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PLUG Plug Power

Filed: 7 Nov 17, 7:00pm

.

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2017

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE TRANSITION PERIOD FROM                    TO                   

 

Commission File Number: 1-34392

 

PLUG POWER INC.

(Exact name of registrant as specified in its charter)

 

 

 

 

Delaware

 

22-3672377

(State or Other Jurisdiction of

 

(I.R.S. Employer

Incorporation or Organization)

 

Identification Number)

 

968 ALBANY SHAKER ROAD, LATHAM, NEW YORK 12110

(Address of Principal Executive Offices, including Zip Code)

 

(518) 782-7700

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non- accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

 

 

 

Large accelerated filer ☐

Accelerated filer ☒

Non-accelerated filer ☐

(Do not check if a smaller reporting company)

Smaller reporting company ☐

Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b 2 of the Exchange Act). Yes ☐ No ☒

 

The number of shares of common stock, par value of $.01 per share, outstanding as of November 8, 2017 was 228,470,294.

 

 


 

2


 

PART 1.  FINANCIAL INFORMATION

 

Item 1 — Interim Financial Statements (Unaudited)

 

Plug Power Inc. and Subsidiaries

Consolidated Balance Sheets

(In thousands, except share and per share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

    

September 30,

    

December 31,

 

 

 

2017

 

2016

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

7,957

 

$

46,014

 

Restricted cash

 

 

14,902

 

 

11,219

 

Accounts receivable

 

 

52,869

 

 

11,923

 

Inventory

 

 

44,687

 

 

29,940

 

Prepaid expenses and other current assets

 

 

12,758

 

 

11,837

 

Total current assets

 

 

133,173

 

 

110,933

 

 

 

 

 

 

 

 

 

Restricted cash

 

 

33,668

 

 

43,403

 

Property, plant, and equipment, net of accumulated depreciation of $31,075 and $29,666, respectively

 

 

8,657

 

 

8,246

 

Leased property, net of accumulated depreciation of $9,731 and $4,544, respectively

 

 

75,344

 

 

54,060

 

Goodwill

 

 

9,314

 

 

8,291

 

Intangible assets, net of accumulated amortization of $1,565 and $1,032, respectively

 

 

3,892

 

 

3,933

 

Other assets

 

 

11,635

 

 

11,966

 

Total assets

 

$

275,683

 

$

240,832

 

 

 

 

 

 

 

 

 

Liabilities, Redeemable Preferred Stock, and Stockholders’ Equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

38,650

 

$

32,112

 

Accrued expenses

 

 

8,912

 

 

8,519

 

Accrual for loss contracts related to service

 

 

 —

 

 

752

 

Deferred revenue

 

 

8,262

 

 

5,736

 

Finance obligations

 

 

23,913

 

 

14,787

 

Current portion of long-term debt

 

 

22,081

 

 

2,964

 

Other current liabilities

 

 

1,330

 

 

1,615

 

Total current liabilities

 

 

103,148

 

 

66,485

 

Deferred revenue

 

 

25,898

 

 

17,413

 

Common stock warrant liability

 

 

5,657

 

 

11,387

 

Finance obligations

 

 

35,466

 

 

29,767

 

Long-term debt

 

 

17,933

 

 

20,829

 

Other liabilities

 

 

119

 

 

241

 

Total liabilities

 

 

188,221

 

 

146,122

 

 

 

 

 

 

 

 

 

Redeemable preferred stock

 

 

 

 

 

 

 

Series C redeemable convertible preferred stock, $0.01 par value per share (aggregate involuntary liquidation preference $16,664); 10,431 shares authorized; Issued and outstanding: 2,620 at September 30, 2017 and 5,231 at December 31, 2016

 

 

709

 

 

1,153

 

Series D redeemable convertible preferred stock, $0.01 par value per share (aggregate involuntary liquidation preference $0 at September 30, 2017 and $18,500 at December 31, 2016); 5,000,000 shares authorized; Issued and outstanding: none at September 30, 2017 and 18,500 at December 31, 2016

 

 

 —

 

 

8,469

 

Stockholders’ equity:

 

 

 

 

 

 

 

Common stock, $0.01 par value per share; 750,000,000 shares authorized; Issued (including shares in treasury): 228,120,565 at September 30, 2017 and 191,723,974 at December 31, 2016

 

 

2,282

 

 

1,917

 

Additional paid-in capital

 

 

1,244,789

 

 

1,137,482

 

Accumulated other comprehensive income

 

 

1,958

 

 

247

 

Accumulated deficit

 

 

(1,159,185)

 

 

(1,051,467)

 

Less common stock in treasury: 582,328 at September 30, 2017 and  December 31, 2016

 

 

(3,091)

 

 

(3,091)

 

Total stockholders’ equity

 

 

86,753

 

 

85,088

 

Total liabilities, redeemable preferred stock, and stockholders’ equity

 

$

275,683

 

$

240,832

 

 

The accompanying notes are an integral part of these unaudited interim consolidated financial statements.

 

3


 

Plug Power Inc. and Subsidiaries

Consolidated Statements of Operations

(In thousands, except share and per share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine months ended

 

 

 

September 30,

 

September 30,

 

 

    

2017

    

2016

    

2017

    

2016

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales of fuel cell systems and related infrastructure

 

$

45,179

 

$

5,653

 

$

55,936

 

$

19,992

 

Services performed on fuel cell systems and related infrastructure

 

 

5,842

 

 

4,763

 

 

16,040

 

 

15,396

 

Power Purchase Agreements

 

 

5,428

 

 

3,858

 

 

14,684

 

 

9,626

 

Fuel delivered to customers

 

 

4,850

 

 

2,909

 

 

12,327

 

 

7,557

 

Other

 

 

128

 

 

376

 

 

279

 

 

779

 

Gross revenue

 

 

61,427

 

 

17,559

 

 

99,266

 

 

53,350

 

Provision for common stock warrants

 

 

(26,057)

 

 

 —

 

 

(27,877)

 

 

 —

 

Net revenue

 

 

35,370

 

 

17,559

 

 

71,389

 

 

53,350

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales of fuel cell systems and related infrastructure

 

 

35,671

 

 

4,241

 

 

44,398

 

 

16,182

 

Services performed on fuel cell systems and related infrastructure

 

 

5,766

 

 

4,481

 

 

17,400

 

 

16,190

 

Provision for loss contracts related to service

 

 

 —

 

 

 —

 

 

 —

 

 

(1,071)

 

Power Purchase Agreements

 

 

7,395

 

 

4,464

 

 

21,460

 

 

10,961

 

Fuel delivered to customers

 

 

5,810

 

 

3,679

 

 

15,262

 

 

9,298

 

Other

 

 

138

 

 

313

 

 

301

 

 

855

 

Total cost of revenue

 

 

54,780

 

 

17,178

 

 

98,821

 

 

52,415

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross (loss) profit

 

 

(19,410)

 

 

381

 

 

(27,432)

 

 

935

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

7,436

 

 

5,001

 

 

20,059

 

 

15,032

 

Selling, general and administrative

 

 

9,535

 

 

8,636

 

 

36,584

 

 

25,485

 

Total operating expenses

 

 

16,971

 

 

13,637

 

 

56,643

 

 

40,517

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating loss

 

 

(36,381)

 

 

(13,256)

 

 

(84,075)

 

 

(39,582)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and other expense, net

 

 

(2,724)

 

 

(2,113)

 

 

(7,112)

 

 

(3,795)

 

Change in fair value of common stock warrant liability

 

 

(1,878)

 

 

1,975

 

 

(16,454)

 

 

4,709

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss before income taxes

 

$

(40,983)

 

$

(13,394)

 

$

(107,641)

 

$

(38,668)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax benefit

 

 

 —

 

 

 —

 

 

 —

 

 

392

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to the Company

 

$

(40,983)

 

$

(13,394)

 

$

(107,641)

 

$

(38,276)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stock dividends declared and accretion of discount

 

 

(25)

 

 

(26)

 

 

(3,086)

 

 

(78)

 

Net loss attributable to common shareholders

 

$

(41,008)

 

$

(13,420)

 

$

(110,727)

 

$

(38,354)

 

Net loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

$

(0.18)

 

$

(0.07)

 

$

(0.52)

 

$

(0.21)

 

Weighted average number of common shares outstanding

 

 

225,762,535

 

 

180,375,680

 

 

212,419,634

 

 

180,261,449

 

 

The accompanying notes are an integral part of these unaudited interim consolidated financial statements.

