FuelCell Energy, Inc. — Q1 FY2019 Form 10-Q
Reporting period: Three months ended January 31, 2019; balance-sheet comparisons are with October 31, 2018. Amounts below are in U.S. dollars unless noted.
Business context
FuelCell Energy designs, manufactures, installs, operates and services stationary fuel-cell power plants, and develops projects that it may retain or sell. The company says positive operating cash flow depends on greater order volume and production, cost reductions, and growth in its generation and service portfolios.
Financial performance
| Metric | Q1 FY2019 | Q1 FY2018 |
|---|---|---|
| Revenue | $17.8 million | $38.6 million |
| Gross profit (loss) | $(2.2) million; (12.4)% margin | $4.6 million; 12.0% margin |
| Operating loss | $(15.2) million | $(5.6) million |
| Net loss | $(17.5) million | $(4.2) million |
| Net loss attributable to common stockholders | $(33.0) million | $(8.4) million |
| Loss per common share | $(0.33) | $(0.12) |
| Operating cash flow | $(12.0) million | $40.0 million provided |
| Investing cash flow | $(14.2) million | $(7.4) million |
| Financing cash flow | $14.2 million provided | $(4.7) million used |
- Revenue declined 54%, chiefly because product revenue fell to zero from $29.5 million, including the prior-year 20 MW HYD project sale. Service and license revenue rose to $11.8 million from $4.1 million, primarily reflecting more module replacements. Generation revenue was $1.5 million; Advanced Technologies revenue was $4.5 million.
- Service and license gross margin turned negative at 4.6%, versus positive 17.0%. Advanced Technologies gross margin rose to 42.4% from 8.5%, reflecting contract timing and mix. Generation gross margin was negative 10.6%, versus positive 15.0%.
- Higher research and development expense ($6.3 million versus $4.0 million) reflected increased development work, including the SureSource 4000. Product costs included $3.2 million of excess-capacity and manufacturing variances, largely attributed to low production volumes.
- Common-stockholder loss includes preferred dividends, deemed dividends and redemption-value adjustments: $15.5 million in Q1 FY2019, versus $4.3 million in Q1 FY2018. These items explain why common-stockholder loss exceeded net loss.
Financial position, debt and liquidity
- At January 31, 2019, unrestricted cash was $27.8 million, down from $39.3 million. Restricted cash was $40.5 million, making total cash and restricted cash $68.2 million. Restricted amounts are pledged for contractual and financing obligations and are not freely available for general use.
- Current assets were $117.1 million and current liabilities $88.0 million. Total debt was $104.4 million, including $38.9 million classified as current; total liabilities were $192.9 million. Debt increased from $87.9 million at October 31, 2018.
- Operating activities used $12.0 million, with cash use including a $7.8 million increase in unbilled receivables. Project-asset spending was $12.6 million. Financing cash inflow included $17.3 million of debt proceeds.
- Management believed available working capital, expected operating cash, project-finance availability and possible future equity proceeds would fund operations for at least 12 months. It cautioned that further capital may be needed and that financing may not be available on acceptable terms.
Changes, outlook and material developments
- FuelCell adopted Topic 606 revenue accounting on November 1, 2018 using the modified retrospective method. Adoption increased opening accumulated deficit by $6.7 million. For Q1, reported revenue was $1.5 million lower and gross loss $1.3 million greater than the company estimated under the prior method, principally due to recognition of service-contract performance guarantees and different timing for service and license revenue.
- Reported backlog was approximately $1.3 billion at January 31, 2019, plus $636.3 million of LIPA project awards not yet included in backlog, for stated combined backlog and awards of about $1.9 billion. Backlog included $982.4 million generation, $291.2 million service and license, and $37.0 million Advanced Technologies. Awards are not definitive backlog until agreements are executed.
- The company reported 11.2 MW of operating projects and 83.1 MW in process, including LIPA awards. Management estimated the in-process portfolio, including LIPA, could generate $70–$80 million in annual recurring revenue when operational. The company forecast FY2019 capital expenditures of $2–$4 million. Production run-rate was described as approximately 33 MW in one discussion and approximately 35 MW in another.
- After quarter-end, the company drew $9.6 million under a new facility of up to $23 million for the 7.4 MW Groton project. It also amended its Hercules loan cash covenant, with a 75%-of-loan-balance minimum cash requirement (plus specified overdue payables) applying after March 31, 2019, and paid a $250,000 amendment fee.
- After quarter-end, the Series C holder waived specified cash-payment rights and agreed to conversion terms that could deliver approximately 25% more shares than under prior terms. The company also agreed to issue 6.0 million common shares in exchange for cancellation of a warrant exercisable for 7.68 million shares. Stockholder approval was still relevant to Series D preferred-stock share issuance.
- Key risks include ongoing losses and cash burn, project construction and financing needs, possible cash repayment or dilution from preferred-stock terms, Nasdaq’s minimum-bid-price compliance deadline of May 28, 2019, and uncertainty around the POSCO Energy arbitration. The company also disclosed an SEC informal investigation concerning certain historical at-the-market share sales; potential rescission claims, damages or penalties are uncertain.
Important facts for investors to verify
- Whether unrestricted cash, project-facility availability and financing sources are sufficient to cover operating needs, debt service and project commitments; separately assess the limits on restricted cash.
- The timing and cash or share settlement of Series C and Series D obligations, required stockholder approvals, share-reservation capacity and potential dilution.
- Whether LIPA awards and other projects convert into definitive contracts, meet construction and commercial-operation schedules, and achieve expected financing and returns.
- Whether service-contract costs, module performance and performance-guarantee estimates support the reported backlog’s expected margins and cash flows.
- Developments in Nasdaq listing compliance, the POSCO Energy arbitration, and the SEC inquiry and possible claims relating to historical at-the-market sales.