized as revenue when an Energy Server begins generating electricity and has been accepted, which is consistent across all purchase options in that acceptance generally occurs after the Energy Server has been installed and is running at full power as defined in each contract. There was no product revenue recognized under sales-type leases for the three and six months ended June 30, 2018 and 2017.

Operating Leases - Certain Power Purchase Agreement Program leases entered into by PPA Company IIIa, PPA Company IIIb, 2014 ESA Holdco, LLC (PPA Company IV) and 2015 ESA Holdco, LLC (PPA Company V) that are leases in substance but do not meet the criteria of sales-type leases or direct financing leases in accordance with ASC 840 are accounted for as operating leases. Revenue under these arrangements is recognized as electricity sales and service revenue and is provided to the customer at rates specified under the contracts. During the three months ended June 30, 2018 and 2017, revenue from electricity sales amounted to $7.7 million and $7.1 million, respectively. During the six months ended June 30, 2018 and 2017, revenue from electricity sales amounted to $15.4 million and $14.2 million, respectively. During the three months ended June 30, 2018 and 2017, service revenue amounted to $3.8 million and $3.9 million, respectively. During the six months ended June 30, 2018 and 2017, service revenue amounted to $7.6 million and $7.8 million, respectively.

Tariff Agreement - PPA Company II entered into an agreement with Delmarva, PJM Interconnection, (PJM), a regional transmission organization, and the State of Delaware under which PPA Company II provides the energy generated from its Energy Servers to PJM and receives a tariff as collected by Delmarva.

Revenue at the tariff rate is recognized as electricity sales and service revenue as it is generated over the term of the arrangement. Revenue relating to power generation at the Delmarva site of $5.7 million and $5.8 million for three months ended June 30, 2018 and 2017, respectively, and revenue relating to power generation at the Delmarva sites of $11.5 million and $11.6 million for the six months ended June 30, 2018 and 2017, respectively, is included in electricity sales in the consolidated statements of operations. Revenue relating to power generation at the Delmarva site of $3.4 million and $3.4 million for the three months ended June 30, 2018 and 2017, respectively, and revenue relating to power generation at the Delmarva sites of $6.9 million and $6.9 million for the six months ended June 30, 2018 and 2017, respectively, is included in service revenue in the consolidated statements of operations.

Incentives and Grants

Self-Generation Incentive Program (SGIP) - The Company’s PPA Entities’ customers receive payments under the SGIP, which is a program specific to the State of California that provides financial incentives for the installation of new and qualifying self-generation equipment that the Company owns. The SGIP funds are assigned to the PPA Entities by the customers and are recorded as other current assets and other long-term assets until received. For sales-type leases, the benefit of the SGIP funds are recorded as deferred revenue which is recognized as revenue when the Energy Server is accepted. For operating leases, the benefit of the SGIP funds are recorded as deferred revenue which is amortized on a straight-line basis over the PPA contract period. The SGIP program issues 50% of the fully anticipated amount in the first year the equipment is placed into service. The remaining incentive is then paid based on the size of the equipment (i.e., nameplate kilowatt capacity) over the subsequent five years. The SGIP program has operational criteria primarily related to fuel mixture and minimum output for the first five years after the qualified equipment is placed in service. If the operational criteria are not fulfilled, it could result in a partial refund of funds received. The SGIP program will expire on January 1, 2021.

The Company received $0.6 million and $1.0 million of SGIP funds for the three months ended June 30, 2018 and 2017, and $0.8 million and $1.7 million for the six months ended June 30, 2018 and 2017, respectively. There were no reductions or refunds of SGIP funds during the three and six months ended June 30, 2018 and 2017, and no accrual has been made for a refund of any incentives.

The Company makes SGIP reservations on behalf of certain of the PPA Entities. However, the PPA Entity receives the SGIP funds directly from the program and, therefore, bears the risk of loss if these funds are not paid.

U.S. Treasury Grants - The Company is eligible for U.S. Treasury grants on eligible property as defined under Section 1603 of the American Recovery and Reinvestment Act of 2009. However, to be eligible for the U.S. Treasury grants, a fuel cell system must have commenced construction in 2011 either physically or through the occurrence of sufficient project costs. For fuel cell systems under Power Purchase Agreement Programs, U.S. Treasury grants are considered a component of minimum lease payments. For fuel cell systems deployed under tariff legislation, the Company recorded the fuel cell systems net of the U.S. Treasury grants. U.S. Treasury grant receivables are classified as other current assets in the Company’s consolidated balance sheets. For operating leases, the benefit of the U.S. Treasury grant is recorded as deferred revenue and is amortized on a straight-line basis over the PPA contract period. No such grants have been accrued or received in the six months ended June 30, 2018 and 2017.

