FuelCell Energy, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended July 31, 2019. Comparisons are with the corresponding 2018 periods. Dollar amounts are in millions unless stated otherwise.
Business context
FuelCell Energy designs, manufactures, installs, operates and services stationary fuel-cell power plants. Revenue comes from product sales, service and licensing, electricity generation, and Advanced Technologies contracts. The company reported that its operations depend on increasing orders and production, reducing costs, and obtaining financing; it had not achieved consistent positive operating cash flow.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $22.7 | $12.1 | $49.7 | $71.6 |
| Gross profit (margin) | $8.0 (35.1%) | $(2.1) ((17.0)%) | $2.1 (4.3%) | $2.0 (2.7%) |
| Operating loss | $(1.1) | $(14.5) | $(33.9) | $(32.8) |
| Net loss | $(5.3) | $(15.9) | $(42.4) | $(33.2) |
| Net loss attributable to common stockholders | $(8.3) | $(17.6) | $(64.2) | $(44.2) |
| Loss per common share | $(0.18) | $(2.45) | $(2.97) | $(6.70) |
Q3 revenue rose 88%, chiefly reflecting a $10.0 million ExxonMobil Research and Engineering (EMRE) license payment, higher generation revenue after acquiring the Bridgeport project, and increased Advanced Technologies activity. Nine-month revenue fell 31%, mainly because the prior-year period included substantial product revenue, including the Hanyang/KOSPO order and the Tulare project sale; no product revenue was recorded in the 2019 period. Nine-month common-stockholder losses included preferred-stock and warrant-related charges, including Series D deemed dividends and redemption accretion.
- Cash flow: For the nine months, operating cash flow was $(18.3), investing cash flow $(59.3), and financing cash flow $43.2. Cash, cash equivalents and restricted cash declined $34.4 to $45.8.
- Liquidity: At July 31, unrestricted cash was $16.0 and restricted cash was $29.8. Current assets were $96.4 versus current liabilities of $98.8. Management said short-term debt and other obligations exceeded cash and current assets.
- Debt: Total debt and financing obligations were $121.2, including $43.4 current and $77.8 long-term. The filing identifies approximately $102.0 of project-level debt and $19.2 of corporate-level debt. Hercules principal was $7.4 at quarter-end; its rate was 10.65%.
- Other balance-sheet items: Inventories were $62.0, project assets $156.4, and accumulated deficit $1,039.9. Inventory increased from $53.6 at October 31, 2018; project assets increased from $99.6, primarily due to the Bridgeport acquisition.
Material changes and unusual items
- Acquired the 14.9 MW Bridgeport Fuel Cell Project in May for approximately $35.5 million, funded with project loans and $15.0 million of previously restricted cash. The project became part of the generation portfolio.
- Recorded $10.0 million of Q3 and nine-month revenue for the EMRE license, for a perpetual, fully paid license related to specified carbon-capture applications.
- Adopted Topic 606 on November 1, 2018; the transition increased accumulated deficit by $6.7 million. The company reported that Topic 606 increased nine-month 2019 revenue by $3.3 million and gross profit by $1.9 million versus the amounts that would have been reported under the prior standard.
- Reduced its workforce by 135 employees, or about 30%, in April. It recorded a $2.8 million impairment of manufacturing automation equipment amid liquidity and low-production concerns. Manufacturing variances were $11.0 million for the nine months, versus $8.5 million a year earlier; production was about 2 MW annualized at quarter-end.
- Completed a 1-for-12 reverse stock split in May. Series C preferred stock was fully converted; Series D conversions included 52.7 million common shares issued at reduced conversion prices during June and July. At-the-market (ATM) sales generated $16.2 million net during the nine months, with about 44.0 million shares sold at an average $0.38 per share.
Outlook, risks and contingencies
- Going concern: Management concluded substantial doubt existed about the company’s ability to continue as a going concern for one year after filing. The company reported recurring losses, negative operating and investing cash flows, negative working capital, delayed payments to some vendors, and dependence on additional financing. It cautioned that it might have to reduce or cease operations or seek bankruptcy protection if funding is unavailable.
- Near-term financing exposure: Hercules covenant waivers were due to expire September 30, 2019, potentially extending to October 22 if the secured balance was reduced to $5.0 million or less by September 30. As of September 4, the principal balance was approximately $5.6 million. The company had agreed to apply 30% of net ATM proceeds to Hercules. NRG and project-level financing also had near-term maturity, call, project-completion, and take-out financing requirements. Defaults could trigger acceleration across multiple obligations.
- Project execution: Generate Lending had a call right that could require repayment of its $10.0 million working-capital loan by September 30; post-quarter amendments changed the call arrangements and imposed reporting and collateral requirements. Fifth Third reduced the Groton construction facility commitment from $23.0 million to $18.0 million and required construction milestones and permanent financing/tax-equity commitments. Failure to meet lender conditions could delay projects or lead to defaults.
- Backlog and capacity: Contract backlog was approximately $1.4 billion; an additional $636.3 million of LIPA project awards was not yet contracted backlog. The company reported 26.1 MW operating and 84.5 MW in process, including awards. It estimated the operating portfolio generates about $22 million in annual revenue and said projects in process could add $70–$80 million of annual recurring revenue if operational. Project financing was not committed for the portfolio, and awards remained subject to definitive agreements.
- Guidance: No specific consolidated revenue or earnings guidance was provided. Fiscal 2019 capital expenditure forecast was $2–$4 million. Management said future production increases would depend on business conditions and that positive operating cash flow requires more orders, higher production, and cost reductions.
- Other risks: Series B preferred dividends were not paid on the May or August 2019 payment dates; unpaid dividends accrue under the preferred terms. The filing also disclosed an ongoing material weakness in internal control over financial reporting; disclosure controls were deemed ineffective. Management reported remediation efforts but said the weakness was not yet remediated. Ordinary-course legal matters were not expected by management to have a material adverse effect, and no material amounts were accrued.
Important facts for investors to verify
- Whether Hercules and project lenders granted further extensions, and whether required repayments, covenant conditions, and refinancing or tax-equity milestones were met.
- Cash available for operations after excluding restricted cash, near-term debt maturities, vendor payment arrangements, and project reserve requirements.
- Actual cash generation, construction progress, financing, and commercial operation timing for Tulare, Groton, and other projects; whether LIPA awards converted into definitive contracts.
- How much future ATM or other equity issuance is required, the resulting dilution, and whether preferred-stock obligations or missed dividends create additional cash demands.
- Whether production, order volume, service margins, and cost-reduction plans improve enough to reduce operating losses and cash burn; also monitor inventory and project-asset impairment risk.
- Progress in remediating the material weakness and the reliability and timeliness of future financial reporting.