- FuelCell Energy Inc’s finances are going from bad to worse due to ballooning debt and increasing losses, meaning that it will likely resort to further dilution in order to stay afloat.
- The company’s prospects look far from promising given current litigation with one of its larger business partners and the recent involvement of a so-called “vulture” fund.
- We are short FCEL and see a 40% downside.
FuelCell Energy, Inc’s stock has enjoyed a remarkable run this week, increasing from less than $3.00 to more than $5.50. Daily trading volume has also been notable, averaging more than 100 million over the last three days. Nothing too surprising given the recent performance of renewable energy stocks, however, this is not the first time that FCEL has drawn our attention as shown by our short report on the company published in early January this year. Many of the red flags we pointed out then still remain and there are some new ones as well.
Outstanding shares: 239.4 million
Market Cap: $1.36 billion
FuelCell Energy Inc. is “a fuel cell power company. It designs, manufactures, operates and services Direct Fuel Cell power plants (a type of molten carbonate fuel cell), to electrochemically produce electricity and heat from a range of basic fuels including natural gas and biogas”. It was founded in 1969 as Energy Research Corporation and completed its IPO in 1992. The company primarily operates in the United States, South Korea, England, Germany, Canada, and Spain.
To say that FCEL is struggling financially would be a massive understatement. The balance sheet and consolidated financial statements on its latest 10Q (for the period ended July 31) read like a horror story. Liabilities stood at a whopping $280 million (a $63 million increase from July 31 2019), and net losses for the quarter amounted to $15.3 million (of which $4.1 million were accrued as a result of interest expenses).
FCEL makes it very clear that its debt issues are so significant that it may have to resort to “ restructuring debt or obtaining additional equity capital on terms that may be onerous or dilutive”. It appears that the company has already resorted to dilution in order to service this debt given that the number of outstanding shares has increased from less 195 million to nearly 240 million between October 2019 and September 2020.
In our previous short report we showed how the company was being “bled dry” by Hercules Capital thanks to a loan and security agreement amendments that entitled Hercules to 30% of the net proceeds of stock sales under an ATM. This in turn forced the company to issue a considerable number of outstanding shares in order to stay afloat and pay off the Hercules Capital debt. Hercules Capital is now out of the picture, but a couple of other entities have stepped in in order to provide the company with the credit it so badly needs.
After Hercules Capital’s departure, the mantle of main creditor was taken over by Orion Energy Partners. On November 6 2020, FCEL and Orion entered into a $200 million loan facility. The company made use of $80 million worth of this loan in order to service its debt with NGR Energy Inc and other third party debt. This is a clear indication that the company is in very poor shape as it shows that the it needs to regularly restructure its debts to stand any chance of servicing them. More concerning is the fact that in order to receive the initial amount of the loan, the company agreed to issue the lender 14 million warrants with an average exercise price of $0.404, which accounts for a considerable portion of the dilution that has taken place over the last 12 months. Furthermore, it appears that Orion Energy Partners is not willing to hold on to company shares, as 17.4 million shares belonging to Orion Energy Partners were registered for sale on June 30 2020 by the company. This is highly concerning as it could be an indication that Orion is not too hopeful about the company’s future prospects.
This would indicate that the pattern of dilution present under Hercules Capital financing is still the modus operandi of the company, and this is unlikely to change anytime soon given the company’s debt situation and consistent quarterly losses.
A more concerning third-party that has recently gotten involved with FCEL is none other than CVI Investments, a so-called “vulture fund” with a rather “impressive” track record as evidenced in our report on it. This fund has been involved with many tickers discussed in our reports such as INPX, TNXP and CODX just to name a few. Consequently, CVI Investments’ involvement should be somewhat concerning for long term shareholders. According to an ownership form filed on October 1 2020, CVI Investments currently holds 19 million FCEL common shares. These shares were likely purchased during the common stock offering that took place in early October when the shares belonging to Orion Energy Partners were sold.
The company is currently facing some potentially expensive litigation involving its Korean business partner POSCO Energy. Despite doing business together for over a decade, the business relation between the two companies has turned somewhat rocky recently. In February 2020, the company notified POSCO that it was in breach of license agreements. On April 27 2020, POSCO initiated a series of three arbitration demands against the Company at the International Chamber of Commerce seated in Singapore alleging certain warranty defects in a sub-megawatt conditioning facility at its facility in Pohang, South Korea and seeking combined damages.
POSCO Energy claims that it has incurred a loss of nearly 1 trillion Won ($809 million), meaning that this legal ordeal could be quite expensive for FCEL. These issues could pose a significant obstacle in FCEL’s plan to expand its Asian operations, further reducing the company’s revenues.
FCEL remains a very poor investment. The company has been financially distressed for a while and this will likely remain the case for the foreseeable future, no matter how many times it restructures its significant debt it will not be able to service it in a timely manner which will in turn result in further dilution at the expense of existing shareholders. Of particular concern is CVI Investments recent involvement, as it is a so-called “vulture” fund with an impressive track record. Add to this lawsuits with long term business partners and it would seem that the company will not be able to generate the necessary revenue to stop consistent quarterly losses and an ever ballooning debt. We are short FCEL and see a 40% downside.