 

 

 

4


 

Plug Power Inc. and Subsidiaries

Consolidated Statements of Comprehensive Loss

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended 

 

Nine months ended

 

 

 

September 30,

 

September 30,

 

 

    

2017

    

2016

    

2017

    

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to the Company

 

$

(40,983)

 

$

(13,394)

 

$

(107,641)

 

$

(38,276)

 

Other comprehensive income - foreign currency translation adjustment

 

 

555

 

 

23

 

 

1,711

 

 

317

 

Comprehensive loss

 

$

(40,428)

 

$

(13,371)

 

$

(105,930)

 

$

(37,959)

 

 

The accompanying notes are an integral part of these unaudited interim consolidated financial statements.

 

5


 

Plug Power Inc. and Subsidiaries

Consolidated Statement of Stockholders’ Equity

(In thousands, except share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

    

    

    

 

    

    

 

    

Accumulated

    

 

    

    

    

 

    

    

 

    

 

 

 

 

 

 

 

 

 

Additional

 

Other

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

Common Stock

 

 Paid-in

 

Comprehensive

 

Treasury Stock

 

Accumulated

 

Stockholders’

 

 

    

Shares

    

Amount

    

Capital

    

Income

    

Shares

    

Amount

    

Deficit

    

Equity

 

December 31, 2016

 

191,723,974

 

$

1,917

 

$

1,137,482

 

$

247

 

 

582,328

 

$

(3,091)

 

$

(1,051,467)

 

$

85,088

 

Net loss attributable to the Company

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(107,641)

 

 

(107,641)

 

Other comprehensive income

 

 —

 

 

 —

 

 

 —

 

 

1,711

 

 

 —

 

 

 —

 

 

 —

 

 

1,711

 

Stock-based compensation

 

101,004

 

 

 1

 

 

7,287

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

7,288

 

Stock dividend

 

48,510

 

 

 1

 

 

76

 

 

 —

 

 

 —

 

 

 —

 

 

(77)

 

 

 —

 

Public offerings, common stock, net

 

9,314,666

 

 

93

 

 

20,571

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

20,664

 

Conversion of preferred stock, Series D

 

9,548,393

 

 

96

 

 

7,682

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

7,778

 

Conversion of preferred stock, Series C

 

2,772,518

 

 

28

 

 

416

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

444

 

Stock option exercises

 

110,000

 

 

 1

 

 

39

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

40

 

Exercise of warrants, net of warrants issued

 

14,501,500

 

 

145

 

 

39,713

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

39,858

 

Provision for common stock warrants

 

 —

 

 

 —

 

 

34,532

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

34,532

 

Accretion of discount

 

 —

 

 

 —

 

 

(3,009)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(3,009)

 

September 30, 2017

 

228,120,565

 

$

2,282

 

$

1,244,789

 

$

1,958

 

 

582,328

 

$

(3,091)

 

$

(1,159,185)

 

$

86,753

 

 

 

The accompanying notes are an integral part of these unaudited interim consolidated financial statements.

6


 

Plug Power Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended

 

 

 

September 30,

 

 

    

2017

    

2016

 

Cash Flows From Operating Activities:

 

 

 

 

 

 

 

Net loss attributable to the Company

 

$

(107,641)

 

$

(38,276)

 

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

Depreciation of property, plant and equipment, and leased property

 

 

6,596

 

 

2,912

 

Amortization of intangible assets

 

 

443

 

 

443

 

Stock-based compensation

 

 

7,288

 

 

6,745

 

Amortization of debt issuance costs

 

 

496

 

 

469

 

Provision for common stock warrants

 

 

34,570

 

 

 —

 

Loss on disposal of leased property

 

 

 —

 

 

41

 

Provision for loss contracts related to service

 

 

 —

 

 

(1,071)

 

Change in fair value of common stock warrant liability

 

 

16,454

 

 

(4,709)

 

Changes in operating assets and liabilities that provide (use) cash: 

 

 

 

 

 

 

 

Accounts receivable

 

 

(40,946)

 

 

10,644

 

Inventory

 

 

(14,747)

 

 

(3,042)

 

Prepaid expenses and other assets

 

 

(590)

 

 

(3,549)

 

Accounts payable, accrued expenses, and other liabilities

 

 

6,524

 

 

7,504

 

Accrual for loss contracts related to service

 

 

(752)

 

 

(5,745)

 

Deferred revenue

 

 

11,011

 

 

(2,035)

 

Net cash used in operating activities

 

 

(81,294)

 

 

(29,669)

 

Cash Flows From Investing Activities:

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

 

(1,820)

 

 

(2,464)

 

Purchases for construction of leased property

 

 

(26,471)

 

 

(42,674)

 

Net cash used in investing activities

 

 

(28,291)

 

 

(45,138)

 

Cash Flows From Financing Activities:

 

 

 

 

 

 

 

Change in restricted cash

 

 

6,052

 

 

1,908

 

Proceeds from exercise of warrants, net of transaction costs

 

 

17,636

 

 

111

 

Proceeds from exercise of stock options

 

 

40

 

 

19

 

Payments for redemption of preferred stock

 

 

(3,700)

 

 

 —

 

Proceeds from public offerings, net of transaction costs

 

 

20,664

 

 

 —

 

Proceeds from short-term borrowing, net of transaction costs

 

 

 —

 

 

23,673

 

Principal payments on short-term borrowing

 

 

 —

 

 

(25,000)

 

Proceeds from borrowing of long-term debt, net of transaction costs

 

 

20,147

 

 

23,407

 

Principal payments on long-term debt

 

 

(4,261)

 

 

 —

 

Increase in finance obligations

 

 

14,664

 

 

29,242

 

Net cash provided by financing activities

 

 

71,242

 

 

53,360

 

Effect of exchange rate changes on cash

 

 

286

 

 

(28)

 

Decrease in cash and cash equivalents

 

 

(38,057)

 

 

(21,475)

 

Cash and cash equivalents, beginning of period

 

 

46,014

 

 

63,961

 

Cash and cash equivalents, end of period

 

$

7,957

 

$

42,486

 

Other Supplemental Cash Flow Information:

 

 

 

 

 

 

 

Cash paid for interest

 

$

2,357

 

$

1,563

 

 

 

 

 

 

 

 

 

Summary of noncash financing activity-conversions of preferred stock to common stock:

 

$

8,222

 

 

 —

 

 

The accompanying notes are an integral part of these unaudited interim consolidated financial statements.

 

 

7


 

Table of Contents

Notes to Interim Consolidated Financial Statements (Unaudited)

1.  Nature of Operations

 

Description of Business

 

Plug Power Inc., or the Company, is a leading provider of alternative energy technology focused on the design, development, commercialization and manufacture of hydrogen fuel cell systems used primarily for the material handling and stationary power market.

 

We are focused on proton exchange membrane, or PEM, fuel cell and fuel processing technologies, fuel cell/battery hybrid technologies, and associated hydrogen storage and dispensing infrastructure from which multiple products are available. A fuel cell is an electrochemical device that combines hydrogen and oxygen to produce electricity and heat without combustion. Hydrogen is derived from hydrocarbon fuels such as liquid petroleum gas, or LPG, natural gas, propane, methanol, ethanol, gasoline or biofuels. Plug Power develops complete hydrogen delivery, storage and refueling solutions for customer locations. Hydrogen can also be obtained from the electrolysis of water, or produced on‑site at consumer locations through a process known as reformation. Currently the Company obtains hydrogen by purchasing it from fuel suppliers for resale to customers.

 

We provide and continue to develop commercially-viable hydrogen and fuel cell product solutions to replace lead‑acid batteries in material handling vehicles and industrial trucks for some of the world’s largest distribution and manufacturing businesses. We are focusing our efforts on industrial mobility applications (forklifts and electric industrial vehicles) at multi‑shift high volume manufacturing and high throughput distribution sites where our products and services provide a unique combination of productivity, flexibility and environmental benefits. Additionally, we manufacture and sell fuel cell products to replace batteries and diesel generators in stationary backup power applications. These products prove valuable with telecommunications, transportation and utility customers as robust, reliable and sustainable power solutions. Our current products and services include:

GenDrive: GenDrive is our hydrogen fueled PEM fuel cell system providing power to material handling vehicles;

GenFuel:  GenFuel is our hydrogen fueling delivery system;

GenCare: GenCare is our ongoing maintenance program for GenDrive fuel cells, GenSure products and GenFuel products;

GenSure:  GenSure (formerly ReliOn) is our stationary fuel cell solution providing scalable, modular PEM fuel cell power to support the backup and grid-support power requirements of the telecommunications, transportation, and utility sectors;

GenKey: GenKey is our turn-key solution combining either GenDrive or GenSure with GenFuel and GenCare, offering complete simplicity to customers transitioning to fuel cell power;

ProGen:  ProGen is our fuel cell engine technology, under development for use in mobility and stationary fuel cell systems; and

GenFund: GenFund is a collaboration with leasing organizations to provide cost efficient and seamless financing solutions to customers.

