FuelCell Energy, Inc. — Q1 FY2020 10-Q
Business context and period. FuelCell Energy develops, builds, owns and services stationary molten-carbonate fuel cell power plants and conducts advanced technology research. This unaudited quarter covers the three months ended January 31, 2020; comparisons are with the three months ended January 31, 2019 unless otherwise noted. Dollar figures below are in U.S. dollars.
Key financial results
| Metric | Q1 FY2020 | Q1 FY2019 |
|---|---|---|
| Revenue | $16.3 million | $17.8 million |
| Gross profit (loss) | $3.3 million; 20.2% margin | $(2.2) million; (12.4)% margin |
| Operating loss | $(3.1) million | $(15.2) million |
| Net loss | $(40.2) million | $(17.5) million |
| Net loss attributable to common stockholders / loss per share | $(41.1) million / $(0.20) | $(33.0) million / $(3.97) |
| Cash used in operating activities | $(6.5) million | $(12.0) million |
| Cash used in investing activities | $(8.3) million | $(14.2) million |
| Cash provided by financing activities | $49.0 million | $14.2 million |
- Revenue fell 9%. There were no product sales in either period. Service and license revenue declined 52% to $5.6 million, while generation revenue increased 268% to $5.4 million, largely reflecting the acquired Bridgeport project. Advanced Technologies revenue rose 15% to $5.2 million.
- Gross profit improved by $5.5 million, and operating loss narrowed by $12.1 million. Lower costs, restructuring and the absence of module replacements helped; a $2.2 million legal settlement also offset administrative and selling expenses.
- Net loss widened despite improved operations, primarily because of a $34.2 million noncash charge from revaluing Orion lender warrants. The charge included $23.7 million on warrants exercised during the quarter and $10.5 million on warrants still outstanding.
- At January 31, cash, cash equivalents and restricted cash totaled $73.9 million, including $38.3 million unrestricted and $35.7 million restricted. Unrestricted cash increased from $9.4 million at October 31, 2019, aided by financing.
- Total assets were $391.4 million and total liabilities were $267.0 million. Debt and financing obligations were $157.2 million, including $80.0 million outstanding under the Orion facility; a further $120.0 million of the facility remained potentially drawable, subject to lender approval and conditions. The balance sheet also reported a $12.1 million warrant liability.
- Inventories were $65.2 million, up from $56.7 million at October 31, 2019. Project assets were $147.9 million. Stockholders’ equity was $64.6 million, excluding the separately presented $59.9 million redeemable Series B preferred stock.
Material changes and business developments
- Operating capacity grew to 28.9 MW from 11.2 MW a year earlier, primarily due to the Bridgeport acquisition. The company reported 44.3 MW of projects under development or construction.
- Backlog at January 31, 2020 included approximately $1.1 billion of generation, $190.5 million of service and license, and $64.6 million of Advanced Technologies contracts; product backlog was zero. The filing separately reports $202.0 million of remaining performance obligations for service, license and Advanced Technologies contracts.
- The company reported an annualized production rate of approximately 20 MW, versus 25 MW a year earlier, and forecast approximately $2.0 million of capital expenditures for fiscal 2020.
- In November 2019, FuelCell Energy entered a two-year ExxonMobil Research and Engineering Company joint development agreement: $5 million for exclusivity and technology access, up to $45 million for research and development, and up to $10 million in milestone payments. Management identified a $5 million technological milestone in calendar 2020 as relevant to liquidity.
- After quarter-end, a subsidiary completed a $14.4 million sale-leaseback of the Tulare plant, generating approximately $10.5 million net proceeds. Most proceeds were restricted or applied to reserves, Orion interest and preferred dividends; the company guaranteed the subsidiary’s lease obligations.
- Common shares outstanding increased from 193.6 million at October 31, 2019 to 211.0 million at January 31, 2020. The company raised approximately $3.5 million net through at-the-market share sales and issued shares upon cashless Orion warrant exercises.
Outlook, liquidity and risks
- Management stated that existing backlog cash flows, unrestricted cash, expected release of certain restricted cash upon milestones, and available Orion borrowings were expected to cover anticipated needs for at least 12 months. This outlook depends on project execution, operating performance, lender approvals and access to additional financing.
- The Orion facility carries 9.9% annual cash interest plus 2.05% payment-in-kind interest. Lenders have broad rights over draws and use of funds; the remaining facility is not assured funding.
- The amended Series 1 preferred obligation is scheduled for payment through December 31, 2021. Under an Orion covenant, the company must satisfy or fully fund that obligation by November 1, 2021; failure may constitute a default and could permit acceleration of Orion debt.
- Restricted cash includes a $5.0 million reserve tied to project milestones and financing conditions. The company also disclosed $34.0 million of unconditional purchase commitments and performance obligations that can require penalties or repairs if minimum plant output is not met.
- Management said current staffing and fiscal 2020 plans would fall short of the Connecticut loan employment requirement. If the company fails the revised employment obligation, an accelerated payment penalty may apply; a potential $2.0 million loan credit is conditional on meeting the requirements and creating additional positions.
- Management cited dependence on external financing, project budgets and schedules, successful plant commissioning and performance, contract and milestone funding, cost reductions, and additional capital. Risks also include competition, regulatory and energy-market changes, customer and supplier disruption, and the COVID-19 outbreak, whose impact was described as uncertain.
- Disclosure controls and procedures were deemed ineffective because a previously identified material weakness in accounting for impairments, credit facilities and other non-routine transactions remained unremediated. Management stated that the financial statements were fairly stated in all material respects and described remediation efforts.
- Legal proceedings arose in the ordinary course of business; management did not expect them, individually or in aggregate, to have a material adverse effect. No material amounts were accrued.
Important facts for investors to verify
- Whether Orion draw conditions and project milestones are met, and how much of the remaining facility lenders will approve and fund.
- Whether the company can meet project cost, commissioning, output and heat-rate targets, particularly for Groton and other projects, and convert backlog into cash.
- Progress on the ExxonMobil agreement, including funding and the calendar 2020 technical milestone.
- Availability of long-term project debt, tax equity or sale-leaseback financing, and the amount of cash that remains restricted or subject to lender consent.
- Ability to fund the Series 1 preferred obligation by the covenant deadline and avoid an Orion default.
- Remediation and testing of the material weakness, as well as any further share issuance, dilution or authorized-share changes.
- Effects of COVID-19 or other disruptions on staffing, supply chains, customer demand, project schedules and financing availability.