Capstone Turbine - Q1/2020 Takeaways - Elevated Cash Usage Continues

Results remain largely underwhelming with substantially negative free cash flow.\n

Company has restarted selling shares into the open market.\n

At the current cash burn pace, the company will likely violate debt covenants early next year.\n

Reverse stock split looming in the not too distant future.\n

Investors should continue to avoid the shares or even sell existing positions given the ongoing cash flow challenges, upcoming reverse split and potential debt covenant violations.\n

Six months ago, I discussed implications of Capstone Turbine's expensive $30 million financing transaction with a division of Goldman Sachs with my bottom line as follows at that time:

The company actually reported negative free cash flow of $21 million for FY2019 which ended on March 31 and finished the year with $29.7 million in cash of which $12 million can't be utilized due to covenants governing the new Goldman Sachs debt.

As evidenced by the company's recent Q1/2020 results, cash usage has continued unabatedly. Free cash flow for the quarter was actually negative by $6.2 million, very much in line with Q1/2019.

As correctly predicted by me, the company re-started utilizing its $25 million at-the-market offering program ("the ATM program") with H.C. Wainwright & Co. during the quarter, selling 1.4 million shares into the open market for net proceeds of approximately $1.2 million. As of June 30, 2019, approximately $16.5 million remained available for issuance under the ATM program.

As a result, the company's overall cash position declined by $5.1 million in Q1/2020 to $24.6 million of which only $12.6 million were available to the company due to the above discussed $12 million minimum liquidity covenant with Goldman Sachs.

At the current cash burn rate, Capstone Turbine will likely violate the minimum liquidity covenant before the end of the company's fiscal year on March 31, 2020 despite a stipulated reduction to $9 million on February 4, 2020.

The only ways to avoid the covenant breach would be to either reduce cash burn or utilize the ATM program more aggressively.

Unfortunately, in absence of meaningful progress in the business over the past couple of quarters, I firmly expect the latter to be the case which would result in ongoing pressure on the company's share price.

Keep in mind that the company only has until November 18 to regain compliance with the Nasdaq's $1 minimum bid price requirement. Not surprisingly, Capstone Turbine is asking investors to approve another reverse stock split within the range from 1:5 to 1:10 on the company's upcoming general meeting on August 30.

More of the same at Capstone Turbine. The company's results remain largely underwhelming with cash burn staying at elevated level and no material improvements yet in sight.

As a result, expect the company to aggressively utilize the company's ATM program to avoid violating the minimum liquidity covenant governing the new Goldman Sachs debt.

In addition, investors need to prepare for another reverse stock split in the not too distant future with the resulting higher stock price likely causing the company to make even heavier use of its ATM facility.

Frankly speaking, there was very little in the company's Q1/2020 results and the subsequent conference call that was suited to instill renewed confidence in management's ability to finally right the ship for Capstone Turbine.

Given the issues discussed above, investors should continue to avoid the company's shares or even sell existing positions as Capstone Turbine is moving closer to potential covenant violations under its new $30 million debt facility with a division of Goldman Sachs.

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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