We provide our products worldwide through our direct product sales force, and by leveraging relationships with original equipment manufacturers, or OEMs, and their dealer networks.

We were organized as a corporation in the State of Delaware on June 27, 1997.

 

8


 

Table of Contents

Notes to Interim Consolidated Financial Statements (Unaudited) (continued)

Unless the context indicates otherwise, the terms “Company,” “Plug Power,” “we,” “our” or “us” as used herein refers to Plug Power Inc. and its subsidiaries.

 

Liquidity

 

Our cash requirements relate primarily to working capital needed to operate and grow our business, including funding operating expenses, growth in inventory to support both shipments of new units and servicing the installed base, growth in equipment leased to customers under long-term arrangements, funding the growth in our GenKey “turn-key” solution, which includes the installation of our customers’ hydrogen infrastructure as well as delivery of the hydrogen fuel,  continued development and expansion of our products, payment of lease obligations under sale/leaseback financings, and the repayment or refinancing of our long-term debt. Our ability to achieve profitability and meet future liquidity needs and capital requirements will depend upon numerous factors, including the timing and quantity of product orders and shipments; attaining and expanding positive gross margins across all product lines; the timing and amount of our operating expenses; the timing and costs of working capital needs; the timing and costs of building a sales base; the ability of our customers to obtain financing to support commercial transactions; our ability to obtain financing arrangements to support the sale or leasing of our products and services to customers and to repay or refinance our long-term debt, and the terms of such agreements that may require us to pledge or restrict substantial amounts of our cash to support these financing arrangements; the timing and costs of developing marketing and distribution channels; the timing and costs of product service requirements; the timing and costs of hiring and training product staff; the extent to which our products gain market acceptance; the timing and costs of product development and introductions; the extent of our ongoing and new research and development programs; and changes in our strategy or our planned activities. If we are unable to fund our operations with positive cash flows and cannot obtain external financing, we may not be able to sustain future operations.  As a result, we may be required to delay, reduce and/or cease our operations and/or seek bankruptcy protection.

 

We have experienced and continue to experience negative cash flows from operations and net losses.  The Company incurred net losses attributable to common shareholders of $110.7 million for the nine months ended September  30, 2017 and $57.6 million, $55.8 million, and $88.6 million for the years ended December 31, 2016, 2015, and 2014, respectively, and has an accumulated deficit of $1.2 billion at September 30, 2017.

 

During the nine  months ended September 30, 2017, cash used in operating activities was $81.3 million, consisting primarily of a net loss attributable to the Company of $107.6 million and net outflows from fluctuations in working capital and other assets and liabilities of $39.5 million, offset by the impact of noncash charges/gains of $65.8 million. The changes in working capital primarily were related to building of inventory and, an increase in accounts receivable offset by an increase of accounts payable, and increases in deferred revenue. As of September 30, 2017, we had cash and cash equivalents of $8.0 million and net working capital of $30.0 million. By comparison, at December 31, 2016, we had cash and cash equivalents of $46.0 million and net working capital of $44.4 million.

 

Net cash used in investing activities for the nine months ended September 30, 2017, totaled $28.3 million and included purchases of property, plant and equipment and outflows associated with materials, labor, and overhead necessary to construct new leased property. Cash outflows related to equipment that we sell and equipment we lease directly to customers are included in net cash used in operating activities and net cash used in investing activities, respectively. Net cash provided by financing activities for the nine months ended September  30, 2017 totaled $71.2 million and primarily resulted from net proceeds of $20.7 million pursuant to public offerings of common stock, net proceeds from borrowing of long-term debt of $20.6 million, net proceeds of $17.6 million pursuant to exercise of warrants, an increase in finance obligations of $14.7 million and a decrease in restricted cash, offset by redemption of Series D preferred stock and principal payments of long-term debt. 

 

In connection with the consummation of the Walmart Transaction Agreement referenced in Note 5, Wal-Mart Stores, Inc. Transaction Agreement, the Company entered into a master lease agreement (the “Wells Fargo MLA”) with Wells Fargo to facilitate the Company’s commercial transactions with Walmart. Pursuant to the Wells Fargo MLA, the Company sells fuel cell systems and hydrogen infrastructure to Wells Fargo and then leases them back and operates them at Walmart sites.  Also, in connection with the consummation of the Amended Loan Agreement referenced in Note

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Notes to Interim Consolidated Financial Statements (Unaudited) (continued)

8, Long-Term Debt, the Company entered into an amended and restated master lease agreement (the “Generate Capital MLA”) with Generate Capital to facilitate the aforementioned Company’s commercial transactions with Walmart. During July 2017, proceeds from transactions under this program, which are accounted for as capital leases, were $17.7 million. 

 

In previous years, the Company signed sale/leaseback agreements with various financial institutions to facilitate the Company’s commercial transactions with key customers. The Company had sold certain fuel cell systems and hydrogen infrastructure to the financial institutions, and leased the equipment back to support certain customer locations and to fulfill its varied PPAs.  In connection with these operating leases, the financial institutions require the Company to maintain cash balances in restricted accounts securing the Company’s lease obligations. Cash received from customers under the PPAs is used to make lease payments.  As the Company performs under these agreements, the required restricted cash balances are released, according to a set schedule. The total remaining lease payments to financial institutions under these agreements was $36.0 million, which has been fully secured with restricted cash and pledged service escrows.

 

We have historically funded our operations primarily through public and private offerings of common and preferred stock, as well as short-term borrowings, long-term debt, project financing and warrant exercises.  The Company believes that its current working capital and cash anticipated to be generated from future operations, as well as borrowings from lending and project financing sources and proceeds from equity offerings, will provide sufficient liquidity to fund operations for at least one year after the date that the financial statements are issued. There is no guarantee that future funding will be available if and when required or at terms acceptable to the Company.  This projection is based on our current expectations regarding new project financing and product sales and service, cost structure, cash burn rate and other operating assumptions.

 

2.  Summary of Significant Accounting Policies

 

Principles of Consolidation

 

The accompanying unaudited interim consolidated financial statements include the financial statements of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

 

Interim Financial Statements

 

The accompanying unaudited interim consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). In the opinion of management, all adjustments, which consist solely of normal recurring adjustments, necessary to present fairly, in accordance with U.S. generally accepted accounting principles (GAAP), the financial position, results of operations and cash flows for all periods presented, have been made. The results of operations for the interim periods presented are not necessarily indicative of the results that may be expected for the full year.

 

Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with GAAP have been condensed or omitted. These unaudited interim consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K, filed for the fiscal year ended December 31, 2016.

 

The information presented in the accompanying unaudited interim consolidated balance sheet as of December 31, 2016, has been derived from the Company’s December 31, 2016 audited consolidated financial statements. All other information has been derived from the unaudited interim consolidated financial statements of the Company.

 

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Notes to Interim Consolidated Financial Statements (Unaudited) (continued)

Revenue Recognition

 

The Company recognizes revenue under arrangements for products and services, which may include the sale of products and related services, including revenue from installation, service and maintenance, spare parts, hydrogen fueling services (which may include hydrogen supply as well as hydrogen fueling infrastructure) and leased units. The Company also recognizes revenue under research and development contracts, which are primarily cost reimbursement contracts associated with the development of PEM fuel cell technology.

 

The Company enters into revenue arrangements that may contain a combination of fuel cell systems and infrastructure, installation, service, maintenance, spare parts, and other support services. Revenue arrangements containing fuel cell systems and related infrastructure may be sold, or provided to customers under a PPA.

