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Item 1.01.
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Entry into a Material Definitive Agreement.
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Settlement Agreement with POSCO Energy Co.,
Ltd. and Korea Fuel Cell Co., Ltd.
Background
From
approximately 2007 through 2015, FuelCell Energy, Inc. (the “Company”) relied on POSCO Energy Co., Ltd. (“POSCO
Energy”) to develop and grow the South Korean and Asian markets for its products and services. Through June of 2020, the Company
recorded license fees and was entitled to receive royalty income from POSCO Energy pursuant to manufacturing and technology transfer agreements
entered into with POSCO Energy, including the Alliance Agreement dated February 7, 2007 (and amendments thereto), the Technology Transfer,
License and Distribution Agreement dated February 7, 2007 (and amendments thereto), the Stack Technology Transfer and License Agreement
dated October 27, 2009 (and amendments thereto), and the Cell Technology Transfer and License Agreement dated October 31, 2012 (and amendments
thereto) (collectively, the “License Agreements”). The Cell Technology Transfer and License Agreement (“CTTA”)
provided POSCO Energy with the exclusive technology rights to manufacture, sell, distribute and service the Company’s SureSource
300, SureSource 1500, and SureSource 3000 fuel cell technology in the South Korean and broader Asian markets. In addition, the License
Agreements required POSCO Energy to, among other things, (i) exercise commercially reasonable efforts to market the Company’s technology
and perform in cooperation with the Company and in accordance with prevailing industry standards, (ii) conduct its business in a manner
that does not attract unfavorable publicity or a negative reputation in the industry, (iii) use all reasonable efforts to prevent the
use or disclosure of the Company’s confidential information to third parties, and (iv) pay to the Company a 3.0% royalty on POSCO
Energy net product sales, as well as a royalty on scheduled fuel cell module replacements under service agreements for fuel cell modules
that were built by POSCO Energy and installed at plants in Asia under the terms of long term service agreements (“LTSAs”)
between POSCO Energy and its customers. POSCO Energy built a cell manufacturing facility in Pohang, South Korea which became operational
in late 2015, but is no longer operating.
In October 2016, the
Company and POSCO Energy extended the terms of certain of the License Agreements to be consistent with the term of the CTTA, which was
to expire on October 31, 2027. Due to certain actions and inactions of POSCO Energy, the Company has not realized any new material
revenues, royalties or new projects developed by POSCO Energy since late 2015.
In
March 2017, the Company entered into a memorandum of understanding (“MOU”) with POSCO Energy to permit the Company to directly
develop the Asian fuel cell business, including the right for the Company to sell SureSource solutions in South Korea and the broader
Asian market. In June 2018, POSCO Energy advised the Company in writing that it was terminating the MOU effective July 15, 2018. Pursuant
to the terms of the MOU, notwithstanding its termination, the Company continued to execute on sales commitments in Asia secured in writing
prior to July 15, 2018, including the 20 megawatt power plant installed for Korea Southern Power Company (“KOSPO”).
In November 2019, POSCO Energy
spun-off its fuel cell business into a new entity, Korea Fuel Cell Co., Ltd. (“KFC”), without the Company’s consent.
As part of the spin-off, POSCO Energy transferred manufacturing and service rights under the License Agreements to KFC, but retained distribution
rights and severed its own liability under the License Agreements. The Company formally objected to POSCO Energy’s spin-off, and
POSCO Energy posted a bond to secure any liabilities to the Company arising out of the spin-off. In September 2020, the Korean Electricity
Regulatory Committee found that POSCO Energy’s spin-off of the fuel cell business to KFC may have been done in violation of South
Korean law.
On February 19, 2020, the
Company notified POSCO Energy in writing that it was in material breach of the License Agreements by (i) its actions in connection with
the spin-off of the fuel cell business to KFC, (ii) its suspension of performance through its cessation of all sales activities since
late 2015 and its abandonment of its fuel cell business in Asia, and (iii) its disclosure of material nonpublic information to third parties
and its public pronouncements about the fuel cell business on television and in print media that have caused reputational damage to the
fuel cell business, the Company and its products. The Company also notified POSCO Energy that, under the terms of the License Agreements,
it had 60 days to fully cure its breaches to the Company’s satisfaction and that failure to so cure would lead to termination of
the License Agreements. Further, on March 27, 2020, the Company notified POSCO Energy of additional instances of its material breach of
the License Agreements based on POSCO Energy’s failure to pay royalties required to be paid in connection with certain module exchanges.
