Bloom Energy Corporation — Q2 2018 Form 10-Q
Business and period. Bloom designs, manufactures and sells solid-oxide fuel-cell Energy Servers for on-site power generation, alongside installation, maintenance and electricity sales under power purchase agreements (PPAs). This unaudited filing covers the three and six months ended June 30, 2018; comparisons are with the corresponding 2017 periods.
Key financial results
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $168.9 million | $86.8 million | $338.2 million | $159.0 million |
| Gross profit (loss) | $32.8 million | $(5.8) million | $76.4 million | $(15.0) million |
| Gross margin | 19.4% | (6.7)% | 22.6% | (9.4)% |
| Operating profit (loss) | $(5.3) million | $(41.2) million | $0.4 million | $(82.3) million |
| Net loss attributable to common shareholders | $(45.7) million | $(63.5) million | $(63.4) million | $(123.0) million |
| Basic and diluted loss per share | $(4.34) | $(6.22) | $(6.05) | $(12.09) |
- Revenue mix, Q2: product $108.7 million; installation $26.2 million; service $20.0 million; electricity $14.0 million.
- Operating expenses: $38.0 million in Q2, up 7.6%; $76.0 million in the first half, up 12.9%. Research and development rose as Bloom invested in next-generation technology.
- Cash flow: first-half operating cash use was $18.6 million, compared with $79.6 million in 2017. Investing activities provided $9.7 million and financing activities used $21.8 million; cash, cash equivalents and restricted cash declined $30.7 million to $149.9 million. Management reported positive operating cash flow of $15.9 million in Q2.
- Liquidity at June 30: cash and cash equivalents were $91.6 million and short-term investments were $15.7 million. Restricted cash of $58.3 million was also held, principally as collateral and reserves, and is not equivalent to unrestricted liquidity. Current assets were $390.3 million and current liabilities $248.1 million.
- Debt: carrying value of total debt was approximately $960.1 million, including $607.4 million recourse debt and $352.8 million non-recourse PPA debt; unpaid principal was $1.016 billion. The company reported compliance with financial covenants at June 30.
- Balance sheet: total assets were $1.158 billion and total liabilities $1.723 billion; accumulated deficit was $2.394 billion. Preferred stock had a stated liquidation preference of approximately $1.442 billion before its subsequent IPO conversion.
Changes and notable items
- Q2 revenue increased 94.6%; first-half revenue increased 112.8%. Product acceptance volume rose 11.7% in Q2 and 23.5% in the first half; deployed capacity reached 328 MW, up 24.7% year over year.
- Management attributed much of the revenue and gross-profit improvement to higher product acceptances, more sales recognized upfront at acceptance, a shift toward direct purchase and traditional lease options, and reinstatement of the federal investment tax credit (ITC). The first-half revenue included a reported $91.2 million ITC benefit, including a retroactive benefit for 2017 acceptances. The filing also reports $28.8 million of ITC benefit in Q2 revenue.
- Product margins improved substantially, but installation remained loss-making: Q2 installation gross loss was $10.9 million and first-half installation gross loss was $7.2 million. Service also recorded a first-half gross loss of $3.6 million. Bloom cited higher costs from customer-specific applications and power-module replacements.
- Q2 included a $19.2 million loss on revaluation of warrant liabilities and embedded derivatives; the first-half loss was $23.2 million. These fair-value changes contributed to net losses and can fluctuate with valuation inputs, including the company’s share price.
- First-half product costs included a one-time $9.4 million charge associated with supplier agreements that required Bloom to forgo previously negotiated discounts following ITC renewal.
- After quarter-end, Bloom completed its July 2018 IPO of 20.7 million Class A shares at $15 per share, receiving $284.3 million net proceeds. The 8% notes converted and preferred stock converted into Class B common stock in connection with the IPO. These subsequent events materially changed financing and capitalization but are not reflected in June 30 balance-sheet amounts.
Outlook, risks and contingencies
- No quantified revenue, earnings or margin guidance is provided. Management stated that it expected existing cash, cash equivalents and short-term investments to fund needs for at least 12 months, and separately disclosed the subsequent IPO proceeds. It also said it did not expect to be profitable for the foreseeable future and did not expect material PPA distributions to fund ongoing cash needs.
- Management’s outlook depends on continued sales growth, cost reduction, product life and performance, customer acceptance, financing availability and access to tax incentives. Customer installations and acceptance timing can shift revenue between periods; sales cycles are lengthy and financing is often needed to deploy backlog.
- Performance obligations merit close attention. At June 30, Bloom reported remaining potential capped underperformance liabilities of about $41.6 million on direct-purchase projects and $56.7 million on third-party PPA projects. Some PPA output-guarantee obligations are uncapped; the filing also reports substantial remaining potential exposure under particular PPA guarantees, including approximately $263.6 million under the PPA II efficiency-guarantee cap.
- Other material risks include dependence on government incentives and tax-equity financing; customer and accounts-receivable concentration; reliance on limited or sole-source suppliers, including rare-earth materials; manufacturing, installation and service execution; and fuel-cell output and efficiency performance. Two customers represented 51.0% and 16.9% of accounts receivable at June 30; Southern Company and Korea Energy accounted for 53% and 17% of first-half revenue, respectively.
- Bloom had recorded $10.5 million for potential repayment of a Delaware manufacturing grant, contingent on employment and compensation milestones. It also disclosed that the EPA was seeking approximately $1.0 million in fines relating to prior handling of certain maintenance units; Bloom contested the matter. The filing states that the claim was not resolved in the provided text.
- The filing describes significant debt-related restrictions and possible refinancing, default and liquidity risks. It also notes that PPA project debt is generally non-recourse, but project cash flows are subject to debt service, reserve requirements and investor distribution priorities.
Most important facts for investors to verify
- How much of the 2018 revenue and gross-margin recovery is sustainable absent retroactive and current-period ITC benefits, and what results would look like on a comparable basis.
- Whether improved acceptance volume and upfront revenue recognition convert into durable operating cash generation, given inventory growth and lower deferred customer deposits.
- Actual performance, service and replacement costs of the installed fleet, and potential exposure under capped and uncapped warranty and PPA guarantees.
- Post-IPO capitalization, conversion of preferred stock and notes, dilution from outstanding equity awards, and the implications of the dual-class voting structure and lock-up expirations.
- Unrestricted liquidity and debt-service capacity after the IPO, including maturity and refinancing requirements, covenant headroom and restrictions on PPA cash distributions.
- Developments in customer concentration, financing-partner capacity, tax incentives, supplier availability, and the Delaware grant and environmental matters.