 

Sales of and Services Performed on Fuel Cell Systems and Related Infrastructure

 

When sold to customers, the Company accounts for each separate deliverable of these multiple deliverable arrangements as a separate unit of accounting if the delivered item or items have value to the customer on a standalone basis. The Company considers a deliverable to have standalone value if the item is sold separately by us or another entity or if the item could be resold by the customer. The Company allocates revenue to each separate deliverable based on its relative selling price. For a majority of our deliverables, the Company determines relative selling prices using its best estimate of the selling price since vendor-specific objective evidence and third-party evidence is generally not available for the deliverables involved in its revenue arrangements due to a lack of a competitive environment in selling fuel cell technology. When determining estimated selling prices, the Company considers the cost to produce the deliverable, a reasonable gross margin on that deliverable, the selling price and profit margin for similar products and services, the Company’s ongoing pricing strategy and policies, the value of any enhancements that have been built into the deliverable and the characteristics of the varying markets in which the deliverable is sold, as applicable. The Company determines estimated selling prices for deliverables in its arrangements based on the specific facts and circumstances of each arrangement and analyzes the estimated selling prices used for its allocation of consideration of each arrangement.

 

Once relative selling prices are determined, the Company proportionately allocates the sale consideration to each element of the arrangement. The allocated sales consideration related to fuel cell systems and infrastructure, spare parts, and hydrogen infrastructure is recognized as revenue at shipment if title and risk of loss have passed to the customer, there is persuasive evidence of an arrangement, the sales price is fixed or determinable, collection of the related receivable is reasonably assured, and customer acceptance criteria, if any, have been successfully demonstrated. The allocated sales consideration related to service and maintenance is generally recognized as revenue on a straight-line basis over the term of the contract, as appropriate.

 

For those customers who do not purchase an extended maintenance contract, the Company does not include a right of return on its products other than rights related to standard warranty provisions that permit repair or replacement of defective goods. The Company accrues for anticipated standard warranty costs at the same time that revenue is recognized for the related product.  Only a limited number of fuel cell units are under standard warranty.

 

In a vast majority of its commercial transactions, the Company sells extended maintenance contracts that generally provide for a five to ten year warranty from the date of product installation. These types of contracts are accounted for as a separate deliverable, and accordingly, revenue generated from these transactions is deferred and recognized in income over the warranty period, generally on a straight-line basis. Additionally, the Company may enter into annual service and extended maintenance contracts that are billed monthly. Revenue generated from these transactions is recognized in income on a straight-line basis over the term of the contract. Costs are recognized as incurred over the term of the contract.  When costs are projected to exceed revenues on the life of the contract, an accrual for loss contracts is recorded.  Costs are estimated based upon historical experience, contractual agreements and the estimated impact of the Company’s cost reduction initiatives.  The actual results may differ from these estimates.

 

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Notes to Interim Consolidated Financial Statements (Unaudited) (continued)

Power Purchase Agreements

 

When fuel cell systems and related infrastructure are provided to customers through a Power Purchase Agreement, or PPA, revenues associated with these agreements are treated as rental income and recognized on a straight-line basis over the life of the agreements.  In conjunction with entering into a PPA with a customer, the Company may enter into sale/leaseback transactions with third-party financial institutions, whereby the fuel cells, related infrastructure, and service are sold to the third-party financial institution and leased back to the Company through either an operating or capital lease.

 

During 2017 and 2016, the Company’s sale/leaseback transactions with third-party financial institutions were required to be accounted for as capital leases under Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Subtopic 840-40, Leases – Sale/Leaseback Transactions (ASC Subtopic 840-40).  As a result, no upfront revenue was recognized at the closing of these transactions and a finance obligation for each lease was established.  The fuel cell systems and related infrastructure that are provided to customers through these PPAs are considered leased property on the accompanying unaudited interim consolidated balance sheet.  Costs to service the leased property and the depreciation of the associated fuel cell systems and related infrastructure are considered cost of PPA revenue on the accompanying unaudited interim consolidated statement of operations.

 

All PPAs entered into through December 31, 2015 had a corresponding sale-leaseback transaction with a third-party financial institution, which was required to be accounted for as an operating lease.  The Company accounts for these sale/leaseback transactions as operating leases in accordance with ASC Subtopic 840-40.  The Company has rental expense associated with sale/leaseback agreements with financial institutions that were entered into commensurate with the PPAs.  Rental expense is recognized on a straight-line basis over the life of the agreements and is characterized as cost of PPA revenue on the accompanying unaudited interim consolidated statement of operations.

 

Fuel Delivered to Customers

 

The Company purchases hydrogen fuel from suppliers and sells to its customers upon delivery.  Revenue and cost of revenue related to this fuel is recorded as dispensed, and included in the respective “Fuel delivered to customers” lines on the unaudited interim consolidated statements of operations.

 

Research and Development Contracts

 

Contract accounting is used for research and development contract revenue. The Company generally shares in the cost of these programs with cost sharing percentages ranging from 30% to 50% of total project costs. Revenue from time and material contracts is recognized on the basis of hours expended plus other reimbursable contract costs incurred during the period and is included within the “other” revenue line on the unaudited interim consolidated statement of operations. All allowable work performed through the end of each calendar quarter is billed, subject to limitations in the respective contracts.

 

Cash Equivalents

 

Cash equivalents consist of money market accounts with an initial term of less than three months. At September 30, 2017 and December 31, 2016, cash equivalents consist of money market accounts.  For purposes of the unaudited interim consolidated statements of cash flows, the Company considers all highly-liquid debt instruments with original maturities of three months or less to be cash equivalents.  The Company’s cash and cash equivalents are deposited with financial institutions located in the U.S. and may at times exceed insured limits.

 

Common Stock Warrant Accounting

 

The Company accounts for common stock warrants as either derivative liabilities or as equity instruments depending on the specific terms of the warrant agreement.

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Notes to Interim Consolidated Financial Statements (Unaudited) (continued)

 

Derivative Liabilities

 

Registered common stock warrants that require the issuance of registered shares upon exercise and do not sufficiently preclude an implied right to cash settlement are accounted for as derivative liabilities. We currently classify these derivative warrant liabilities on the accompanying unaudited interim consolidated balance sheets as a long-term liability, which are revalued at each balance sheet date subsequent to the initial issuance, using the Black-Scholes pricing model. This pricing model, which is based, in part, upon unobservable inputs for which there is little or no market data, requires the Company to develop its own assumptions. Changes in the fair value of the warrants are reflected in the accompanying unaudited interim consolidated statements of operations as change in fair value of common stock warrant liability.

 

Equity Instruments

 

Common stock warrants that meet certain applicable requirements of ASC Subtopic 815-40, Derivatives and Hedging – Contracts in Entity’s Own Equity, and other related guidance, including the ability of the Company to settle the warrants without the issuance of registered shares or the absence of rights of the grantee to require cash settlement, are accounted for as equity instruments. The Company classifies these equity instruments within additional paid-in capital on the accompanying unaudited interim consolidated balance sheets. Common stock warrants accounted for as equity instruments represent the warrants issued to Amazon.com, Inc. and Wal-Mart Stores, Inc. as discussed in Notes 4 and 5.  These warrants are remeasured at each financial reporting date prior to vesting, using the Monte Carlo pricing model.  Once these warrants vest, they are no longer remeasured.  This pricing model, which is based, in part, upon unobservable inputs for which there is little or no market data, requires the Company to develop its own assumptions. Changes in fair value resulting from remeasurement of common stock warrants issued in connection with the Amazon Transaction Agreement and the Walmart Transaction Agreement, as described in Notes 4 and 5, Amazon.com, Inc. Transaction Agreement and Wal-Mart Stores, Inc. Transaction Agreement, respectively, and are recorded as cumulative catch up adjustments as a reduction of revenue.

 

Use of Estimates

 

The unaudited interim consolidated financial statements of the Company have been prepared in conformity with U.S. generally accepted accounting principles, which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited interim consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Reclassifications

 

Reclassifications are made, whenever necessary, to prior period financial statements to conform to the current period presentation.  These reclassifications did not have a net impact the results of operations or net cash flows in the periods presented.

 

Recent Accounting Pronouncements

 

In July 2017, an accounting update was issued to address narrow issues identified as a result of the complexity associated with applying generally accepted accounting principles (GAAP) for certain financial instruments with characteristics of liabilities and equity. This update addresses the complexity of accounting for certain financial

instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. The Company early adopted this accounting update during the three months ended June 30, 2017. The adoption of this accounting update was considered in determining that warrants issued during the second quarter of 2017 (see note 4) were equity classified.

 

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Notes to Interim Consolidated Financial Statements (Unaudited) (continued)

In May 2017, an accounting update was issued to provide clarity and reduce both diversity in the practice and cost and complexity when applying the guidance under Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 718, Compensation-Stock Compensation, to a change to the terms or conditions of a share-based payment award.  The amendments in this update provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting.  This accounting update is effective for annual periods and interim periods within those annual periods, beginning after December 15, 2017.  Early adoption is permitted, including adoption in any interim period. The amendments in this update should be applied prospectively to an award modified on or after the adoption date.