On April 27, 2020, POSCO Energy
initiated a series of three arbitration demands against the Company at the International Court of Arbitration of the International Chamber
of Commerce seated in Singapore, in which it alleged certain warranty defects in a sub-megawatt conditioning facility at its facility
in Pohang, South Korea and sought combined damages of approximately $3.3 million. Prior to filing the arbitrations, POSCO Energy obtained
provisional attachments from the Seoul Central District Court attaching certain revenues owed to the Company by KOSPO as part of such
warranty claims, which delayed receipt of certain payments owed to the Company. POSCO Energy subsequently sought additional provisional
attachments on KOSPO revenues from the Seoul Central District Court based on unspecified warranty claims in an additional amount of approximately
$7 million, and additional provisional attachments on KOSPO revenues from the Seoul Central District Court based on its alleged counterclaims
in the license termination arbitration described below in an additional amount of approximately $110 million. As of October 31, 2021,
outstanding accounts receivable due from KOSPO were $11.2 million. POSCO Energy posted a bond in
the amount of $46 million to secure any damages to the Company resulting from the attachments.
On June 28, 2020, the Company
terminated the License Agreements and filed a demand for arbitration against POSCO Energy and KFC in the International Court of Arbitration
of the International Chamber of Commerce based on POSCO Energy’s (i) failure to exercise commercially reasonable efforts to sell
the Company’s technology in the South Korean and Asian markets, (ii) disclosure of the Company’s proprietary information to
third parties, (iii) attack on the Company’s stock price, and (iv) spin-off of POSCO Energy’s fuel cell business into KFC
without the Company’s consent. The Company requested that the arbitral tribunal (a) confirm through declaration that POSCO Energy’s
exclusive license to market the Company’s technology and products in South Korea and Asia is null and void as a result of the breaches
of the License Agreements and that the Company had the right to pursue direct sales in these markets, (b) order POSCO Energy and KFC to
compensate the Company for losses and damages suffered in the amount of more than $200 million, and (c) order POSCO Energy and KFC to
pay the Company’s arbitration costs, including counsel fees and expenses. The Company retained outside counsel on a contingency
basis to pursue its claims, and outside counsel entered into an agreement with a litigation finance provider to fund the legal fees and
expenses of the arbitration. In October 2020, POSCO Energy filed a counterclaim in the arbitration (x) seeking approximately $880 million
in damages based on allegations that the Company misrepresented the capabilities of its fuel cell technology to induce POSCO Energy to
enter into the License Agreements and failed to turn over know-how sufficient for POSCO Energy to successfully operate its business; (y)
seeking a declaration that the License Agreements remained in full force and effect and requesting the arbitral tribunal enjoin the Company
from interfering in POSCO Energy’s exclusive rights under the License Agreements and (z) seeking an order that the Company pay POSCO
Energy’s arbitration costs, including counsel fees and expenses.
The Company discontinued revenue
recognition of the deferred license revenue related to the License Agreements in July 2020 given the then-pending arbitrations.
On September 14, 2020, POSCO
Energy filed a complaint in the United States District Court for the Southern District of New York (the “SD Court”) alleging
that the Company delayed the removal of restrictive legends on certain share certificates held by POSCO Energy in 2018, thus precluding
POSCO Energy from selling the shares and resulting in claimed losses in excess of $1,000,000. On September 16, 2021, the SD Court ruled
in the Company’s favor on a motion for summary judgement dismissing all four counts of POSCO Energy’s complaint regarding
share certificates held by POSCO Energy in 2018, but granted POSCO Energy leave to file an amended complaint.
