Last week, I advised investors in ailing molten carbonate fuel cell power plant developer FuelCell Energy to "prepare for bankruptcy within short notice" as I viewed another amendment to the company's $21.3 million senior term loan facility with Hercules Capital (HTGC) as unlikely given recent events.
Photo: Recently reacquired Bridgeport 14.9 MW Fuel Cell Park - Source: Company Website
As it has turned out, the company managed to buy almost two additional months of time for the newly appointed restructuring officers to sort things out (emphasis added by author):
The Company has significant short-term debt and other obligations currently due or maturing in less than one year, which are in excess of the Company’s cash and current asset balance, and the Company has been delaying certain payments to conserve cash. The Company has entered into a series of amendments to its corporate loan agreement with its senior lender Hercules Capital, Inc. (“Hercules”) in order to, among other things, provide for a lower minimum cash covenant and avoid events of default and acceleration of amounts due under the loan agreement. Most recently, Hercules provided an amendment through August 9, 2019. In exchange for this new amendment, the Company has agreed to pay down a portion of the outstanding principal amount in June 2019.
That said, things continue to look beyond ugly for the company as unrestricted cash was down from $27.8 million at the end of Q1 to just $14.9 million as of April 30:
Given the Company’s current liquidity position, management expects to disclose that there is substantial doubt about the Company’s ability to continue to operate as a going concern (...).
At least, "management has plans to alleviate the substantial doubt":
These plans include exploring refinancing alternatives for the Company’s senior secured credit facility with Hercules. However, the Company may not be able to obtain such refinancing on acceptable terms, or at all. If the Company is not able to consummate such a refinancing transaction by August 9, 2019, and if Hercules is not willing to provide further accommodations, the Company could default on its obligations under its senior secured credit facility with Hercules, which would trigger additional defaults under other agreements. Other plans include implementing cost reduction measures such as the reduction in force implemented in April, increasing sales activity related to the Company’s products, and negotiating and entering into advanced technology research and development contracts. The Company may also consider licensing certain of its technology, sales of intellectual property and other assets, and/or sales of common stock directly to investors or through the Company’s at-the-market sales plan (which is subject to contractual requirements, trading windows and market conditions) to raise capital in the future.
Unfortunately, none of the measures stated by management above looks suited to really deal with the company's short-term debt and liquidity issues.
Moreover, even after recent workforce reductions and ceasing dividend payments on its 5% Series B Cumulative Convertible Perpetual Preferred Stock, quarterly cash burn from operations will still amount to approximately $9 million, way too high to support the current business model of mostly retaining fuel cell power plants in its portfolio and harvest the cash flows from the respective long-term power purchase agreements.
As stated before, I expect the newly appointed restructuring officers having a hard time to develop a sustainable business model for the company given the massive level of required upfront capital investment and large cash burn from operations. Even if all of the roughly $200 million in existing debt and preferred equity would be converted to new common stock, the company would still burn substantial amounts of cash each quarter and require hundreds of millions of additional capital to deliver on its roughly $1.3 billion in backlog.
But even liquidating the company will likely prove difficult as its power plant assets require regular maintenance and stack replacement - work that can only be performed by FuelCell Energy.
The company managed to buy two additional months of time for its newly appointed restructuring officers to sort things out in exchange for repaying another portion of its senior credit facility with Hercules Capital.
But with unrestricted cash likely down to below $10 million after being already six weeks into Q2 and a repayment under the credit facility due later this month, the company's liquidity position will be heading towards zero at the end of the quarter without raising additional funds.
The only short-term option seems to utilize the company's $50 million "At Market Issuance Sales Agreement" with B. Riley FBR (RILY) and Oppenheimer & Co. under which $42 million were still available at the end of Q1. But given stock price and trading volume, potential proceeds will likely be insufficient to provide adequate liquidity.
Given these issues, my expectations haven't really changed. I continue to expect the company to file for bankruptcy albeit somewhat later than previously anticipated based on the newly disclosed term loan amendment.
Unfortunately, even converting existing debt obligations and preferred equity into new common shares wouldn't result in a viable business model with material operating cash burn likely to continue for the foreseeable future.
Even liquidation under Chapter 7 doesn't look like an option as the company's fuel cell power plants need regular maintenance and stack replacement.
At this point, I do not see how FuelCell Energy can be restructured into a viable entity but even if a financially stronger iteration of the company might emerge, current common and preferred equityholders are unlikely to see a recovery.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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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