 

In January 2017, an accounting update was issued to simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test.  Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. This accounting update is effective for years beginning after December 15, 2019.  Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is evaluating the impact this update will have on the consolidated financial statements.

 

In November 2016, an accounting update was issued to reduce the existing diversity in the classification and presentation of changes in restricted cash on the statement of cash flows. This accounting update is effective for years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company is evaluating the impact this update will have on the consolidated financial statements.

 

In October 2016, an accounting update was issued to simplify how an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs.  Consequently, the amendments in this update eliminate the exception for an intra-entity transfer of an asset other than inventory.  Two common examples of assets included in the scope of this update are intellectual property and property, plant, and equipment.  This accounting update is effective for the annual periods beginning after December 15, 2017 and interim periods within those years.  The Company does not expect the adoption of this update to have a significant effect on the consolidated financial statements.

 

In August 2016, an accounting update was issued to reduce the existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows.  This accounting update is effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period.  The Company is evaluating the impact this update will have on the consolidated financial statements.

 

In February 2016, an accounting update was issued which requires balance sheet recognition for operating leases, among other changes to previous lease guidance.  This accounting update is effective for fiscal years beginning after December 15, 2018.  The Company is evaluating the impact this update will have on the consolidated financial statements.

 

In June 2014, an accounting update was issued that replaces the existing revenue recognition framework regarding contracts with customers.  In July 2015, the FASB announced a one year delay in the required adoption date from January 1, 2017 to January 1, 2018.  The Company has established an internal implementation team to oversee the adoption of the new standard.  To date the Company has identified relevant arrangements and performance obligations and does not believe adoption of the standard will have a significant impact on the timing and amount of revenue recognized, as well as the amount of revenue allocated to the identified performance obligations.  The Company anticipates providing further information about the impacts of adoption at year end.  The Company is planning on accounting for the transition using the modified retrospective basis method.

 

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Notes to Interim Consolidated Financial Statements (Unaudited) (continued)

3.  Earnings Per Share

 

Basic earnings per common share are computed by dividing net loss attributable to common shareholders by the weighted average number of common shares outstanding during the reporting period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock (such as stock options, unvested restricted stock, common stock warrants, and preferred stock) were exercised or converted into common stock or resulted in the issuance of common stock (net of any assumed repurchases) that then shared in the earnings of the Company, if any. This is computed by dividing net earnings by the combination of dilutive common share equivalents, which is comprised of shares issuable under outstanding warrants, the conversion of preferred stock, and the Company’s share-based compensation plans, and the weighted average number of common shares outstanding during the reporting period. Since the Company is in a net loss position, all common stock equivalents would be considered to be anti-dilutive and are, therefore, not included in the determination of diluted earnings per share. Accordingly, basic and diluted loss per share are the same.

 

The dilutive potential common shares are summarized as follows:

 

 

 

 

 

 

 

 

 

At September 30,

 

 

    

2017

 

2016

    

Stock options outstanding (1)

 

19,965,599

 

14,982,570

 

Restricted stock outstanding

 

248,077

 

26,667

 

Common stock warrants (2)

 

115,824,242

 

4,000,100

 

Preferred stock (3)

 

2,782,075

 

5,554,594

 

Number of dilutive potential common shares

 

138,819,993

 

24,563,931

 


(1)

During the three months ended September 30, 2017 and 2016, the Company granted 5,030,000 and 3,312,500 stock options, respectively.  During the nine months ended September 30, 2017 and 2016, the Company granted 5,480,863 and 3,592,500 stock options, respectively.

 

(2)

In February 2013, the Company issued 23,637,500 warrants as part of an underwritten public offering with an exercise price of $0.15 per warrant.  Of these warrants issued in February 2013, 100 were unexercised as of September 30, 2017 and 2016.

 

In January 2014, the Company issued 4,000,000 warrants as part of an underwritten public offering with an exercise price of $4.00 per warrant. In December 2016, as a result of additional public offerings, and pursuant to the effect of the anti-dilution provisions of these warrants, the exercise price of the $4.00 warrants was reduced to $0.65. Of these warrants issued in January 2014, all 4,000,000 warrants were exercised during the three months ended June 30, 2017,  as described in Note 10, Stockholders’ Equity.    

 

In December 2016, the Company issued 10,501,500 warrants as part of two concurrent underwritten public offerings with an exercise price of $1.50 per warrant.  Of these warrants issued in December 2016, none and all 10,501,500 warrants were exercised during the three and nine months ended September 30, 2017, respectively, as described in Note 10, Stockholders’ Equity.

 

In April 2017, the Company issued 5,250,750 warrants with an exercise price of $2.69 per warrant, as described in Note 10, Stockholders’ Equity.  Of these warrants issued in April 2017, none have been exercised as of September 30, 2017.

 

In April 2017, the Company issued warrants to acquire up to 55,286,696 of the Company’s common stock as part of a transaction agreement, subject to certain vesting events, as described in Note 4, Amazon.com, Inc. Transaction Agreement.  The first tranche of 5,819,652 warrant shares vested upon the execution of the transaction agreement.  Of these warrants issued in April 2017, none have been exercised as of September 30, 2017.

 

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Notes to Interim Consolidated Financial Statements (Unaudited) (continued)

In July 2017, the Company issued warrants to acquire up to 55,286,696 of the Company’s common stock as part of a transaction agreement, subject to certain vesting events, as described in Note 5, Wal-Mart Stores, Inc. Transaction Agreement.  The first tranche of 5,819,652 warrant shares vested upon the execution of the transaction agreement.  Of these warrants issued in July 2017, none have been exercised as of September 30, 2017.

 

(3)

The preferred stock amount represents the dilutive potential common shares of the Series C redeemable convertible preferred stock, based on the conversion price of the preferred stock as of September 30, 2017 and 2016, respectively.  Of the 10,431 Series C redeemable preferred stock issued in May 16, 2013, 5,200 and 2,611 had been converted to common stock during the year ended December 31, 2014 and the three months ended September 30, 2017,  respectively, with the remainder still outstanding.  Of the 18,500 Series D redeemable convertible preferred stock issued on December 22, 2016, 3,700 shares have been redeemed and the remaining 14,800 have been converted to common stock during the nine months ended September 30, 2017.

   

 

4. Amazon.com, Inc. Transaction Agreement

 

On April 4, 2017, the Company and Amazon.com, Inc. (“Amazon”) entered into a Transaction Agreement (the “Amazon Transaction Agreement”), pursuant to which the Company agreed to issue to Amazon.com NV Investment Holdings LLC, a wholly owned subsidiary of Amazon, warrants to acquire up to 55,286,696 shares of the Company’s common stock (the “Amazon Warrant Shares”), subject to certain vesting events described below. The Company and Amazon entered into the Amazon Transaction Agreement in connection with existing commercial agreements between the Company and Amazon with respect to the deployment of the Company’s GenKey fuel cell technology at Amazon distribution centers. The existing commercial agreements contemplate, but do not guarantee, future purchase orders for the Company’s fuel cell technology. Additionally, Amazon and Plug Power will begin working together on technology collaboration, exploring the expansion of applications for Plug Power’s line of ProGen fuel cell engines.  The vesting of the Amazon Warrant Shares is linked to payments made by Amazon or its affiliates (directly or indirectly through third parties) pursuant to the existing commercial agreements.

 

The majority of the Amazon Warrant Shares will vest based on Amazon’s payment of up to $600.0 million to the Company in connection with Amazon’s purchase of goods and services from the Company. The first tranche of 5,819,652 Amazon Warrant Shares vested upon the execution of the Amazon Transaction Agreement.  Accordingly, $6.7 million, the fair value of the first tranche of Amazon Warrant Shares, was recognized as selling, general and administrative expense on the accompanying unaudited interim consolidated statement of operations for the nine months ended September 30, 2017. The second tranche of 29,098,260 Amazon Warrant Shares will vest in four installments of 7,274,565 Amazon Warrant Shares each time Amazon or its affiliates, directly or indirectly through third parties, make an aggregate of $50.0 million in payments for goods and services to the Company, up to payments totaling $200.0 million in the aggregate. The exercise price for the first and second tranches of Amazon Warrant Shares will be $1.1893 per share. After Amazon has made payments to the Company totaling $200.0 million, the third tranche of 20,368,784 Amazon Warrant Shares will vest in eight installments of 2,546,098 Amazon Warrant Shares each time Amazon or its affiliates, directly or indirectly through third parties, make an aggregate of $50.0 million in payments for goods and services to the Company, up to payments totaling $400.0 million in the aggregate. The exercise price of the third tranche of Amazon Warrant Shares will be an amount per share equal to ninety percent (90%) of the 30-day volume weighted average share price of the common stock as of the first vesting date of the second tranche of Amazon Warrant Shares. The Amazon Warrant Shares are exercisable through April 4, 2027.

