FuelCell Energy, Inc. — Q3 FY2020 Form 10-Q
Reporting period: Three and nine months ended July 31, 2020; balance-sheet comparisons are to October 31, 2019. Unless stated otherwise, amounts are in millions of U.S. dollars. The company develops, manufactures, operates and services molten-carbonate fuel-cell power systems, with related hydrogen and carbon-capture development.
Financial performance
| Metric | Q3 FY2020 | Q3 FY2019 | Nine months FY2020 | Nine months FY2019 |
|---|---|---|---|---|
| Revenue | $18.7 | $22.7 | $53.9 | $49.7 |
| Gross profit (loss) | $(3.1) | $8.0 | $0.3 | $2.1 |
| Gross margin | (16.7)% | 35.1% | 0.6% | 4.3% |
| Operating loss | $(10.8) | $(1.1) | $(22.0) | $(33.9) |
| Net loss | $(15.3) | $(5.3) | $(70.3) | $(42.4) |
| Net loss attributable to common stockholders | $(16.1) | $(8.3) | $(72.8) | $(64.2) |
| Loss per share, basic and diluted | $(0.07) | $(0.18) | $(0.35) | $(2.97) |
Q3 revenue fell 18%, largely reflecting the absence of $10.0 million of EMRE license revenue recognized in Q3 2019; service and license revenue declined 38%. Service and license costs rose sharply, including a $2.8 million increase in a service-contract loss accrual for earlier-than-planned module replacements. Generation revenue declined 13% amid Bridgeport maintenance and upgrades, and generation gross margin was negative 34.0%. Advanced Technologies revenue rose 20% to $6.9 million.
For the nine months, revenue increased 8%, supported by higher generation and Advanced Technologies revenue, but gross profit fell to $0.3 million. Operating loss improved as administrative and selling expenses and R&D costs declined. Net loss worsened primarily because of a $39.3 million noncash charge from remeasuring Orion warrants, as well as lower gross profit; the per-share loss improved versus 2019 largely because the weighted-average share count increased substantially.
Cash flow, liquidity and debt
- Cash used in operating activities was $24.6 million for the nine months, versus $18.3 million used in the prior-year period. Investing activities used $24.3 million, versus $59.3 million, while financing activities provided $116.6 million, versus $43.2 million.
- At July 31, cash, cash equivalents and restricted cash totaled $107.3 million. This included $41.0 million of restricted cash and $66.3 million reported as unrestricted cash; $16.2 million of the latter was project cash restricted in use under the Orion facility. Excluding that project cash, cash available for general corporate purposes was $50.1 million.
- Total debt and financing obligations were $166.2 million net of deferred finance costs and discounts ($175.7 million before those deductions), compared with $106.3 million net at October 31, 2019. The Orion facility had $80.0 million outstanding. Its stated interest is 9.9% cash plus 2.05% payment-in-kind interest. $17.7 million of debt was classified as current.
- The company reported $146.8 million of current assets and $54.6 million of current liabilities. Inventory was $60.5 million, including $9.0 million classified as long-term. Total liabilities were $280.6 million.
- Management cited substantial-doubt indicators, including recurring losses and negative cash flows, financing costs and lender restrictions, and the need for additional capital. Management expected to meet obligations for at least twelve months from issuance, assuming no extraordinary COVID-19 impacts, but said further financing or other cash-generation measures would be needed as early as the FY2020 Form 10-K to address substantial doubt in future periods.
Business developments, outlook and material items
- The operating portfolio was 32.6 MW at quarter-end, with 40.6 MW in development or construction. Management estimated the operating portfolio generates about $22 million of annual revenue, dependent on output and operating conditions. Generation backlog was about $1.1 billion; service and license backlog was $176.0 million; Advanced Technologies backlog was $51.9 million. Backlog is not a guarantee of realization.
- Production ran at an estimated annualized 10 MW in Q3. Management expected an approximately 21 MW annualized run rate in the quarter ending October 31, 2020. No specific revenue or earnings guidance was provided.
- The Torrington manufacturing facility was shut from March 18 to June 22, 2020 because of COVID-19. Management did not then expect a material impact on current project schedules, but warned that restrictions had delayed customer engagement and postponed bids. COVID-related disruption could recur.
- The company sold 25.1 million shares through its Jefferies at-the-market program through July 31, raising $62.3 million net; another 3.2 million shares were sold after quarter-end for $7.8 million net. The program had approximately $2.7 million remaining as of September 10. Common shares outstanding were 236.2 million at July 31 and 239.4 million at September 3.
- The $35 million Orion secondary facility for general corporate purposes carried a $1 million nonrefundable option premium, 9.9% cash interest plus 2.05% PIK interest, and additional draw discounts and collateral terms. The company reported no draws as of September 10, 2020.
- In September 2020, the SEC entered a cease-and-desist order concerning historical securities-offering disclosures. The company neither admitted nor denied the findings; the SEC imposed no civil penalties or disgorgement and granted requested Regulation A and D waivers.
- Disputes with POSCO Energy and Korea Fuel Cell include POSCO’s arbitration claims seeking about $3.3 million and the company’s arbitration claim seeking more than $200 million. POSCO-related proceedings delayed collection of $3.1 million in receivables from Korea Southern Power at July 31. The company had not recognized an accounting disposition of $22.3 million in deferred revenue related to the terminated license agreements.
- Disclosure controls were deemed ineffective because a previously identified material weakness in controls over asset impairments, credit facilities and non-routine transactions remained unremediated. Management stated the financial statements were fairly stated in all material respects.
Key investor verification points
- Track operating cash burn and the company’s ability to secure financing and satisfy Orion lender conditions; distinguish corporate-use cash from project and restricted cash.
- Verify whether the project pipeline reaches commercial operation on schedule and within budget, including Groton, San Bernardino and other projects, and whether generation performance improves after maintenance and module replacements.
- Monitor gross margins, module replacement costs, production rates and whether Advanced Technologies work and milestones convert into cash receipts.
- Assess dilution from equity sales, warrants and incentive awards, alongside debt service and the Series 1 preferred obligation due by 2021.
- Follow the POSCO disputes, delayed receivable collection, deferred revenue treatment, PPP loan forgiveness review and remediation of the material weakness in internal controls.