Investment Tax Credits (ITC) - Through December 31, 2016, the Company’s Energy Servers were eligible for federal investment tax credits, or ITCs, that accrued to eligible property under Internal Revenue Code Section 48. Under the Company's Power Purchase Agreement Programs, ITCs are primarily passed through to Equity Investors. Approximately 1% to 10% of the incentives are received by the Company, with the balance distributed to the remaining Equity Investors of the PPA Entity. These incentives are accounted for under the flow-through method. Subsequently, on February 9, 2018, the U.S. Congress passed legislation to extend the federal investment tax credits for fuel cell systems retroactive to January 1, 2017. Due to the reinstatement of ITC in 2018, the benefit of ITC to total revenue for product accepted was a $46.5 million benefit in the six months ended June 30, 2018 which included $44.9 million of product revenue benefit related to the retroactive ITC for 2017 acceptances.

The ITC program has operational criteria for the first five years after the qualified equipment is placed in service. If the qualified energy property is disposed of, or otherwise ceases to be investment credit property before the close of the five year recapture period is fulfilled, it could result in a partial reduction of the incentives. No ITC recapture has occurred during the three and six months ended June 30, 2018 and 2017.

Renewable Energy Credits (RECs) - RECs are tradeable energy credits that represent 1 megawatt hour of electricity generated from an eligible renewable energy resource generated in the U.S. RECs are primarily ‘held for use’ and are presented as part of other current assets and other long-term assets in the consolidated balance sheets until the RECs are sold and accounted for as revenue. The Company accounts for such RECs as output from the facility where they originate. The Company values these RECs at the lower of cost or market at the end of each reporting period.

To the extent the PPA Entities do not produce enough RECs to satisfy the requirements under certain of the Company’s PPA Entities’ PPAs, the Company may also acquire RECs under stand-alone purchase agreements with third parties to satisfy these REC obligations. Under PPAs with certain customers, the Company’s PPA Entities are required to deliver a specified quantity of biogas RECs or Western Electricity Coordinating Council (WECC) RECs. In order to meet these obligations, the Company’s PPA Entities may enter into REC purchase agreements with third parties to purchase a fixed quantity of the relevant RECs at a fixed price and on a fixed schedule. The PPA Entities utilize the Western Renewable Energy Information System (WREGIS), an independent tracking system for the region covered by the WECC, which allows the PPA Entities to manage RECs purchased and deliver the RECs to satisfy the customer obligation. Purchased RECs used to satisfy customer obligations are recorded at cost and are presented as part of other current assets and other long-term assets in the consolidated balance sheets. Costs of RECs purchased are expensed as the Company’s obligation to provide such RECs to customers occurs.

The Company estimates the number of excess RECs it will ultimately acquire under the non-cancelable purchase contracts over the number required to satisfy its obligations to its customers. The Company records a purchase commitment loss if the fair value of RECs is less than the fixed purchase price amount. The purchase commitment loss is recorded on the consolidated balance sheets as a component of other current liabilities and other long-term liabilities.

Components of Revenue and Cost of Revenue

Revenue - The Company primarily recognizes revenue from the sale and installation of Energy Servers, the sales of electricity and by providing services under extended operations and under maintenance services contracts (together, service agreements).

Product Revenue - All of the Company’s product revenue is generated from the sale of the Company's Energy Servers to direct purchase and lease customers. The Company generally begins to recognize product revenue from contracts with customers for the sales of its Energy Servers once the Company achieves acceptance; that is, generally when the system has been installed and is running at full power as defined in each contract.

All of the Company’s product arrangements contain multiple elements representing a combination of revenue from Energy Servers, from installation and from maintenance services. Upon acceptance, the Company allocates fair value to each of these elements and the Company limits the amount of revenue recognized for delivered elements up to an amount that is not contingent upon future delivery of additional products or services or upon meeting any specified performance conditions. The sale of the Company’s Energy Servers also includes a standard one-year warranty, the estimated cost of which is recorded as a component of cost of product revenue.

Installation Revenue - All of the Company’s installation revenue is generated from the sale and installation of the Company's Energy Servers to direct purchase and lease customers. The Company generally begins to recognize installation revenue from contracts with customers for the sales of its Energy Servers once the Company achieves acceptance; that is, generally when the system has been installed and running at full power.

Service Revenue - Service revenue is generated from operations and maintenance services agreements that extend the standard one-year warranty coverage beyond the initial first year for Energy Servers sold under direct purchase, traditional lease and managed services sales. Customers can renew these agreements on an annual basis. Revenue is recognized ratably over the term of the renewed one-year service period. The Company anticipates that almost all of its customers will continue to renew their maintenance services agreement each year.