 

The Amazon Warrant Shares provide for net share settlement that, if elected by the holders, will reduce the number of shares issued upon exercise to reflect net settlement of the exercise price. The Amazon Warrant Shares provide for certain adjustments that may be made to the exercise price and the number of shares of common stock issuable upon exercise due to customary anti-dilution provisions based on future events.  These warrants are classified as equity instruments.

 

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Notes to Interim Consolidated Financial Statements (Unaudited) (continued)

Because the Amazon Warrant Shares contain performance criteria (i.e. aggregate purchase levels), which Amazon must achieve for the Amazon Warrant Shares to vest, as detailed above, the final measurement date for the Amazon Warrant Shares is the date on which the Amazon Warrant Shares vest. Prior to the final measurement, when achievement of the performance criteria has been deemed probable, the estimated fair value of Amazon Warrant Shares is being recorded as a reduction to revenue and an addition to additional paid-in capital based on the projected number of Amazon Warrant Shares expected to vest, the proportion of purchases by Amazon and its affiliates within the period relative to the aggregate purchase levels required for the Amazon Warrant Shares to vest and the then-current fair value of the related Amazon Warrant Shares. To the extent that projections change in the future as to the number of Amazon Warrant Shares that will vest, as well as changes in the fair value of the Amazon Warrant Shares, a cumulative catch-up adjustment will be recorded in the period in which the estimates change.

 

At September 30, 2017, 5,819,652 of the Amazon Warrant Shares have vested.  The amount of selling, general and administrative expense attributed to this first tranche recorded in April 2017, was $7.1 million, including legal and other fees associated with the negotiation and completion of the agreement.  The amount of provision for common stock warrants recorded as a reduction of revenue during the three and nine months ended September 30, 2017 was $14.2 million and $16.1 million, respectively.    

 

5. Wal-Mart Stores, Inc. Transaction Agreement

 

On July 20, 2017, the Company and Wal-Mart Stores, Inc. (“Walmart”) entered into a Transaction Agreement (the “Walmart Transaction Agreement”), pursuant to which the Company agreed to issue to Walmart a warrant to acquire up to 55,286,696 shares of the Company’s common stock, subject to certain vesting events (the “Walmart Warrant Shares”). The Company and Walmart entered into the Walmart Transaction Agreement in connection with existing commercial agreements between the Company and Walmart with respect to the deployment of the Company’s GenKey fuel cell technology across various Walmart distribution centers. The existing commercial agreements contemplate, but do not guarantee, future purchase orders for the Company’s fuel cell technology. The vesting of the warrant shares, is linked to payments made by Walmart or its affiliates (directly or indirectly through third parties) pursuant to transactions entered into after January 1, 2017 under existing commercial agreements.

 

The majority of the Walmart Warrant Shares will vest based on Walmart’s payment of up to $600.0 million to the Company in connection with Walmart’s purchase of goods and services from the Company. The first tranche of 5,819,652 Walmart Warrant Shares vested upon the execution of the Walmart Transaction Agreement.  Accordingly, $10.9 million, the fair value of the first tranche of Walmart Warrant Shares, was recorded as a provision for  common stock warrants and presented as a reduction to revenue on the accompanying unaudited interim consolidated statement of operations for the three and nine month periods ended September 30, 2017. The second tranche of 29,098,260 Walmart Warrant Shares will vest in four installments of 7,274,565 Walmart Warrant Shares each time Walmart or its affiliates, directly or indirectly through third parties, make an aggregate of $50.0 million in payments for goods and services to the Company, up to payments totaling $200.0 million in the aggregate. The exercise price for the first and second tranches of Walmart Warrant Shares will be $2.1231 per share. After Walmart has made payments to the Company totaling $200.0 million, the third tranche of 20,368,784 Walmart Warrant Shares will vest in eight installments of 2,546,098 Walmart Warrant Shares each time Walmart or its affiliates, directly or indirectly through third parties, make an aggregate of $50.0 million in payments for goods and services to the Company, up to payments totaling $400.0 million in the aggregate. The exercise price of the third tranche of Walmart Warrant Shares will be an amount per share equal to ninety percent (90%) of the 30-day volume weighted average share price of the common stock as of the first vesting date of the second tranche of Walmart Warrant Shares, provided that, with limited exceptions, the exercise price for the third tranche will be no lower than $1.1893. The Walmart Warrant Shares are exercisable through July 20, 2027.

 

The Walmart Warrant Shares provide for net share settlement that, if elected by the holders, will reduce the number of shares issued upon exercise to reflect net settlement of the exercise price. The Walmart Warrant Shares provide for certain adjustments that may be made to the exercise price and the number of shares of common stock issuable upon exercise due to customary anti-dilution provisions based on future events.  These warrants are classified as equity instruments.

17


 

Table of Contents

Notes to Interim Consolidated Financial Statements (Unaudited) (continued)

 

Because the Walmart Warrant Shares contain performance criteria (i.e. aggregate purchase levels), which Walmart must achieve for the Walmart Warrant Shares to vest, as detailed above, the final measurement date for the Walmart Warrant Shares is the date on which the Walmart Warrant Shares vest. Prior to the final measurement, when achievement of the performance criteria has been deemed probable, the estimated fair value of Walmart Warrant Shares is being recorded as a reduction to revenue and an addition to additional paid-in capital based on the projected number of Walmart Warrant Shares expected to vest, the proportion of purchases by Walmart and its affiliates within the period relative to the aggregate purchase levels required for the Walmart Warrant Shares to vest and the then-current fair value of the related Walmart Warrant Shares. To the extent that projections change in the future as to the number of Walmart Warrant Shares that will vest, as well as changes in the fair value of the Walmart Warrant Shares, a cumulative catch-up adjustment will be recorded in the period in which the estimates change.

 

At September 30, 2017, 5,819,652 of the Walmart Warrant Shares have vested.  The amount of provision for common stock warrants recorded as a reduction to revenue during the three and nine months ended September 30, 2017 was  $11.8 million.  

 

6.  Inventory

 

Inventory as of September 30, 2017 and December 31, 2016 consists of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

    

September 30, 2017

    

December 31, 2016

 

Raw materials and supplies

 

$

37,282

 

$

26,298

 

Work-in-process

 

 

4,082

 

 

1,865

 

Finished goods

 

 

3,323

 

 

1,777

 

 

 

$

44,687

 

$

29,940

 

 

Raw materials and supplies include spare parts inventory held at service locations valued at $5.8 million and $3.3  million as of September 30, 2017 and December 31, 2016, respectively.

 

 

7. Leased Property

 

Leased property at September 30, 2017 and December 31, 2016 consists of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

    

September 30,

    

December 31,

 

 

 

2017

 

2016

 

Leased property

 

$

85,075

 

$

58,604

 

Less: accumulated depreciation

 

 

(9,731)

 

 

(4,544)

 

Leased property, net

 

$

75,344

 

$

54,060

 

 

Depreciation expense related to leased property was $1.9 million and $0.9 million for the three months ended September 30, 2017 and 2016, respectively.  Depreciation expense related to leased property was $5.2 million and $1.6 million for the nine months ended September 30, 2017 and 2016, respectively.

