Business context and reporting period
Bloom Energy Corporation designs, manufactures and sells on-site solid-oxide fuel cell systems. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2018, with comparisons to the corresponding 2017 periods. Revenue is primarily U.S.-based and comes from Energy Server sales and installation, maintenance services, and electricity sold under power purchase agreements (PPAs).
In July 2018, Bloom completed its IPO, raising approximately $282.3 million net of underwriting discounts, commissions and offering costs. The offering and related conversions materially changed the capital structure: preferred shares and $221.6 million of 8% notes converted into Class B common stock. Class B shares carry ten votes per share, compared with one vote per Class A share.
Key financial metrics
Amounts are in millions of dollars unless otherwise stated.
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $190.2 | $93.8 | $528.4 | $252.7 |
| Gross profit (loss) | $23.4 | $(15.1) | $99.8 | $(30.1) |
| Gross margin | 12% | (16%) | 19% | (12%) |
| Operating loss | $(66.1) | $(47.7) | $(65.7) | $(130.0) |
| Net loss | $(82.5) | $(76.4) | $(155.0) | $(209.3) |
| Net loss attributable to common stockholders | $(78.6) | $(71.8) | $(142.0) | $(194.8) |
| Net loss per share, basic and diluted | $(0.97) | $(6.97) | $(4.13) | $(19.06) |
- Revenue mix: Q3 product revenue was $125.7 million, installation $29.7 million, service $20.8 million and electricity $14.1 million. Nine-month product revenue was $355.7 million, installation $70.1 million, service $60.6 million and electricity $42.1 million.
- Cash flow: Nine-month operating cash use was $13.6 million, versus $65.1 million in 2017. Investing activities provided $15.4 million, mainly reflecting investment maturities; financing activities provided $261.8 million, primarily from the IPO. Cash, cash equivalents and restricted cash totaled $444.2 million at period end.
- Liquidity: Cash and cash equivalents were $395.5 million and short-term investments $4.5 million. Current assets were $698.5 million and current liabilities $271.9 million. Management said available cash and short-term investments should fund operating, capital and other cash needs for at least 12 months.
- Debt: Debt carrying value was $740.8 million, including $392.2 million of recourse debt and $348.6 million of non-recourse PPA-entity debt; unpaid principal was $792.7 million. The filing reports compliance with financial covenants at September 30, 2018. The 8% notes converted at the IPO, while $296.2 million principal and accrued interest remained outstanding under the 6% convertible notes.
- Other metrics: Bloom reported 206 product acceptances in Q3, up 46.1% year over year, and 348 MW deployed at quarter end, up 25.6%. One customer represented 40.9% of accounts receivable at September 30.
Material changes versus the prior comparable period
- Revenue more than doubled in Q3 and for the nine-month period. Growth reflected more product acceptances, a greater share of sales recognized upon acceptance, customer-specific applications and reinstatement of the federal investment tax credit (ITC).
- The nine-month revenue benefit from the ITC was $125.7 million, including $45.5 million related to retroactive 2017 acceptances. Management said Q3 revenue included $34.5 million of ITC benefit, compared with $2.4 million in Q3 2017.
- Gross profit improved substantially, but installation remained loss-making: Q3 installation gross loss was $10.4 million and nine-month installation gross loss was $17.6 million. Management attributed pressure in part to the cost and complexity of customer-specific applications.
- Operating expenses rose to $89.5 million in Q3 from $32.6 million. Stock-based compensation was $71.7 million in Q3 and $87.5 million for the nine months, compared with $7.7 million and $22.3 million, respectively, in 2017. Management attributed much of the increase to IPO-related RSU grants and employee retention awards.
- Common-stockholder loss increased in Q3 despite higher revenue, partly reflecting higher operating costs and stock compensation. The nine-month common-stockholder loss narrowed from 2017; comparisons also reflect a $21.6 million nine-month loss on revaluation of warrant liabilities and embedded derivatives in 2018.
- Debt carrying value declined from $941.3 million at December 31, 2017 to $740.8 million at September 30, 2018, chiefly following conversion of the 8% notes and debt repayments. The IPO also increased cash and equity.
Outlook, management commentary, risks and unusual items
- Outlook: The filing provides no specific numeric revenue or earnings guidance. Management expects continued GAAP losses for the foreseeable future and expects research and development, sales and marketing, and general and administrative expenses to rise as the business expands. It also cites continued cost reduction, improved product life and execution of installations as important to future profitability.
- Funding and incentives: Management believes liquidity is adequate for at least 12 months, but says additional financing may be needed if available sources do not meet future needs. Bloom does not expect significant cash distributions from its PPA entities and remains dependent on product sales. ITC and other incentives support customer economics and financing; the filing describes risks from incentive changes, qualification requirements and potential recapture.
- Performance obligations: Bloom provides output and efficiency warranties and guarantees. The filing cites approximately $40.9 million of remaining potential liability under a cap for direct-purchase project underperformance and $70.4 million under caps for third-party PPA performance guarantees. Some PPA arrangements also include uncapped quarterly output-guarantee obligations. These are potential exposures, not amounts reported as losses incurred.
- Operations and market risks: Key risks include customer and financing-partner concentration, long sales and installation cycles, installation cost overruns, reliance on limited or sole-source suppliers (including rare-earth materials), product performance and service costs, competition, and regulatory or policy changes affecting distributed generation and incentives. Southern Company accounted for 54% of Q3 revenue and 51% of nine-month revenue.
- Contingencies: Bloom recorded $10.5 million of long-term liabilities for potential recapture of a Delaware manufacturing grant; the filing describes possible further repayment if employment and compensation milestones are not met. Bloom also disclosed a disputed EPA fine claim of approximately $1.0 million, which it is contesting. A September 2018 amended arbitration claim by two former executives alleges, among other matters, breach of contract and fraud; Bloom says it believes the claim is without merit and recorded no loss contingency.
- Governance and dilution: The dual-class structure concentrates voting power in Class B holders. The filing also reports substantial outstanding equity awards and unrecognized compensation cost, and identifies the IPO lock-up expiration in January 2019 as a possible source of share-sale pressure.
Important facts for investors to verify
- How much of reported growth and gross-margin improvement is attributable to ITC benefits, acceptance timing and customer-specific product mix, and how results may change if incentives expire or are reduced.
- The terms, maturities, conversion features, restrictions and repayment capacity associated with the $740.8 million debt carrying value, particularly the recourse debt and 6% convertible notes.
- Whether the 12-month liquidity assessment remains supportable given continuing losses, working-capital demands, inventory growth and limited expected PPA cash distributions.
- The actual and potential cost of warranty, output and efficiency commitments, including exposure under uncapped PPA guarantees and the performance of earlier-generation systems.
- The sustainability of customer concentration, access to financing partners, supplier availability and installation capacity as deployments grow.
- The status and potential financial impact of the Delaware grant milestones, EPA matter and amended arbitration claim, as well as dilution and voting-control effects of equity awards and the dual-class structure.