Electricity Revenue - The Company’s PPA Entities purchase Energy Servers from the Company and sell electricity produced by these systems to customers through long-term power purchase agreements (PPAs). Customers are required to purchase all of the electricity produced by the Energy Servers at agreed-upon rates over the course of the PPA's contractual term. The Company recognizes revenue from the PPAs as the electricity is provided over the term of the agreement.

Cost of Product Revenue - Cost of product revenue consists of costs of Energy Servers that the Company sells to direct and lease customers, and includes costs paid to the Company’s materials suppliers, personnel costs, certain allocated costs, shipping costs, provisions for excess and obsolete inventory and the depreciation costs of the Company’s equipment. Estimated standard one-year warranty costs are also included in cost of product revenue, see Warranty Costs below.

Cost of Installation Revenue - Cost of installation revenue consists of the costs to install the Energy Servers that the Company sells to direct and lease customers, and includes costs paid to the Company’s materials and service providers, personnel costs and allocated costs.

Cost of Service Revenue - Cost of service revenue consists of costs incurred under maintenance service contracts for all customers including direct sales, lease and Power Purchase Agreement Program customers, and includes personnel costs for the Company’s customer support organization, certain allocated costs and extended maintenance-related product repair and replacement costs.

Cost of Electricity Revenue - Cost of electricity revenue primarily consists of the depreciation of the cost of the Energy Servers owned by the PPA Entities and the cost of gas purchased in connection with the Company’s first PPA Entity. The cost of electricity revenue is generally recognized over the term of the customer’s PPA contract. The cost of depreciation of the Energy Servers is reduced by the amortization of any U.S. Treasury Department grant payment in lieu of the energy investment tax credit associated with these systems.

Warranty Costs - The Company generally warrants its products sold to its direct customers for one year following the date of acceptance of the products (“standard one-year warranty”). Additionally, as part of its MSAs, the Company provides output and efficiency guarantees (collectively “performance guarantees”) to its customers which contractually guarantee specified levels of efficiency and output. Such amounts have not been material to date.

As part of both its standard one-year warranty and MSA obligations, the Company monitors the operations of the underlying systems, including their efficiency and output levels. The performance guarantee payments represent maintenance decisions made by the Company and are accounted for as costs of goods sold. To estimate the warranty costs, the Company continuously monitors product returns for warranty failures, and maintains the reserve for the related warranty expense based on various factors including historical warranty claims, field monitoring and results of lab testing. The Company’s obligations under its standard product warranty and MSAs are generally in the form of product replacement, repair or reimbursement for higher customer electricity costs. Further, if the Energy Servers run at a lower efficiency or power output than the Company committed under its performance guarantee, the Company will reimburse the customer for this underperformance. The Company’s obligation includes ensuring the customer’s equipment operates at least at the efficiency and power output levels set forth in the customer agreement. The Company’s aggregate reimbursement obligation for this performance guarantee for each order is capped at a portion of the purchase price.

The standard one-year warranty covers defects in materials and workmanship under normal use and service conditions, and against manufacturing or performance defects. The Company’s warranty accrual represents its best estimate of the amount necessary to settle future and existing claims during the warranty period as of the balance sheet date. The Company accrues for warranty costs based on estimated costs that may be incurred including material costs, labor costs and higher customer electricity costs should the units not work for extended periods. Estimated costs associated with standard one-year warranty, including the performance guarantee payments, are recorded at the time of sale as a component of costs of goods sold.

Shipping and Handling Costs - The Company records costs related to shipping and handling in cost of revenue.

Sales and Utility Taxes - The Company recognizes revenue on a net basis for taxes charged to its customers and collected on behalf of the taxing authorities.

Components of Operating Expenses

Advertising and Promotion Costs - Expenses related to advertising and promotion of products are charged to sales and marketing expense as incurred. The Company did not incur any material advertising or promotion expenses during the three and six months ended June 30, 2018 and 2017.

Research and Development - The Company conducts internally funded research and development activities to improve anticipated product performance and reduce product life-cycle costs. Research and development costs are expensed as incurred and include salaries and expenses related to employees conducting research and development.

