FuelCell Energy, Inc. — Form 10-Q Summary
Reporting period: Second quarter and six months ended April 30, 2019; filed June 17, 2019. FuelCell Energy designs, manufactures, installs, operates and services stationary fuel-cell power plants, and develops related technologies. Financial amounts below are in U.S. dollars.
Financial performance and position
| Metric | Three months ended April 30 | Six months ended April 30 |
|---|---|---|
| Revenue, 2019 | $9.2 million | $27.0 million |
| Revenue, 2018 | $20.8 million | $59.4 million |
| Gross profit (loss), 2019 | $(3.6) million | $(5.8) million |
| Operating loss, 2019 | $(17.6) million | $(32.9) million |
| Net loss, 2019 | $(19.5) million | $(37.1) million |
| Net loss attributable to common stockholders, 2019 | $(22.9) million | $(55.9) million |
| Loss per common share, 2019 | $(2.06) | $(5.77) |
Per-share figures are retroactively adjusted for the May 8, 2019 1-for-12 reverse stock split. Six-month operating cash flow was negative $18.2 million, versus positive $41.9 million in 2018; investing cash flow was negative $29.4 million and financing cash flow positive $20.4 million. Cash, cash equivalents and restricted cash declined $27.3 million to $53.0 million.
- Liquidity: April 30 unrestricted cash was $14.9 million; restricted cash was $38.1 million. Current assets were $104.3 million and current liabilities $110.8 million.
- Debt: Total debt and financing obligations were $113.0 million, including $54.8 million classified as current. The filing reports significant short-term obligations, delayed payments to conserve cash and negative working capital.
- Margins: Q2 gross margin was negative 39.5%, compared with negative 3.0% in Q2 2018. For the six months, gross margin was negative 21.6%, versus positive 6.7%.
- Other balance-sheet items: Inventory was $57.0 million and project assets $123.1 million. Unconditional purchase commitments totaled $48.1 million.
Changes versus the prior comparable periods
- Revenue fell 56% in Q2 and 55% in the first half. Product revenue was zero in both 2019 periods, compared with $12.2 million in Q2 2018 and $41.7 million in the first half of 2018; the prior periods included plant and equipment sales.
- First-half service and license revenue rose to $14.4 million from $7.3 million, largely due to module replacements, but gross margin declined to 2.1% from 18.8%. Advanced Technologies revenue increased to $9.5 million from $6.8 million, with higher gross profit attributed to contract timing and mix.
- First-half net loss more than doubled, and common-stockholder loss increased to $55.9 million from $26.6 million. Results included preferred-stock-related charges and a $3.2 million Series A warrant exchange charge.
- Operating cash flow swung from positive to negative, partly because the prior-year period benefited from collections and inventory deliveries related to the HYD contract.
- Adoption of Topic 606 on November 1, 2018 increased opening accumulated deficit by $6.7 million. For the six months, reported revenue was $2.3 million lower than it would have been under the prior accounting method, while reported net loss was $1.3 million higher. Comparisons are therefore affected by the accounting change.
Outlook, developments and material risks
- Going concern: Management concluded substantial doubt exists about the company’s ability to continue as a going concern for one year after filing, citing recurring losses, negative working capital, operating and investing cash outflows, and the need for additional capital. Management’s refinancing, project-financing and cost-reduction plans are not assured; failure to obtain funding could force further cuts, asset sales, cessation of operations or bankruptcy protection.
- Near-term financing: Hercules amendments extended accommodations only through August 9, 2019 and required principal payments, including application of $6.0 million of the subsequent $10.0 million ExxonMobil Research and Engineering (EMRE) license payment to the loan. NRG’s maturity was extended to July 12, 2019. A Hercules default could trigger defaults or acceleration under other financing arrangements.
- EMRE license: After quarter-end, the company granted EMRE a perpetual, worldwide, fully paid license relating to carbonate fuel-cell carbon-capture applications and received $10.0 million. The license is non-exclusive but broad; $6.0 million was designated for Hercules repayment.
- Restructuring and production: The April 2019 reduction in force eliminated 135 jobs, or 30% of the workforce; management estimated annual payroll savings of about $11.5 million. Production, previously about 25 MW annualized, was reduced to 2.5 MW after the reorganization. A $2.8 million manufacturing-automation asset impairment was recorded. The company forecast fiscal 2019 capital expenditures of $2–4 million.
- Projects and backlog: At April 30, contract backlog was about $1.3 billion, plus $636.3 million of LIPA project awards not yet in backlog. Projects in process, including awards, totaled 84.5 MW; management estimated $70–80 million in additional annual recurring revenue once operational. Conversion to contracts, financing, construction and operation remains uncertain.
- Bridgeport acquisition: On May 9, the company acquired the 14.9 MW Bridgeport project for approximately $35.5 million, financed with project-level debt and $15 million of project-restricted cash released at closing. The project’s obligations and required reserves constrain project cash.
- Preferred-stock dilution and obligations: After quarter-end, Series D holders asserted triggering events and converted shares at a reduced price of $0.4619; approximately 12.1 million common shares were issued in these conversions. The filing states 8,396 Series D shares, with $8.5 million liquidation value, remained outstanding as of June 13. Series B dividends due May 15 were not paid; the filing says $1.0 million would be payable for that dividend period if declared.
- Controls and other contingencies: Disclosure controls were ineffective due to a material weakness in controls over asset impairments and credit-facility accounting and disclosures; the weakness contributed to the delayed filing. The company also disclosed POSCO Energy arbitration and an SEC informal investigation concerning certain historical at-the-market share sales. Management reported no material accrual for ordinary-course legal proceedings.
The filing provides no specific earnings or revenue guidance. Management’s outlook depends on refinancing, additional project financing, improved order volume and cost reductions. Principal risks include continued losses, dilution, debt covenant or payment defaults, project delays and cost overruns, low manufacturing utilization, service-performance obligations, and the ability to secure funding.
Important facts for investors to verify
- Whether Hercules and NRG obligations were refinanced, repaid or further extended, and whether the company met the amended loan terms and deadlines.
- Cash available for general operations after restricted funds, project reserves, debt service and required project spending are accounted for.
- Actual dilution and remaining Series D preferred shares following the reduced-price conversions, and any further preferred-stock payment or conversion rights.
- Whether project awards become definitive backlog and projects reach commercial operation on schedule with sufficient financing and expected economics.
- Whether the workforce reduction and lower production rate deliver the estimated savings without impairing delivery, service capacity or future growth.
- Progress in remediating the material weakness and any developments in the POSCO arbitration or SEC investigation.