Bloom Energy Corporation (NYSE: BE) — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing was signed March 31, 2020. Unless noted, financial figures are in U.S. dollars.
Business context and reporting period
Bloom designs, manufactures, sells and services stationary solid-oxide fuel-cell systems (“Energy Servers”) for on-site power generation. Its systems primarily use natural gas or biogas. The 10-K reports a major restatement of prior-period financial statements, adopts ASC 606 for 2019 using the modified retrospective method, and includes recast quarterly figures. Accordingly, comparisons with 2018 are affected by accounting changes and unusual transactions.
Key financial and operating metrics
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Revenue | $785.2 million | $632.6 million, restated |
| Gross profit | $97.6 million; 12% margin | $105.8 million; 17% margin |
| Operating loss | $232.8 million | $165.0 million, restated |
| Net loss | $323.5 million | $291.3 million, restated |
| Net loss available to common stockholders | $306.9 million; $2.67 per share | $273.5 million; $5.14 per share |
| Cash provided by (used in) operating activities | $163.8 million | $(91.9) million |
| Cash provided by (used in) investing activities | $53.4 million | $(125.4) million |
| Cash provided by (used in) financing activities | $(120.3) million | $317.2 million |
Revenue increased 24.1%; management says the increase would have been 39.6% excluding the 2018 retroactive investment tax credit (ITC) benefit and the 2019 ASC 606 timing adjustment. Product revenue was $557.3 million, installation $60.8 million, service $95.8 million and electricity $71.2 million. Product acceptances rose 47.6% to 1,194 systems measured in 100-kilowatt equivalents. Product cost per kilowatt accepted fell 14.6% to $2,881; installation cost per kilowatt fell 45.8% to $644.
Fourth quarter: Revenue was $213.5 million, gross profit $24.9 million, operating loss $47.9 million, net loss $71.0 million and loss available to common stockholders $68.3 million, or $0.58 per share.
Cash, liquidity and debt: At year-end, cash and cash equivalents were $202.8 million; restricted cash was $174.6 million, much of it tied to project and financing obligations; short-term investments were nil. Working capital was a deficit of $101.3 million. Consolidated debt carrying value was $636.8 million, comprising $401.4 million recourse and $235.4 million non-recourse debt; $337.6 million was classified as current. Total liabilities were $1.49 billion and stockholders’ deficit was $259.6 million. Operating cash flow included substantial non-cash charges and working-capital inflows; it should not be read as equivalent to recurring cash earnings.
Product sales backlog was $1.1 billion, or 198 MW, at year-end, versus $0.8 billion and 138 MW at the prior year-end. Management expected at least 50% of backlog to deploy within 12 months, subject to financing, installation and other conditions.
Material changes versus prior comparable period
- Revenue grew, but gross profit fell $8.2 million and gross margin declined five percentage points. Operating loss widened by $67.8 million.
- 2019 revenue included a $34.6 million reduction related to ASC 606 adoption. The 2018 comparison includes a $45.5 million retroactive ITC benefit; excluding these items, management reported stronger underlying revenue growth.
- 2019 cost of revenue included $94.8 million of expenses associated with the PPA II and PPA IIIb Energy Server upgrades. The upgrades also involved asset write-offs, accelerated depreciation, debt repayment and deconsolidation of PPA II.
- Operating expenses rose 22.0% to $330.4 million. Total stock-based compensation was $196.3 million, including approximately $91.3 million attributed to IPO-related employee RSU grants.
- Operating cash flow improved from a $91.9 million use in 2018 to $163.8 million provided in 2019; the filing attributes the 2019 result in part to working-capital changes and non-cash adjustments.
Restatement, outlook, risks and unusual items
- Restatement: Managed Services and similar transactions previously treated as sales should have been accounted for as financing arrangements. The correction defers revenue recognition to electricity generation over the contract term, records Energy Servers as property and equipment, and records financing obligations. Other corrections involved manufacturing stock compensation capitalization and embedded price-protection derivatives. Cumulative revenue was overstated by $192.1 million through September 30, 2019; the 2018 annual revenue restatement reduced revenue by $109.4 million. The auditor’s opinion is that the restated financial statements present fairly, but the auditor did not audit internal-control effectiveness.
- Controls: Management concluded disclosure controls and internal control over financial reporting were ineffective at December 31, 2019, identifying a material weakness involving insufficient accounting expertise and controls for complex or non-routine transactions. Remediation includes using qualified internal or third-party technical accounting resources.
- Debt and subsequent financing: Year-end cash and liquidity were insufficient to cover the then-current debt obligations and operating needs. On March 31, 2020, the company agreed to extend most 6% convertible notes to December 2021, with a higher 10% interest rate, an $8 conversion price and at least $70 million due September 2020; it also modified the Constellation note, issued $30 million of additional convertible notes and arranged a proposed $70 million senior secured notes placement, subject to closing conditions. Management said available cash, these measures and operating cash flows were expected to cover needs for 12 months from filing, while noting uncertainty and COVID-19 exposure.
- COVID-19: The filing describes disruption to installations, suppliers, international operations and customer-site access, as well as uncertainty over demand, liquidity and financing. Management could not reasonably estimate the full financial impact.
- Concentration and policy: Southern Company and SK (Korea) represented approximately 34% and 23% of 2019 revenue, respectively. Demand and customer financing are exposed to ITC phase-down, other incentives, utility tariffs, natural-gas policy, electricity prices and access to tax-equity and third-party financing.
- Contingencies: Bloom disclosed an approximately $1.0 million EPA notice of potential fines concerning historic handling of gas-cleaning units, which it contests; securities and other litigation; and up to $108.7 million of indemnity exposure related to the Delaware PPA upgrade, which management considered remote and for which it recorded no reserve. A Delaware facility grant also carries potential repayment obligations; $10.5 million was recorded for possible recapture.
- Guidance: The filing provides no specific numerical FY 2020 revenue or earnings guidance. Management expects continued losses for the foreseeable future and identifies growth, cost reduction, manufacturing, service performance and financing access as factors in reaching profitability.
Important facts for investors to verify
- Review the restated statements and ASC 606 reconciliation to distinguish accounting timing changes from underlying sales, margins and cash generation.
- Confirm completion and terms of the announced debt extensions and financing, including the $70 million repayment requirement, collateral, covenants and remaining maturities.
- Assess unrestricted liquidity separately from restricted project cash, and evaluate the sustainability of positive 2019 operating cash flow.
- Track remediation and testing of the material weakness and the reliability of future reporting on complex financing arrangements.
- Monitor customer concentration, backlog conversion, project acceptance timing, incentive availability and COVID-19 effects on suppliers and installations.
- Evaluate warranty/service economics, PPA upgrade costs, and the potential impact of disclosed legal, environmental and indemnification exposures.