Stock-Based Compensation - The Company accounts for stock options and restricted stock units (RSUs) awarded to employees and non-employee directors under the provisions of Financial Accounting Standards Board Accounting Standards Codification Topic 718 - Compensation-Stock Compensation (ASC 718) using the Black-Scholes valuation model to estimate fair value. The Black-Scholes valuation model requires the Company to make estimates and assumptions regarding the underlying stock’s fair value, the expected life of the option and RSU, the risk-free rate of return interest rate, the expected volatility of the Company's common stock price and the expected dividend yield. In developing estimates used to calculate assumptions, the Company establishes the expected term for employee options and RSUs, as well as expected forfeiture rates, based on the historical settlement experience and after giving consideration to vesting schedules. Forfeitures are estimated at the time of grant and revised in subsequent periods, if necessary, if actual forfeitures differ from initial estimates. Stock-based compensation expense is recorded net of estimated forfeitures such that expense is recorded only for those stock-based awards that are expected to vest. Previously recognized expense is reversed for the portion of awards forfeited prior to vesting as and when the forfeitures occurred. The Company typically records stock-based compensation expense under the straight-line attribution method over the vesting term, which is generally five years, and records stock-based compensation expense for performance based awards using the graded-vesting method. Stock-based compensation expense is recorded in the consolidated statements of operations based on the employees’ respective function.

Stock-based compensation cost for RSUs is measured based on the fair value of the underlying shares on the date of grant. Up to June 30, 2018, RSUs were subject to a time-based vesting condition and a performance-based vesting condition, both of which require satisfaction before the RSUs were vested and settled for shares of common stock. The performance-based condition was tied to a liquidity event such as a sale event or the completion of the Company’s IPO. The time-based condition ranges between six months to two years from the end of the lock-up period after a liquidity event. Subsequent to June 30, 2018, RSUs are only subject to a time-based vesting condition. No expense related to these awards will be recognized unless the performance condition is satisfied.

Compensation expense for equity instruments granted to non-employees is measured on the date of performance at the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measured. Compensation expense for equity instruments granted to non-employees is periodically remeasured as the underlying instruments vest. The fair value of the equity instruments is charged to earnings over the term of the service agreement.

The Company records deferred tax assets for awards that result in deductions on the Company’s income tax returns, unless the Company cannot realize the deduction (i.e., the Company is in a net operating loss (NOL) position), based on the amount of compensation cost recognized and the Company’s statutory tax rate. Beginning in the first quarter of fiscal 2017 with the adoption of ASU 2016-09 on a prospective basis, stock-based compensation excess tax benefits or deficiencies are reflected in the consolidated statements of operations as a component of the provision for income taxes. No tax benefit or expense for stock-based compensation has been recorded for the three and six months ended June 30, 2018 and 2017, since the Company remains in an NOL position.

Determining the amount of stock-based compensation to be recorded requires the Company to develop estimates for the inputs used in the Black-Scholes valuation model to calculate the grant-date fair value of stock options. The Company used the following weighted-average assumptions in applying the Black-Scholes valuation model:



	Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018	2017

Risk-free interest rate	2.73%—2.77%		2.01% - 2.07%		2.49% - 2.77%	2.01% - 2.07%
Expected term (in years)	6.21—6.69		6.12—6.62		6.18—6.69	6.08—6.62
Expected dividend yield	—		—		—	—
Expected volatility	54.6	%	59.8	%	54.6% -55.1%	59.8% - 61.0%

The risk free interest rate for periods within the contractual life of the option is based on the U.S. Treasury zero coupon issues in effect at the grant date for periods corresponding with the expected term of option. The Company’s estimate of an expected term is calculated based on the Company’s historical share option exercise data. The Company has not and does not expect to pay dividends in the foreseeable future. The estimated stock price volatility is derived based on historical volatility of the Company’s peer group, which represents the Company’s best estimate of expected volatility.

The amount of stock-based compensation recognized during a period is based on the value of that portion of the awards that are ultimately expected to vest. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from estimates. The term “forfeitures” is distinct from “cancellations” or “expirations” and represents only the unvested portion of the surrendered option. The Company reviews historical forfeiture data and determines the appropriate forfeiture rate based on that data. The Company reevaluates this analysis periodically and adjusts the forfeiture rate as necessary and ultimately recognizes the actual expense over the vesting period only for the shares that vest.

Refer to Note 11 - Stock-Based Compensation and Employee Benefits for further discussion of the Company’s stock-based compensation arrangements.

Income Taxes - The Company accounts for income taxes using the liability method under Financial Accounting Standards Board Accounting Standards Codification Topic 740 - Income Taxes (ASC 740). Under this method, deferred tax assets and liabilities are determined based on net operating loss carryforwards, research and development credit carryforwards and temporary differences resulting from the different treatment of items for tax and financial reporting purposes. Deferred items are measured using the enacted tax rates and laws that are expected to be in effect when the differences reverse. Additionally, the Company must assess the likelihood that deferred tax assets will be recovered as deductions from future taxable income. The Company has provided a full valuation allowance on its deferred tax assets because it believes it is more likely than not that its deferred tax assets will not be realized.

