Capstone Turbine - A Great Short Even At All-Time Lows

Company provides disappointing preliminary Q2/FY2020 results.\n

Despite a $5.1 million emergency capital raise in early September, cash balance declined even further with available liquidity below $9 million at quarter end.\n

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

Expect the company to aggressively sell new shares into the open market after the reverse stock split next month.\n

Equityholders are basically stuck between a rock and a hard place as they will either end up being diluted into oblivion or wiped out in bankruptcy. Get short.\n

On Thursday morning, Capstone Turbine provided investors an early look at the company's upcoming Q2/FY2020 results:

While revenue was up by 8% sequentially, the company's top line actually came in well below consensus expectations of $23.2 million.

In addition, the company's book-to-bill ratio weakened substantially quarter-over-quarter, down from 1.7:1 in Q1 to just 1.0:1, by far the weakest bookings performance over the past couple of quarters.

Lastly, the company's cash position declined by another $3.7 million sequentially despite a $5.1 million emergency capital raise in early September with net proceeds of approximately $4.6 million.

Assuming no additional sales under the company's at-the-market offering ("ATM") program with H.C. Wainwright & Co., cash usage for the quarter calculates to a whopping $8.3 million.

Keep in mind that the company is subject to a $12 million minimum liquidity covenant governing $30 million in expensive senior secured debt owed to a subsidiary of Goldman Sachs (GS).

As a result, the company's available liquidity was down to just $8.9 million at the end of last month.

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 way to avoid the covenant breach would be to raise additional cash by diluting the company's already badly-stricken shareholders even further.

Given the rather low average daily trading volume of just 337k shares, selling stock into the open market would likely not raise sufficient funds for Capstone Turbine at this point.

As the company will have to execute another reverse stock split until November 18 at the latest point to avoid being delisted from the Nasdaq Stock Market, I would expect Capstone Turbine to aggressively utilize its ATM program immediately following the reverse stock split just like it did in November 2015 after an 1:20 reverse stock split.

Unfortunately, in absence of any meaningful progress in the business over the past couple of quarters, selling more stock into the open market will only delay the inevitable by a couple of months at best.

More of the same at Capstone Turbine. The company's results remain underwhelming with cash burn staying at elevated levels and the weakest book-to-bill ratio reported over the past four quarters.

Given the urgent requirement to raise more capital, investors will have to prepare for further, outsized dilution following the upcoming reverse stock split next month.

Expect the shares to remain under heavy pressure over the next couple of weeks and to accelerate their decline following the reverse stock split due to anticipated, aggressive utilization of the company's ATM program.

Quite similar to FuelCell Energy (FCEL), common equityholders are basically stuck between a rock and a hard place as they will either end up being diluted into oblivion or wiped out in bankruptcy.

Investors should continue to avoid the shares or sell existing positions as Capstone Turbine is moving closer to bankruptcy. Even a short sale at current all-time lows should still yield decent returns.

I am/we are short 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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