The Settlement Agreement
In order to resolve the disputes
described above, on December 20, 2021, the Company entered into a Settlement Agreement (the “Settlement Agreement”) with POSCO
Energy and KFC (POSCO Energy and KFC may be collectively referred to herein as “PE Group”). The Settlement Agreement provides,
among other things, that the parties will cooperate in good faith to effect a market transition to the Company of the molten carbonate
fuel cell business in Korea in accordance with the terms and conditions of the Settlement Agreement. To that end, the Settlement Agreement
provides that any and all past, current, or potential disputes and claims between the Company, on the one hand, and POSCO Energy and KFC,
on the other, of any nature whatsoever, whether known or unknown, asserted or not asserted, based on actions or omissions of any party
on or before the date of Settlement Agreement are fully and finally settled, including such disputes and claims, directly or indirectly,
in connection with the legal disputes and License Agreements described above, with the exception of (i) an unfiled claim by the Company
in the amount of approximately $1.8 million with respect to certain royalties the Company believes are owed by POSCO Energy with respect
to replacement modules deployed by POSCO Energy at Gyenonggi Green Energy and other sites for which POSCO Energy has not paid royalties,
and (ii) an unfiled claim by POSCO Energy in an unknown amount with respect to a series of purchase orders for materials and components
which began in 2014 under a supply chain contract, both of which claims remain unsettled. The Company does not believe the claim by POSCO
Energy with respect to purchase orders for materials and components under the supply chain contract has merit and the Company retains
the right to file a counterclaim for damages it believes it has incurred with respect to such supply chain contract. With respect to the
attachments described above, the Settlement Agreement provides that, within five days of the date of the Settlement Agreement, POSCO Energy
will file an application with the Seoul Central District Court to revoke the attachments. Thereafter, the Company expects to promptly
receive the outstanding KOSPO accounts receivable of approximately $11.2 million held by the Seoul Central District Court.
Under
the Settlement Agreement, the parties have also agreed that, within five days of the date thereof, the Company will withdraw its
objection to the spin-off of KFC from POSCO Energy, and that the License Agreements are not terminated, but instead are deemed to be amended
such that POSCO Energy and KFC only have the right (i) to provide maintenance and repair services to PE Group’s existing customers
on existing molten carbonate power generation and thermal projects under LTSAs currently in force as well as LTSAs that have expired and
are pending renewal as of the settlement date (collectively, “Existing LTSAs”), (ii) to supply replacement modules purchased
from the Company only for their existing customers for existing molten carbonate power generation and thermal projects under Existing
LTSAs and (iii) to own, operate and maintain all facilities and factories solely for the purposes set forth in (i) and (ii) above (collectively,
the “Right to Service License”). POSCO Energy and KFC further agree that, as of the date of the Settlement Agreement, the
License Agreements are deemed to be amended such that the Company exclusively enjoys all rights as to its technology in Korea and Asia,
other than the Right to Service License. The Settlement Agreement further provides that the License Agreements will terminate automatically
upon sixty days prior written notice to PE Group if (i) the Company enters into a business collaboration agreement with a Korean company
to construct, assemble, manufacture, market, sell, distribute, import, export, install, commission, service, maintain, or repair products
incorporating the Company’s technology, or otherwise conduct the Company’s business, in the Korean market; or (ii) the Company
expands the capacity of its existing Korean entity such as to perform such activities itself. In the event of the termination of the License
Agreements, the license granted to PE Group under the Right to Service License will continue notwithstanding the termination of the License
Agreements, except that PE Group’s right to own, operate, and maintain all facilities and factories for the purpose of servicing
any orders or requests made by the Company will terminate. For the avoidance of doubt, pursuant to the terms of the Settlement Agreement,
PE Group has no right to manufacture modules or any other product incorporating the Company’s technology under the License Agreements
as amended, the Right to Service License or otherwise unless requested and authorized by the Company to do so.
The Settlement Agreement further
provides that, in order to service its existing customers under the Existing LTSAs, KFC will place a firm, non-cancelable order for twelve
SureSource 3000 modules within two weeks after the date of the Settlement Agreement and an additional firm, non-cancelable order for eight
SureSource 3000 modules on or before June 30, 2022, all at a price of $3.0 million per module. In addition, KFC agrees to use commercially
reasonable efforts to order fourteen additional SureSource 3000 modules by December 31, 2022, at a price of $3.0 million per module if
ordered by such date. If KFC materially breaches the Settlement Agreement by failing to make timely and full payment for the modules for
which KFC is required to place orders under the Settlement Agreement and does not cure such material breach within fifteen days of notice
of such breach by the Company, the License Agreements and the Right to Service License granted to PE Group will be terminated. If the
Company materially breaches the Settlement Agreement by failing to supply the modules for which KFC is required to place orders under
the Settlement Agreement, as long as KFC has made the payment for such modules and has otherwise satisfied its contractual obligations
for those modules and such material breach is not cured within sixty days after notice from PE Group, PE Group will have the right to
terminate the Settlement Agreement. With respect to any other alleged breach, material or otherwise, of the Settlement Agreement, the
parties’ exclusive remedy consists solely of general damages.