The Company follows the accounting guidance in ASC 740-10, which requires a more-likely-than-not threshold for financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. The Company records a liability for the difference between the benefit recognized and measured pursuant to ASC 740-10 and the tax position taken or expected to be taken on the Company’s tax return. To the extent that the assessment of such tax positions change, the change in estimate is recorded in the period in which the determination is made. The Company establishes reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. These reserves are established when the Company believes that certain positions might be challenged despite the Company’s belief that the tax return positions are fully supportable. The reserves are adjusted in light of changing facts and circumstances such as the outcome of a tax audit. The provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate. The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense.

Comprehensive Loss - The Company’s comprehensive loss is comprised of the Company’s net loss and unrealized gains (losses) on the remeasurement of the effective portion of the Company’s interest rate swap agreements to fair value and on the Company’s available for sale securities.

Fair Value Measurement

Financial Accounting Standards Board Accounting Standards Codification Topic 820 - Fair Value Measurements and Disclosures (ASC 820), defines fair value, establishes a framework for measuring fair value under US GAAP and enhances disclosures about fair value measurements. Fair value is defined under ASC 820 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under ASC 820 must maximize the use of observable inputs and minimize the use of unobservable inputs. The guidance describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following:



Level 1		Quoted prices in active markets for identical assets or liabilities. Financial assets utilizing Level 1 inputs typically include money market securities and U.S. Treasury securities.

Level 2		Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Financial instruments utilizing Level 2 inputs include interest rate swaps.

Level 3		Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Financial liabilities utilizing Level 3 inputs include natural gas fixed price forward contract derivatives, warrants issued to purchase the Company’s preferred stock and embedded derivatives bifurcated from convertible notes. Derivative liability valuations are performed based on a binomial lattice model and adjusted for illiquidity and/or nontransferability and such adjustments are generally based on available market evidence.

Components of Balance Sheet

Cash, Cash Equivalents, Short-Term Investments and Restricted Cash - The Company considers highly liquid short-term investments with original maturities of 90 days or less at the date of purchase as cash equivalents.

The Company considers highly liquid investments with original maturities of greater than 90 days at the date of purchase as short-term investments. Short-term investments are reported at fair value with unrealized gains or losses, net of tax, recorded in accumulated other comprehensive income (loss). The specific identification method is used to determine the cost of any securities disposed with any realized gains or losses recognized as income or expense in condensed consolidated statements of operations. Short-term investments are anticipated to be used for current operations and are, therefore, classified as available-for-sale in current assets even though their maturities may extend beyond one year. The Company periodically reviews short-term investments for impairment. In the event a decline in value is determined to be other-than-temporary, an impairment loss is recognized. When determining if a decline in value is other-than-temporary, the Company takes into consideration the current market conditions and the duration and severity of and the reason for the decline as well as considering the likelihood that it would need to sell the security prior to a recovery of par value.

As of June 30, 2018, short-term investments were comprised of $15.7 million of U.S. Treasury Bills. As of December 31, 2017, short-term investments were comprised of $26.8 million of U.S. Treasury Bills. The costs of these securities approximated their fair values and there were no material gross realized or unrealized gains, gross realized or unrealized losses or impairment for the periods ended June 30, 2018 and December 31, 2017. As of June 30, 2018, all investments were scheduled to mature within the next twelve months.

Restricted cash is held as collateral to provide financial assurance that the Company will fulfill commitments related to its power purchase agreement financings, its debt service reserves, its maintenance service reserves and its facility lease agreements. Restricted cash that is expected to be used within one year of the balance sheet date is classified as a current asset, whereas restricted cash expected to be used more than a year from the balance sheet date is classified as a non-current asset.

Derivative Financial Instruments - The Company enters into derivative forward contracts to manage its exposure relating to the fluctuating price of fuel under certain of its power purchase agreements entered in connection with the Bloom Electrons program (refer to Note 12 - Power Purchase Agreement Programs). In addition, the Company enters into fixed forward swap arrangements to convert variable interest rates on debt to a fixed rate. The Company also issued derivative financial instruments embedded in its 6% Notes as a means by which to provide additional incentive to investors and to obtain a lower cost cash-source of funds.

Derivative transactions are governed by procedures covering areas such as authorization, counterparty exposure and hedging practices. Positions are monitored based on changes in the spot price in the commodity market and their impact on the market value of derivatives. Credit risk on derivatives arises from the potential for counterparties to default on their contractual obligations to the Company. The Company limits its credit risk by dealing with counterparties that are considered to be of high credit quality. The Company does not enter into derivative transactions for trading or speculative purposes.

