Capstone Turbine - Another Secondary Offering Interferes With Recent Momentum

| About: Capstone Turbine (CPST)
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Summary

The company raises some much needed cash at the price of severe dilution for investors.

Recent order trends have been improving with last quarter's book-to-bill ratio at multi-year highs.

The company is not out of the woods yet as cash burn remains high and EBITDA breakeven at least a couple of quarters still away.

The shares had just started to pick up some major momentum as of late which today's offering now brought to an abrupt end.

Given the improved balance sheet and prospects for renewed growth in the company's business, risk tolerant investors might want to use the setback to initiate a position.

Capstone Turbine (NASDAQ:CPST) management yesterday literally decided to grab the bull by the horns and turn the recent momentum in the company's share price into some much needed fresh cash by continuing the company's seemingly neverending slew of secondary offerings.

This time the company essentially sold 8,215,000 shares at roughly $1.75 coupled with warrants attached to purchase another 4,107,500 shares (at an exercise price of $2.55) for net proceeds of $13.1 mln. While the offering was structured in a somewhat more complex way to help potential buyers avoiding the 5% ownership threshold, the numbers stated above actually present the quintessence.

Two weeks ago the company released selected preliminary fiscal fourth quarter 2016 financial results (ended March 31, 2016), that once again fell short of analyst expectations, but nevertheless contained some encouraging news as Capstone reported a very strong book-to-bill ratio of 1.8:1 for the quarter. In fact this was the highest number recorded for this metric in a couple of years.

Moreover the company was able to recover $1.4 mln in bad debt and restarted shipments to its Russian distributor, that until the recent turmoil in the oil and gas industry had been one of its most important counterparties.

But despite $5.4 mln in proceeds from the company's ongoing at-the-market offering program (ATM), the company's cash balance at the end of Q4 was down to $17.0 mln from $18.5 mln reported at the end of Q3. Given that $5 mln of that balance is actually restricted under the company's credit agreements with Wells Fargo (NYSE:WFC), the cash effectively available to Capstone Turbine was just $12 mln at the end of the last quarter. It should be noted though, that there was another roughly $10 mln in additional liquidity available to the company under its Wells Fargo credit lines at the end of calendar year 2015.

So given the ongoing weak cash position, particularly in light of the potential need to support renewed revenue growth by committing additional working capital going forward, yesterday's announcement should not have come as a big surprise to investors. Supported by an ongoing recovery in the oil price and commodity markets in general, a very bullish overall stock market and the company's recent disclosure of improving order trends, the stock price almost doubled over the last few weeks on strong trading volume. On Monday the shares ended the session at a multi-month high of $2.51, a whopping 25% increase from last week's closing price.

Given the recent momentum in the shares coupled with a large increase in the average trading volume, investors might wonder why management decided to put the recent winning streak to an abrupt end instead of further utilizing the company's at-the-market offering program to place the new shares in a more gentle way to protect the share price and moreover avoid issuing free warrant sweeteners in a public offering.

In my view, this would indeed have at least been worth a try, but given that it took the company the entire Q4 to sell 4 mln shares through the ATM program, management clearly was inclined to take the somewhat unexpected chance to commence an underwritten public offering with a well known tier two investment bank in order to place a rather large amount of shares all at once.

With regard to dilution the company reported roughly 19.8 mln outstanding shares at the end of calendar year 2015. During the first three months of 2016 another 4 mln shares were issued under the ATM program. Combined with today's offering the share count will skyrocket to roughly 32 mln, a whopping 60% dilution within the last four months. At today's closing price of $1.90 the company's market capitalization of $60 mln has already tripled from recent lows.

The warrants issued as a sweetener in today's offering represent another roughly 13% potential dilution and management might very well decide to issue even more shares under the company's ATM program going forward.

In the last quarter the company obviously burned another $6.9 mln in cash when combining the $1.5 mln decrease in the reported cash balance and the $5.4 mln in net proceeds from the ongoing ATM program, so the proceeds from today's offering might not even be enough to carry Capstone Turbine through calendar year 2016.

On the other hand, recent business trends seem to have improved considerably and therefore cash burn might decrease somewhat over time. Management has stated, that the current EBITDA breakeven revenue level would be around $30 mln with efforts in place to get this threshold down to the $25 mln level. Suffice to say, potentially reaching EBITDA breakeven looks still a couple of quarters away for the company, so investors should prepare for even more dilution going forward.

While long standing Capstone Turbine investors might be already used to the company's seemingly neverending pattern of diluting its shareholders in order to make up for its equally neverending losses, investors new to the company should be cautioned here:

Capstone Turbine has been a public company for close to 16 years now and NEVER recorded a profitable quarter during this time. The company's reverse split-adjusted initial public offering price was $320 with the shares peaking at almost $2,000 closely thereafter.

The company has burned hundreds of millions in cash raised from investors on an ongoing basis over time and actually didn't exactly thrive even in the heydays of the oil price two years ago. While quarterly revenue peaked at almost double current levels at that time, the company's losses were actually even higher due to an inflated cost structure and poor management.

Unfortunately management hasn't exactly changed from that days and more or less the same people that weren't able to squeeze out a profit of the business at almost double current revenue levels, are now in charge of consolidating the business at half of its former size.

So clearly investing in Capstone Turbine is not for the faint of heart and only very risk tolerant investors should consider using the setback to take a speculative position in order to position themselves for potentially better times ahead.

Personally I decided to buy into today's carnage given the improved business prospects and the greater margin of safety now that some much needed cash has successfully been raised.

Hopefully management will use some of today's proceeds to pay down the Wells Fargo credit line in order to free up the $5 mln in currently restricted cash.

Investors might also want to take a look at my initial article on Capstone Turbine published more than six months ago after the company's ugly Q2/FY16 earnings warning. In conclusion, I encouraged investors to take a short position in the shares with the share price at roughly triple current levels at that time. This call was actually greatly rewarded and I covered my short position shortly after the company's 1:20 reverse split on November, 9.

But this time I decided to take a swing long position as a bet on improved company results as well as the potential for the stock to resume its recent momentum once the effects of today's offering have been digested by market participants. Given that as a daytrader I usually don't commit to longer term positions, this is a very rare exemption to my longstanding strategy. Investors should be cautioned that my investment track record outside of daytrading activities has been quite mixed over time, so as always don't bet the farm on a highly speculative stock like CPST and moreover protect your investment by using a stop-loss.

To make this trade work, oil prices as well as the broader market will have to show ongoing strength in order to maintain or perhaps even increase recent investor attention to the stock. Personally I am looking for CPST to ideally resume its recent upswing in short order and ascend to new pre-offering highs on ongoing strong volume. My short term price target is $3, a level at which I would consider taking potential gains off the table.

Disclosure: I am/we are long CPST.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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