FuelCell Energy, Inc. — Form 10-Q summary
Reporting period: Fiscal second quarter and six months ended April 30, 2020. Financial amounts below are in U.S. dollars; millions are used unless otherwise noted. The filing is unaudited.
Business context and financial performance
FuelCell Energy develops, manufactures and services molten-carbonate fuel-cell power systems and owns or develops power-generation projects. Revenue comes from service and license agreements, electricity generation and Advanced Technologies contracts. There was no product revenue in either comparable period.
| Metric | Three months ended April 30, 2020 | Prior-year quarter | Six months ended April 30, 2020 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $18.9m | $9.2m | $35.1m | $27.0m |
| Gross profit (loss) | $0.2m | ($3.6m) | $3.4m | ($5.8m) |
| Gross margin | 0.9% | (39.5%) | 9.8% | (21.6%) |
| Operating loss | ($8.1m) | ($17.6m) | ($11.3m) | ($32.9m) |
| Net loss | ($14.8m) | ($19.5m) | ($54.9m) | ($37.1m) |
| Net loss attributable to common stockholders | ($15.6m) | ($22.9m) | ($56.7m) | ($55.9m) |
| Basic and diluted loss per share | ($0.07) | ($2.06) | ($0.27) | ($5.77) |
| Cash used in operating activities | Not provided for quarter | Not provided for quarter | ($14.7m) | ($18.2m) |
Revenue, margins and material changes
- Quarterly revenue more than doubled, principally from higher service and license revenue, increased generation revenue following the Bridgeport project acquisition, and Advanced Technologies work, including the EMRE agreement. Six-month revenue rose 30%.
- Six-month gross profit improved to $3.4m from a $5.8m loss. Service and license gross profit increased to $5.0m from $0.3m, in part due to EMRE license revenue. Advanced Technologies gross profit was $4.5m versus $3.9m.
- Generation remained loss-making: its gross loss was $1.1m for the quarter and $1.2m for the six months. The six-month generation margin was (11.7%), compared with (6.7%) a year earlier. Higher generation costs included depreciation and project operating costs.
- Administrative and selling expense and research and development expense declined, reflecting 2019 restructuring and reduced internal R&D spending. Six-month administrative expense also benefited from a $2.2m legal settlement recorded as an offset to expense.
- Six-month net loss increased, largely because of a $37.6m noncash charge from revaluing Orion lender warrants. Common-stockholder loss per share was lower than the prior-year figure, but the weighted-average share count rose sharply to 206.6m from 9.7m, reflecting share issuances and the prior-year capital structure.
Cash, liquidity and debt
- At April 30, cash, cash equivalents and restricted cash totaled $73.4m: $29.1m was classified as unrestricted cash and cash equivalents and $44.3m as restricted cash. Of the $29.1m, $18.6m was project cash restricted to approved project uses and approximately $6.0m represented remaining PPP proceeds subject to eligible-use requirements. Management stated that only about $4.5m was available for general corporate purposes after those amounts.
- Operating cash use was $14.7m; investing cash use was $14.3m, including $13.6m of project-asset spending; financing provided $62.8m, led by Orion borrowing and other debt proceeds. Cash, cash equivalents and restricted cash increased by $33.6m over the six months.
- Debt and financing obligations were $173.2m net of deferred financing costs and discounts; the filing also describes approximately $183.3m of gross consolidated debt and financing obligations. Current long-term debt was $13.8m. Total liabilities were $285.5m. The $200m Orion senior secured facility had $80m drawn at April 30; its stated cash interest rate is 9.9%, plus 2.05% payment-in-kind interest.
- Management identified substantial doubt about the company’s ability to continue as a going concern. A June 8, 2020 Orion amendment, subsequent to quarter-end, committed up to $35m of additional delayed-draw loans for general corporate purposes. Draws are subject to conditions, carry substantial fees and interest, and must be repaid by September 1, 2021. Management said this amendment alleviated substantial doubt for at least one year from issuance, assuming no extraordinary or unanticipated impacts, but said additional financing or other measures would be needed as early as the expected Q3 2020 filing to address future periods.
- Other notable obligations include $29.2m of unconditional purchase commitments, $55.7m of sale-leaseback financing obligations, and Series 1 preferred-share obligations with scheduled payments through 2021. Orion lenders have broad approval and collateral rights, including a pledge of the company’s intellectual property in connection with the secondary facility commitment.
Outlook, risks and unusual items
- No formal revenue or earnings guidance is provided. Management forecast fiscal 2020 capital expenditures below $1.0m and expected to resume Torrington manufacturing tentatively on June 22, 2020. The company said a timely restart was not expected to materially affect current project schedules, but further delay could affect schedules and related financing.
- The 32.6 MW operating portfolio was described as generating approximately $22m of annual revenue, depending on output and operating conditions. A further 40.6 MW of projects were in development or construction. Generation backlog was approximately $1.1bn; service and license backlog $183.3m; Advanced Technologies backlog $56.8m. Backlog is not a guarantee of timing or realization.
- COVID-19 temporarily shut the Torrington manufacturing facility and impeded customer access, business development and some bids. The company cited possible supply-chain, project-schedule, demand and financing impacts. Annualized production was approximately 12 MW in the quarter and 16.5 MW for the six-month period, versus a 25 MW fiscal 2019 rate.
- The company received a $6.5m PPP loan. Forgiveness was uncertain and subject to SBA and bank approval; the filing noted the application would be subject to SBA audit and disclosed an SEC Division of Enforcement voluntary information request concerning the loan and the company’s need for it.
- Disclosure controls and procedures were ineffective because a previously identified material weakness in financial reporting controls had not been remediated as of April 30, 2020. Management nevertheless stated that the financial statements were fairly stated in all material respects.
- Other risks include continued losses and negative operating cash flow, dependence on outside financing and lender approvals, project execution and performance guarantees, inventory exposure, preferred-share payment requirements, and disputes with POSCO Energy. The filing also disclosed POSCO-related arbitrations and delayed receipt of certain customer payments.
Important facts for investors to verify
- Whether and when Orion’s up-to-$35m secondary facility was drawn, the resulting fees and debt burden, and whether further financing was secured.
- Actual unrestricted corporate liquidity after excluding project cash, restricted cash and PPP funds, and the company’s cash runway and progress toward addressing future going-concern risk.
- Whether manufacturing resumed as planned, and the resulting effects on production, project completion, costs and customer demand.
- Generation-portfolio operating performance and margins, project financing and completion milestones, and whether backlog converts into revenue and cash flow.
- Outcome of the PPP forgiveness process and SEC inquiry, remediation of the material weakness, and developments in POSCO-related disputes and delayed receivables.