The Company accounts for its derivative instruments as either assets or liabilities and carries them at fair value on the consolidated balance sheets. Changes in the fair value of the derivatives that qualify and are designated as cash flow hedges are recorded in accumulated other comprehensive loss on the consolidated balance sheets and for those that do not qualify for hedge accounting or are not designated as hedges are recorded through earnings in the consolidated statements of operations.

While the Company hedges certain of its natural gas requirements under its power purchase agreements, it has not designated these forward contracts as hedges for accounting purposes. Therefore, the Company records the change in the fair value of its forward contracts in cost of revenue on the consolidated statements of operations. The fair value of the forward contracts is recorded on the consolidated balance sheets as a component of accrued other current liabilities and derivative liabilities. As the forward contracts are considered economic hedges, the changes in the fair value of the forward contracts are classified as operating activities within the statement of cash flows, which is consistent with the classification of the cash flows of the hedged item.

The Company’s interest rate swap arrangements qualify as cash flow hedges for accounting purposes as they effectively convert variable rate obligations into fixed rate obligations. The Company evaluates and calculates the effectiveness of the hedge at each reporting date. The effective change is recorded in accumulated other comprehensive loss and will be recognized as interest expense on settlement. Ineffectiveness is recorded in other income (expense), net. If a cash flow hedge is discontinued due to changes in the forecasted hedged transactions, hedge accounting is discontinued prospectively and unrealized gain or loss on the related derivative is recorded in accumulated other comprehensive loss and is reclassified into earnings in the same period during which the hedged forecasted transaction affects earnings. The fair value of the swap arrangement is recorded on the consolidated balance sheets as a component of accrued other current liabilities and derivative liabilities. The changes in fair value of swap agreement are classified as operating activities within the statement of cash flows, which is consistent with the classification of the cash flows of the hedged item.

The Company issued convertible notes with conversion features. These conversion features were evaluated under ASC topic 815-40, were determined to be embedded derivatives and were bifurcated from the debt and are classified as liabilities on the consolidated balance sheets. The Company records these derivative liabilities at fair value and adjusts the carrying value to their estimated fair value at each reporting date with the increases or decreases in the fair value recorded as a gain (loss) on revaluation of warrant liabilities and embedded derivatives in the consolidated statements of operations.

Customer Financing Receivables - Leases are classified as either operating or sales-type leases in accordance with the relevant accounting guidelines. Customer financing receivables are generated by Energy Servers leased to PPA Entities’ customers in leasing arrangements that qualify as sales-type leases. Financing receivables represents the gross minimum lease payments to be received from customers and the system’s estimated residual value, net of unearned income and allowance for estimated losses. Initial direct costs for sales-type leases are recognized as cost of revenue when the Energy Servers are placed in service.

The Company reviews its customer financing receivables by aging category to identify significant customer balances with known disputes or collection issues. In determining the allowance, the Company makes judgments about the creditworthiness of a majority of its customers based on ongoing credit evaluations. The Company also considers its historical level of credit losses and current economic trends that might impact the level of future credit losses. The Company writes off customer financing receivables when they are deemed uncollectible. The Company has not had to maintain an allowance for doubtful accounts to reserve for potentially uncollectible customer financing receivables as historically all of its receivables on the consolidated balance sheets have been paid and are expected to be paid in full.

Accounts Receivable - Accounts receivable primarily represents trade receivables from sales to customers recorded at net realizable value. As the Company does for its customer financing receivables, the Company reviews its accounts receivable by aging category to identify significant customer balances with known disputes or collection issues. In determining the allowance, the Company makes judgments about the creditworthiness of a majority of its customers based on ongoing credit evaluations. The Company also considers its historical level of credit losses and current economic trends that might impact the level of future credit losses. The Company writes off accounts receivable when they are deemed uncollectible. The Company has not had to maintain an allowance for doubtful accounts to reserve for potentially uncollectible accounts receivable as historically all of its receivables on the consolidated balance sheets have been paid and are expected to be paid in full.

Inventories - Inventories consist principally of raw materials, work-in-process and finished goods and are stated on a first-in, first-out basis at the lower of cost or net realizable value.

The Company records inventory excess and obsolescence provisions for estimated obsolete or unsellable inventory, including inventory from purchase commitments, equal to the difference between the cost of inventory and estimated net realizable value based upon assumptions about market conditions and future demand for product generally expected to be utilized over the next 12 to 24 months, including product needed to fulfill the company’s warranty obligations. If actual future demand for the Company’s products is less than currently forecasted, additional inventory provisions may be required. Once a provision is recorded, it is maintained until the product to which it relates to is sold or otherwise disposed. The inventory reserves were $14.1 million and $15.7 million as of June 30, 2018 and December 31, 2017, respectively.