 

8.  Long-Term Debt

 

NY Green Bank Loan

 

On December 23, 2016, the Company, and its subsidiaries Emerging Power Inc. and Emergent Power Inc. entered into a loan and security agreement with NY Green Bank, a Division of the New York State Energy Research & Development Authority (NY Green Bank), pursuant to which NY Green Bank made available to the Company a secured term loan facility in the amount of $25.0 million (Term Loan Facility), subject to certain terms and conditions.  The Company borrowed $25.0 million upon closing and incurred costs of $1.2 million.  On July 21, 2017, the Company and

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Table of Contents

Notes to Interim Consolidated Financial Statements (Unaudited) (continued)

NY Green Bank entered into an amendment to the Term Loan Facility (Amended Loan Agreement), which among other things, provided for an additional $20.0 million term loan, increasing the size of the total commitment to $45.0 million, amended the interest rate, prepayment penalty (for any prepayment in the calendar year 2017 or 2018, a prepayment charge equal to 7.5% of the advance amount being prepaid) and product deployment and employment targets.  The maturity date of the Amended Loan Agreement will remain at December 23, 2019.  As with the existing facility, the up-sized facility will be repaid primarily as the Company’s various restricted cash reserves are released over the term of the facility. During the three months ended September 2017, the Company borrowed the additional $20.0 million of working capital financing and incurred closing costs of $0.5 million. At September 30, 2017, the outstanding principal balance under the Term Loan Facility was $40.8 million.  The fair value of the Term Loan Facility approximates the carrying value as of September 30, 2017. 

 

Advances under the Term Loan Facility bear interest at a rate equal to the sum of (i) the LIBOR rate for the applicable interest period, plus applicable margin of 9.5%.  The interest rate at September 30, 2017 was approximately 10.8%.  The term of the loan is three years, with a maturity date of December 23, 2019.  As of September 30, 2017, estimated remaining principal payments will be approximately $8.0 million, $19.1 million, and $13.7 million during the remainder of the year ended December 31, 2017, and years ending December 31, 2018, and 2019, respectively.  These payments will be funded by restricted cash released, as described in Note 14, Commitments and Contingencies.

 

Interest and a varying portion of the principal amount is payable on a quarterly basis and the entire then outstanding principal balance of the Term Loan Facility, together with all accrued and unpaid interest, is due and payable on the maturity date.  On the maturity date, the Company may also be required to pay additional fees of up to $1.8 million if the Company is unable to meet certain goals related to the deployment of fuel cell systems in the State of New York and increasing the Company’s number of full-time employees in the State of New York.  The Company is currently on track to meet those goals.

 

9.  Accrual for Loss Contracts Related to Service

 

The following table summarizes activity related to the accrual for loss contracts related to service during the nine months ended September 30, 2017 and 2016, respectively (in thousands):

 

 

 

 

 

 

 

 

 

 

Nine months ended

 

 

September 30, 2017

 

September 30, 2016

Beginning balance 

 

$

752

 

$

10,050

    Change in estimate

 

 

 —

 

 

(1,071)

    Reductions for losses realized

 

 

(752)

 

 

(5,745)

Ending balance 

 

$

 —

 

$

3,234

 

 

10.  Stockholders’ Equity

 

Exercise of Common Stock Warrants

 

On December 22, 2016, the Company issued 10,501,500 warrants in connection with offerings of common stock and Series D Redeemable Preferred Stock at an exercise price of $1.50 per share.  On April 12, 2017, the Company and Tech Opportunities LLC (“Tech Opps”) entered into an agreement, pursuant to which Tech Opps exercised in full its warrants to purchase an aggregate of 10,501,500 shares of common stock, at an exercise price of $1.50 per share.  The net proceeds received by the Company pursuant to the exercise of the existing warrants was $15.1 million and the Company issued to Tech Opps warrants to acquire up to 5,250,750 shares of common stock at an exercise price of $2.69  per share.  The warrants were exercisable as of October 12, 2017 and will expire on October 12, 2019. The warrants are subject to anti-dilution provisions in the event of issuance of additional shares of common stock and certain other conditions, as further described in the warrant agreement.

 

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Table of Contents

Notes to Interim Consolidated Financial Statements (Unaudited) (continued)

During April 2017, the 4,000,000 warrants issued in January 2014 as part of an underwritten public offering with Heights Capital Management Inc., were exercised in full to purchase an aggregate of 4,000,000 shares of the Company’s common stock, at an exercise price of $0.65 per share. The aggregate cash exercise price paid to the Company pursuant to the exercise of the warrants was $2.6 million.

 

Pursuant to the exercises of the above warrants, additional paid-in capital was increased $27.1 million and warrant liability reduced by $27.1 million.

 

At Market Issuance Sales Agreement

 

On April 3, 2017, the Company entered into an At Market Issuance Sales Agreement (the “Sales Agreement”) with FBR Capital Markets & Co., as sales agent (“FBR”), pursuant to which the Company may offer and sell, from time to time through FBR, shares of common stock par value $0.01 per share having an aggregate offering price of up to $75.0 million.  During 2017, the Company has issued 9,314,666 shares of common stock and raised net proceeds, after accruals, underwriting discounts and commissions and other fees and expenses, of $20.7 million, pursuant to the Sales Agreement.

 

11.  Redeemable Convertible Preferred Stock

 

In December 2016, the Company completed an offering of an aggregate of 18,500 shares of the Company’s Series D Redeemable Preferred Stock, par value $0.01 per share (the “Series D Preferred Stock”) to purchase 7,381,500 shares of the Company’s common stock, par value $0.01 per share (the “Common Stock”), resulting in aggregate proceeds of approximately $15.6 million.  During the nine months ended September 30, 2017, the Company redeemed 3,700 shares of the Series D Preferred Stock, at an aggregate redemption price of approximately $3.7 million.  On April 5, 2017, all of the remaining outstanding shares of the Series D Preferred Stock were converted into an aggregate of 9,548,393 shares of the Company’s common stock at a conversion price of $1.55.  The conversion was done at the election of the holder in accordance with the terms of the offering. No shares of Series D Preferred Stock remain outstanding.

 

On January 26, 2017, Air Liquide sold an aggregate of 2,620 shares of the Company’s Series C Redeemable Preferred Stock, par value $0.01 per share (the “Series C Preferred Stock”) to FiveT Capital Holding AG and FiveMore Special Situations Fund Limited.  Following the sale, Air Liquide owned 2,611 shares of Series C Preferred Stock, Five T Capital Holding AG owns 1,750 shares of Series C Preferred Stock and FiveMore Special Situations Fund Limited owns 870 shares of Series C Preferred Stock. On August 28, 2017, Air Liquide acquired 2,772,518 shares of Common Stock by converting all 2,611 shares of Series C Preferred Stock at the conversion price of $0.2343.  Following the conversion, Five T Capital Holding AG and FiveMore Special Situations Fund Limited continue to own 1,750 and 870 shares of Series C Preferred Stock, respectively.  

 

12.  Income Taxes

The deferred tax asset generated from the Company’s net operating loss has been offset by a full valuation allowance because it is more likely than not that the tax benefits of the net operating loss carry forward will not be realized. The Company also recognizes accrued interest and penalties related to unrecognized tax benefits, if any, as a component of income tax expense.

During the nine months ended September 30, 2016, the Company released its liability for unrecognized tax benefits of $392 thousand, as the related statute of limitations has expired.

 

13.  Fair Value Measurements

 

Derivative Liabilities

 

The Company’s common stock warrant liability represents the only asset or liability classified financial

20


 

Table of Contents

Notes to Interim Consolidated Financial Statements (Unaudited) (continued)

instrument measured at fair value on a recurring basis in the unaudited interim consolidated balance sheets.  The fair value measurement is determined by using Level 3 inputs due to the lack of active and observable markets that can be used to price identical assets.  Level 3 inputs are unobservable inputs and should be used to determine fair value only when observable inputs are not available.  Unobservable inputs should be developed based on the best information available in the circumstances, which might include internally generated data and assumptions being used to price the asset or liability.

 

Fair value of the common stock warrant liability is based on the Black-Scholes pricing model which is based, in part, upon unobservable inputs for which there is little or no market data, requiring the Company to develop its own assumptions.

 

The Company used the following assumptions for its liability-classified common stock warrants:

 

 

 

 

 

 

 

 

Nine months ended

 

 

September 30, 2017

 

September 30, 2016

Risk-free interest rate

 

1.01% - 2.01%

 

0.68%  - 0.77%

Volatility

 

62.00% - 108.77%

 

59.60% - 60.60%

Expected average term

 

0.39 - 5.23

 

1.39 - 2.29

 

There was no expected dividend yield for the warrants granted.

 

If factors change and different assumptions are used, the warrant liability and the change in estimated fair value could be materially different. Generally, as the market price of our common stock increases, the fair value of the warrants increase, and conversely, as the market price of our common stock decreases, the fair value of the warrants decrease. Also, a significant increase in the volatility of the market price of the Company’s common stock, in isolation, would result in significantly higher fair value measurements; and a significant decrease in volatility would result in significantly lower fair value measurements.