Pursuant to the Settlement
Agreement, with respect to new modules to be supplied by the Company and deployed by PE Group to its existing customers, the Company will
provide its standard warranty against module defects until the earlier of eighteen months from the date of shipment or twelve months from
the date of installation. As part of the global settlement of the disputes among the parties and subject to the qualifications set forth
in the Settlement Agreement, the Company will reimburse PE Group for any annual output penalty amount paid by PE Group to its customers
pursuant to Existing LTSAs (whether such Existing LTSA is extended or renewed), caused by a shortfall or defect in the new modules for
a period of up to seven years. The maximum annual reimbursement obligation with regard to any PE Group customer for any new module provided
by the Company will not exceed an amount equal to 7.5% per year of the module purchase price. The Company will not be required to reimburse
PE Group for any penalty paid by PE Group under the Existing LTSAs that is not caused by a shortfall or defect in the modules to be supplied
by the Company including, without limitation, any shortfall or defect caused by a site-related problem, a problem with the balance of
plant, or other components of the project.
Although the Company has the
exclusive and unrestricted right under the Settlement Agreement to perform, pursue, and otherwise conduct its business in relation to
new fuel cell projects (including new projects with PE Group’s existing customers) in Korea and Asia, the parties have agreed that,
except as further provided in the Settlement Agreement with respect to PE Group’s existing customers Noeul Green Energy and Godeok
Green Energy, the Company will not engage in discussions with PE Group’s existing customers regarding Existing LTSAs without PE Group’s
consent. The parties have further agreed that if PE Group cannot enter into an agreement with its existing customers to extend or renew
Existing LTSAs by December 31, 2022, PE Group will cooperate with the Company so that the Company may discuss and, at the Company’s
sole discretion, enter into an extension of an Existing LTSA, a new LTSA to replace an Existing LTSA, or a module sales agreement with
PE Group’s existing customers; provided that (i) should the Company enter into such an arrangement with a PE Group existing customer,
and (ii) the Company is required to provide replacement modules to such existing customer under such arrangement, and (iii) PE Group has
not already deployed all or some the modules that PE Group ordered under Settlement Agreement, the Company will purchase the number of
required replacement modules from PE Group at a price of $3.0 million per module (to the extent such modules are available and have not
yet been deployed). The purchase of such replacement modules by the Company is contingent upon the modules being in proper condition as
determined by inspection process to be agreed by the parties. Any modules purchased by the Company from PE Group under these terms will
be included as part of the firm orders KFC is required to make pursuant to the Settlement Agreement.
With respect to operations
and maintenance agreements, the Settlement Agreement provides that KFC will have the right of first refusal on providing operation and
maintenance services on commercially reasonable terms for new LTSAs entered into by the Company in Korea for a period of the first to
occur of either twenty-four months after the date of the Settlement Agreement or until such time as the Company engages a third party
capable of providing such services in Korea. If KFC and the Company agree that KFC should provide operation and maintenance services pursuant
to the right of first refusal, KFC and the Company will enter into one or more operation and maintenance agreements that reflect commercially
reasonable terms and conditions as agreed by KFC and the Company at that time.
With respect to balance of
plant (“BOP”), KFC currently has eight units of BOP available, and the Settlement Agreement provides that the Company has
the option to purchase such units of BOP for any new molten carbonate fuel cell projects within Korea at a price of KRW 2,550,000,000
per unit. The Company will also have a non-exclusive, non-transferrable, non-sublicensable license to use the intellectual property imbedded
in the BOP units in Korea in consideration for a reasonable license fee to be separately agreed by the parties. Detailed terms and conditions
of BOP and related software and firmware supply will be discussed and agreed in good faith in separate BOP supply agreements in the event
the Company exercises its option to purchase any of such BOP.
The foregoing summary of the
Settlement Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the Settlement
Agreement, a copy of which is included as Exhibit 10.1 hereto and incorporated herein by reference.
As
noted above, the Company retained outside counsel on a contingency basis to pursue its claims against POSCO Energy and KFC, and
outside counsel entered into an agreement with a litigation finance provider to fund the legal fees and expenses of the arbitration proceedings
brought by the Company against POSCO Energy and KFC. As the Company has entered into the Settlement Agreement, it is required to remit
fees to its counsel, Wiley Rein, LLP (“Wiley”), subject to the terms of its engagement letter with Wiley. On December 23,
2021, the Company agreed that it will pay Wiley a total of $24.0 million to satisfy all obligations to Wiley under the Company’s
engagement letter, of which $14.0 million will be paid on or before December 30, 2021, $5.0 million will be paid on or before March 30,
2022, and $5.0 million will be paid on or before June 30, 2022.