Property, Plant and Equipment - Property, plant and equipment, including leasehold improvements, are stated at cost, less accumulated depreciation. Energy Servers are depreciated to their residual values over the terms of the power purchase and tariff agreements. Leasehold improvements are depreciated over the shorter of the lease term or their estimated depreciable lives. Buildings are amortized over the shorter of the lease or property term or their estimated depreciable lives.

Depreciation is calculated using the straight-line method over the estimated depreciable lives of the respective assets as follows:



		Depreciable Lives
Energy Servers		15-21 years
Computers, software and hardware		3-5 years
Machinery and equipment		5-10 years
Furniture and fixtures		3-5 years
Leasehold improvements		1-5 years
Buildings		35 years

When assets are retired or disposed, the assets and related accumulated depreciation and amortization are removed from the Company's general ledger and the resulting gain or loss is reflected in the consolidated statements of operations.

Foreign Currency Transactions - The functional currency of the Company’s foreign subsidiaries is the U.S. dollar since they are considered financially and operationally integrated. Foreign currency monetary assets and liabilities are remeasured into U.S. dollars at end-of-period exchange rates. Nonmonetary assets and liabilities such as property, plant and equipment and equity are remeasured at historical exchange rates. Revenue and expenses are remeasured at average exchange rates in effect during each period, except for those expenses related to the previously noted balance sheet amounts which are remeasured at historical exchange rates. Transaction gains and losses are included as a component of other expense, net in the Company’s consolidated statements of operations and have not been significant for all periods presented.

Convertible Preferred Stock Warrants - The Company accounts for freestanding warrants to purchase shares of its convertible preferred stock as liabilities on the consolidated balance sheets at fair value upon issuance. The convertible preferred stock warrants are recorded as a liability because the underlying shares of convertible preferred stock are contingently redeemable which, therefore, may obligate the Company to transfer assets at some point in the future. The warrants are subject to remeasurement to fair value at each balance sheet date or immediately before exercise of the warrants. Any change in fair value is recognized in the consolidated statements of operations. The Company’s convertible preferred stock warrants will continue to be remeasured until the earlier of the exercise or expiration of warrants, the completion of a deemed liquidation event, the conversion of convertible preferred stock into common stock or until the convertible preferred stock can no longer trigger a deemed liquidation event. At that time, the convertible preferred stock warrant liability will be reclassified to convertible preferred stock or additional paid-in capital, as applicable. These warrants were valued on the date of issuance, using the Probability-Weighted Expected Return Model (PWERM). In accordance with ASC 480 - Distinguish Liability from Equity (ASC 480), these warrants are classified within warrant liability in the consolidated balance sheets.

Allocation of Profits and Losses of Consolidated Partnerships to Noncontrolling Interests - The Company generally allocates profits and losses to noncontrolling interests under the hypothetical liquidation at book value (HLBV) method. HLBV is a balance sheet-oriented approach for applying the equity method of accounting when there is a complex structure, such as the flip structure of the PPE Entities. The determination of equity in earnings under the HLBV method requires management to determine how proceeds upon a hypothetical liquidation of the entity at book value would be allocated between its investors. The noncontrolling interests balance is presented as a component of permanent equity in the consolidated balance sheets. Noncontrolling interests with redemption features, such as put options, that are not solely within the Company’s control are considered redeemable noncontrolling interests. Exercisability of put options are solely dependent upon the passage of time, and hence, such put options are considered to be probable of becoming exercisable. The Company elected to accrete changes in the redemption value over the period from the date it becomes probable that the instrument will become redeemable to the earliest redemption date of the instrument using an interest method. The balance of redeemable noncontrolling interests is reported at the greater of its carrying value or its maximum redemption value at each reporting date. The redeemable noncontrolling interests are in the temporary equity section in the mezzanine section of the consolidated balance sheets as redeemable noncontrolling interests. Refer to Note 12 - Power Purchase Agreement Programs for more information.

For income tax purposes, the Equity Investor committed to invest in the PPE Entities receives a greater proportion of the share of losses and other income tax benefits. This includes the allocation of investment tax credits which are distributed to the Equity Investor through an Investment Company subsidiary of the Company. Allocations are initially based on the terms specified in each respective partnership agreement until the Equity Investor’s targeted rate of return specified in the partnership agreement is met (the "flip" of the flip structure) whereupon the allocations change. In some cases, after the Equity Investors receive their contractual rate of return, the Company receives substantially all of the remaining value attributable to the long-term recurring customer payments and the other incentives.

