by Debra Fiakas CFA
Hydrogen technology developer and fuel cell producer Hydrogenics, Inc. (HYGS: Nasdaq) closed out last year ‘following on’ with new capital and new fuel cell orders. The company staged a public sale of its common stock through what is frequently referred to as a ‘follow on’ offering, coming along as this one did some years after the company’s initial public offering. The pricing of these new shares of common stock was ‘followed’ quite closely by announcement of a new order for Hydrogenics fuel cells by a forklift manufacturer in North America. The appearance of positive fundamental momentum sparked my interest because it is often the case that improved valuation sentiment can ‘follow’ a string of good news.
The company took home approximately $17.9 million in new capital (before expenses) after selling 2.4 million new shares of common stock at $7.75 per share in mid-December 2015. Management has indicated the extra money will be used to support operations while the company ramps up sales of its proprietary hydrogen fuel cell technology. In the twelve months ending September 2015, the company used $8.6 million in cash to shore up operations.
Hydrogenics was not out of money before the offering. At the end of September 2015, the company had $6.9 million in the bank. However, at the recent pace in cash usage by operations, that cash kitty would only have lasted about eight to nine months. With proceeds from the stock offering, Hydrogenics has plenty of runway to get sales up and at least reach break-even altitude.
Indeed, the order from the forklift customer is encouraging for achieving break-even. Valued at $2 million, the order requires Hydrogenics to deliver fuel cell components to a forklift manufacturer within the first quarter of 2016. The components will be installed in forklifts destined for use in warehouses owned by a ‘big box retailer’ in North America. To put the order in perspective, $2 million represents a 5% increase in sales over the company’s revenue run rate near $40 million per year. There is potential apparently for ‘follow on’ orders (there are those interesting words again) as the retailer replaces conventional forklifts with new forklifts powered by hydrogen fuel cells across its warehouse operations.
If this was the only recent order activity, Hydrogenics situation might not be as interesting. In November 2015, the company won supply agreements from an unspecified number of Chinese electric vehicle manufacturers for its hydrogen fuel cell and fueling station solutions. Hydrogenics did reveal that one of the relationships is with Yutong, China’s largest bus manufacturer. While it is a bit worrisome that the company was not a bit more forthcoming about how many unique supply agreements were actually signed, the opportunity clear to penetrate the China market with a product that fits that country’s transportation and environmental goals.
Whichever companies have shown interest, the supply agreements involve fuel cell components for 2,000 vehicles over the next three to five years. The new relationships will evolve over time, with potential revenue near $10 million in the first year. There is potential for ‘follow on’ (there we have it again) that could lead to revenue near $100 million over the next five years.
It is possible the company ended 2015, with over $20 million in the bank, a nest egg that could support the operations are the current level of sales and spending for at least another two years. With so many sales opportunities for Hydrogenics to ‘follow on’ the cash might last quite a bit longer. What is more, Hydrogenics may have enough cash to pay down some of its debt, which totaled $12.1 million at the end of September 2015. Even more interesting might be a deployment of cash for investments in new technology or production capacity.
Shares of Hydrogenics have held up since the stock offering a few weeks ago. The stock closed the year 2015 at $8.77 on improved trading volume compared to most of the previous year. Just the same the stock price is off highs reached in late November 2015 when the stock reached a 52-week high of $12.08, making the stock as interesting as the fundamental developments in the company.
Debra Fiakas is the Managing Director of Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.
Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.