FUELCELL ENERGY INC quarterly report, Q3 FY2018

FuelCell Energy, Inc. — Q3 FY2018 Form 10-Q

Reporting period: Three and nine months ended July 31, 2018. Amounts are in U.S. dollars; financial statement amounts are in millions unless otherwise stated. The company designs, manufactures, installs, operates and services stationary fuel-cell power plants and develops related technologies.

Financial performance and position

Metric	Three months ended July 31, 2018	Nine months ended July 31, 2018
Revenue	$12.1 million; up 17% year over year	$71.6 million; up 50%
Gross profit (loss)	($2.1) million; gross margin (17.0%), versus (25.4%)	$2.0 million; gross margin 2.7%, versus a $0.4 million loss and (0.9%) margin
Operating loss	$14.5 million, versus $14.3 million	$32.8 million, versus $36.8 million
Net loss	$15.9 million	$33.2 million
Net loss attributable to common stockholders / loss per share	$17.6 million / $0.20	$44.2 million / $0.56

Nine-month product revenue rose to $43.1 million, mainly from the 20 MW HYD/KOSPO project and sale of the City of Tulare plant. Product revenue still generated a $1.1 million gross loss, though substantially improved from the prior-year $8.4 million loss.
Nine-month service and license revenue declined 47% to $12.9 million, largely due to fewer module replacements and lower royalties. Advanced Technologies revenue fell 31% to $10.3 million, with lower gross profit reflecting contract timing and mix. Generation revenue was broadly flat at $5.3 million, but gross profit fell to $0.3 million amid higher maintenance costs and a $0.5 million project impairment.
At July 31, unrestricted cash was $48.7 million; restricted cash was $38.6 million, leaving total cash and restricted cash of $87.3 million. Total assets were $358.2 million, total liabilities $193.1 million, and stockholders’ equity $95.5 million. Inventory was $60.1 million and project assets $89.7 million.
Total debt and financing obligations were $90.5 million, including $14.5 million current. The company reported $46.3 million of project-related debt/financing and approximately $44.2 million at the corporate level. Hercules debt carried a 10.40% rate as of July 31; its agreement includes a minimum unrestricted-cash covenant.
Operating cash flow was positive $29.3 million for the nine months, compared with $57.8 million used in the prior-year period. The improvement was principally driven by collections and inventory deliveries under the HYD contract, including decreases in receivables of $33.1 million and inventories of $22.1 million. Investing cash use was $36.0 million, including $28.4 million for project assets; financing provided $6.5 million.

Material changes and notable items

Quarterly revenue increased, while the gross loss narrowed; operating loss was slightly higher, as increased research and development spending offset gross-profit improvement. Quarterly service costs included $1.2 million associated with termination of a legacy sub-megawatt service agreement.
For the nine-month comparison, the company moved from a gross loss to a modest gross profit and reduced operating loss. Common-stockholder loss per share improved to $0.56 from $1.01, but weighted-average shares increased to 79.3 million from 45.9 million. The 2018 common-stockholder loss included $8.6 million of Series C deemed dividends.
Cash generation should be viewed in light of the working-capital release from HYD execution; the company continued to report substantial net losses and invested heavily in project assets.
The company sold 5.2 million shares under its at-the-market program during the quarter, receiving about $6.7 million net. Common shares outstanding were 92.3 million at July 31, compared with 69.5 million at October 31, 2017.

Outlook, risks and contingencies

Management said available cash, operating cash flows, financing availability and access to capital markets were expected to fund operations for at least 12 months. It also cautioned that additional capital may be needed and cannot be assured on acceptable terms.
Production was running at an annualized rate of about 25 MW; management’s target was 55 MW by April 2019, supported by backlog and awards. FY2018 capital expenditure guidance was $11–$13 million.
At July 31, backlog was approximately $793 million, with an additional $1.1 billion of awards, for total backlog and awards of about $1.9 billion. Some awards were not yet definitive contracts. Projects in process totaled 84.5 MW, including awards not yet in backlog; management estimated $70–$80 million in annual recurring revenue once these projects become operational.
The company had 11.2 MW operating and 22.5 MW under development/construction as described in its liquidity discussion; the broader 84.5 MW projects-in-process figure includes awards. Project build-out requires upfront capital and is exposed to construction, financing, permitting and timing risks.
After quarter-end, the company closed an offering of Series D convertible preferred stock on August 29, expected to provide approximately $25.4 million net for working capital, project financing and general purposes. The shares were initially convertible into approximately 22.2 million common shares, subject to restrictions and adjustments, and carry installment redemption terms. The Series C conversion price was also reduced from $1.84 to $1.50. These securities create potential dilution and cash-redemption risk.
POSCO Energy advised the company that it was terminating the parties’ memorandum of understanding effective July 15, 2018 and intended to exit the fuel-cell business during 2018. The filing says the future scope of the relationship and its effects on Asian market access remain uncertain.
Other exposures include $59.2 million of unconditional purchase commitments; service performance and warranty obligations; possible indemnity payments related to investment tax credit valuations, which management did not consider probable; and government contract funding/termination risk. The company also disclosed an informal SEC investigation concerning certain historical at-the-market share sales; potential rescission, damages or penalties cannot be predicted.
Management cited continuing losses, reliance on external financing, execution and cost-reduction challenges, customer concentration, competition, fuel and electricity price movements, and technology, project, supplier and foreign-exchange risks. It reported disclosure controls were effective and no material change in internal control over financial reporting.

Most important facts for investors to verify

Whether the 55 MW production-rate target is achieved and whether higher volume improves product margins and cash generation.
Whether the $1.1 billion of awards convert into definitive, financed projects and when projects in process reach operation or generate cash.
How much of reported operating cash flow reflects repeatable operations versus HYD-related receivable and inventory reductions.
Liquidity after the Series D offering, including Hercules covenant compliance and the cash-versus-stock funding of preferred-stock installment obligations.
The extent of dilution from Series C and Series D conversions, at-the-market sales and other equity-linked securities.
Developments in the POSCO Energy relationship and the SEC inquiry into historical at-the-market sales.