Recent Accounting Pronouncements

Revenue Recognition - In May 2014, the FASB issued guidance which will replace numerous requirements in US GAAP, including industry-specific requirements, and provide companies with a single revenue recognition model for recognizing revenue from contracts with customers. The core principle of the new standard is that a company should recognize revenue to show the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In August 2015, the FASB deferred the effective date by one year to December 15, 2018 for annual reporting periods beginning after that date. The FASB also permitted early adoption of the standard, but not before the original effective date of December 15, 2016. During 2016, the FASB issued several amendments to the standard, including clarification to the guidance on reporting revenues as a principal versus an agent, identifying performance obligations, accounting for intellectual property licenses, assessing collectability, presentation of sales taxes, impairment testing for contract costs and disclosure of performance obligations.

The two permitted transition methods under the new standard are (1) the full retrospective method, in which case the standard would be applied to each prior reporting period presented, and the cumulative effect of applying the standard would be recognized at the earliest period shown, or (2) the modified retrospective method, in which case the cumulative effect of applying the standard would be recognized at the date of initial application. The Company is in the process of assessing the impact on the Company’s consolidated financial statements and whether it will adopt the full retrospective or modified retrospective approach.

Leases - In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which will replace most existing lease accounting guidance in US GAAP. The core principle of the ASU is that an entity should recognize the rights and obligations resulting from leases as assets and liabilities. ASU 2016-02 requires qualitative and specific quantitative disclosures to supplement the amounts recorded in the financial statements so that users can understand more about the nature of an entity’s leasing activities, including significant judgments and changes in judgments. ASU 2016-02 will be effective for the Company beginning in fiscal 2020, and requires the modified retrospective method of adoption. The Company is evaluating the impact of this guidance on its consolidated financial statements and disclosures.

Financial Instruments - In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326). The pronouncement was issued to provide more decision-useful information about the expected credit losses on financial instruments and changes the loss impairment methodology. This pronouncement will be effective for the Company from fiscal year 2021. A prospective transition approach is required for debt securities for which an other-than-temporary impairment had been recognized before the effective date. The Company is currently evaluating the impact of the adoption of this update on its financial statements.

Statement of Cash Flows - In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments (Topic 230), which clarifies the classification of the activity in the consolidated statements of cash flows and how the predominant principle should be applied when cash receipts and cash payments have more than one class of cash flows. This pronouncement will be effective for the Company from fiscal year 2019, with early adoption permitted. Adoption will be applied retrospectively to all periods presented. The Company is currently evaluating the impact this guidance will have on the consolidated financial statements and related disclosures.

Income Taxes - In October 2016, the FASB issued ASU 2016-16, Income Taxes—Intra-Entity Transfers of Assets Other Than Inventory (Topic 740), which requires that the entities recognize the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. The amendments in this ASU are effective for public business entities in annual reporting periods beginning after December 15, 2017 and for the interim periods therein, and for all other entities in annual reporting periods beginning after December 15, 2018, and interim reporting periods in annual reporting periods beginning after December 15, 2019. Early adoption is permitted only at the beginning of an annual period for which no financial statements (interim or annual) have already been issued or made available for issuance. The Company is currently evaluating the impact of its pending adoption of this standard on its consolidated financials.

Statement of Cash Flows - In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows—Restricted Cash (Topic 230), related to the presentation of restricted cash in the statement of cash flows. The pronouncement requires that a statement of cash flows explain the change during the period in cash, cash equivalents, and amounts generally described as restricted cash. Amounts generally described as restricted cash are included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts. Refer to Note 3 - Financial Instruments for more information. The Company elected to early adopt the updated guidance in January 2017 resulting in the application of its requirements to all applicable periods presented. The adoption of this guidance did not have an effect on the Company’s results of operations, financial position or liquidity, other than the presentation of restricted cash or restricted cash equivalents in the statements of cash flows. The Company elected to early adopt the updated guidance in January 2017 resulting in the application of its requirements to all applicable periods presented. The adoption of this guidance did not have an effect on the Company’s results of operations, financial position or liquidity, other than the presentation of restricted cash or restricted cash equivalents in the statements of cash flows.

Financial Instruments - In July 2017, the FASB issued ASU 2017-11, Accounting for Certain Financial Instruments with Down Round Features and Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. Part I of this ASU addresses the complexity of accounting for certain financial instruments with down round features. Per the ASU, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. The ASU is effective for public entities for fiscal years beginning after December 15, 2018 and early adoption is permitted. The Company has elected to early adopt the ASU on January 1, 2018. The adoption of the standard did not have a material impact on the Company’s financial statements.