 

The following table shows the activity in the common stock warrant liability (in thousands):

 

 

 

 

 

 

 

 

 

 

 

Nine months ended

 

Common stock warrant liability

 

September 30, 2017

    

September 30, 2016

 

Beginning of period

 

$

11,387

 

$

5,735

 

Change in fair value of common stock warrants

 

 

16,454

 

 

(4,709)

 

Issuance of common stock warrants

 

 

4,905

 

 

 —

 

Exercise of common stock warrants

 

 

(27,089)

 

 

(141)

 

End of period

 

$

5,657

 

$

885

 

 

 

Equity Instruments

 

The fair value measurement of the Company’s equity-classified common stock warrants is determined by using Level 3 inputs due to the lack of active and observable markets that can be used to price identical assets.  Level 3 inputs are unobservable inputs and should be used to determine fair value only when observable inputs are not available.  Unobservable inputs should be developed based on the best information available in the circumstances, which might include internally generated data and assumptions being used to price the warrants.

 

Fair value of the equity-classified common stock warrants is based on the Monte Carlo pricing model which is based, in part, upon unobservable inputs for which there is little or no market data, requiring the Company to develop its own assumptions.

 

 The Monte Carlo pricing models used in the determination of the fair value of the equity-classified warrants also incorporate assumptions involving future revenues associated with Amazon and Walmart, and related timing.  The

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Table of Contents

Notes to Interim Consolidated Financial Statements (Unaudited) (continued)

Company used the following assumptions for its equity-classified common stock warrants:

 

 

 

 

 

 

 

 

Nine months ended

 

 

September 30, 2017

 

September 30, 2016

Risk-free interest rate

 

2.30% - 2.36%

 

 —

Volatility

 

85.00% - 90.00%

 

 —

Expected average term

 

9.51 - 10.00

 

 —

 

There was no expected dividend yield for the warrants granted.

 

The following table represents the fair value per warrant on the execution date of the transaction agreements and as of September 30, 2017:

 

 

 

 

 

 

 

 

Amazon Warrant Shares

 

Walmart Warrant Shares

Issuance date - first tranche

$

1.15

$

1.88

As of period end - second tranche

 

2.29

 

2.25

 

 

 

14.  Commitments and Contingencies

 

Operating Leases

 

As of September 30, 2017 and December 31, 2016, the Company has several non-cancelable operating leases (as lessor and as lessee), primarily associated with sale/leaseback transactions that are partially secured by restricted cash (see also Note 1) as summarized below.  These leases expire over the next six years. Minimum rent payments under operating leases are recognized on a straight‑line basis over the term of the lease.  Leases where the Company is the lessor contain termination clauses with associated penalties, the amount of which cause the likelihood of cancelation to be remote.

 

Future minimum lease payments under non-cancelable operating leases (with initial or remaining lease terms in excess of one year) as of September 30, 2017 are (in thousands):

 

 

 

 

 

 

 

 

 

    

As Lessor

    

As Lessee

Remainder of 2017

 

$

5,585

 

$

3,271

2018

 

 

22,339

 

 

12,920

2019

 

 

22,143

 

 

11,789

2020

 

 

20,987

 

 

10,633

2021

 

 

16,751

 

 

6,346

2022 and thereafter

 

 

8,639

 

 

1,962

Total future minimum lease payments

 

$

96,444

 

$

46,921

 

Rental expense for all operating leases was $3.4 million and $3.7 for the three months ended September 30, 2017 and 2016, respectively.  Rental expense for all operating leases was $9.9 million and $10.1 for the nine months ended September 30, 2017 and 2016, respectively. 

 

At September 30, 2017 and December 31, 2016, prepaid rent and security deposits associated with sale/leaseback transactions were $11.4 million and $11.8 million, respectively.  At September 30, 2017, $1.8 million of the amount is included in prepaid expenses and other current assets and $9.6 million was included in other assets on the unaudited interim consolidated balance sheet.  At December 31, 2016, $1.9 million of this amount was included in prepaid expenses and other current assets and $9.9 million was included in other assets on the consolidated balance sheet.

 

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Table of Contents

Notes to Interim Consolidated Financial Statements (Unaudited) (continued)

Finance Obligations

 

During the nine months ended September 30, 2017, the Company entered into a sale/leaseback transaction, which was accounted for as a capital lease and reported as part of finance obligations on the Company’s unaudited interim consolidated balance sheet.  The outstanding balance of finance obligations related to sale/leaseback transactions at September 30, 2017 was $45.9 million.  The fair value of the finance obligation approximates the carrying value as of September 30, 2017.

 

Future minimum lease payments under non-cancelable capital leases related to sale/leaseback transactions (with initial or remaining lease terms in excess of one year) as of September 30, 2017 are (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

Imputed

 

Net Present

 

    

Payments

    

Interest

    

Value

Remainder of  2017

 

$

12,389

 

$

1,501

 

$

10,888

2018

 

 

14,632

 

 

2,916

 

 

11,716

2019

 

 

5,540

 

 

2,078

 

 

3,462

2020

 

 

5,540

 

 

1,668

 

 

3,872

2021

 

 

5,540

 

 

1,199

 

 

4,341

2022 and thereafter

 

 

13,058

 

 

1,418

 

 

11,640

Total future minimum lease payments

 

$

56,699

 

$

10,780

 

$

45,919

 

In prior years, the Company received cash for future services to be performed associated with certain sale/leaseback transactions and recorded the balance as a finance obligation.  The outstanding balance of this obligation at September 30, 2017 and December 31, 2016 is $11.1 million and $12.8 million, respectively.  The amount is amortized using the effective interest method.  The fair value of this finance obligation approximates the carrying value as of September 30, 2017.

 

The Company has a capital lease associated with its property in Latham, New York.  Liabilities relating to this agreement of $2.3 million and $2.4 million have been recorded as a finance obligation, in the accompanying unaudited interim consolidated balance sheets as of September 30, 2017 and December 31, 2016, respectively.  The fair value of this finance obligation approximates the carrying value as of September 30, 2017.

 

Restricted Cash

 

The Company has entered into sale/leaseback agreements associated with its products and services.  In connection with these agreements, cash of $47.6 million is required to be restricted as security and will be released over the lease term. The Company has additional letters of credit backed by security deposits as disclosed in the Operating Leases section above.

 

The Company also has letters of credit in the aggregate amount of $1.0 million associated with an agreement to provide hydrogen infrastructure and hydrogen to a customer at its distribution center and with a finance obligation from the sale/leaseback of its building.  Cash collateralizing these letters of credit is also considered restricted cash.

 

Litigation

 

Legal matters are defended and handled in the ordinary course of business.  The Company has established accruals for matters for which management considers a loss to be probable and reasonably estimable. It is the opinion of management that facts known at the present time do not indicate that such litigation, after taking into account insurance coverage and the aforementioned accruals, will have a material adverse impact on our results of operations, financial position, or cash flows.

 

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Table of Contents

Notes to Interim Consolidated Financial Statements (Unaudited) (continued)

Concentrations of credit risk

 

Concentrations of credit risk with respect to receivables exist due to the limited number of select customers with whom the Company has initial commercial sales arrangements. To mitigate credit risk, the Company performs appropriate evaluation of a prospective customer’s financial condition.

 

At September 30, 2017, one customer comprises approximately 87.1% of the total accounts receivable balance.  At December 31, 2016, two customers comprise approximately 59.9% of the total accounts receivable balance.

 

For the nine months ended September 30, 2017, 84.0% of total consolidated revenues were associated primarily with two customers. For the nine months ended September 30, 2016, 41.7% of total consolidated revenues were associated primarily with one customer.  

 

 

 

 

 

 

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Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion should be read in conjunction with our accompanying unaudited interim consolidated financial statements and notes thereto included within this report, and our audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K, filed for the fiscal year ended December 31, 2016.  In addition to historical information, this Form 10-Q and the following discussion contain statements that are not historical facts and are considered forward-looking within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. These forward-looking statements contain projections of our future results of operations or of our financial position or state other forward-looking information. In some cases you can identify these statements by forward-looking words such as “anticipate,” “believe,” “could,” “continue,” “estimate,” “expect,” “intend,” “may,” “should,” “will,” “would,” “plan,” “projected” or the negative of such words or other similar words or phrases. We believe that it is important to communicate our future expectations to our investors. However, there may be events in the future that we are not able to accurately predict or control and that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. Investors are cautioned not to unduly rely on forward-looking statements because they involve risks and uncertainties, and actual results may differ materially from those discussed as a result of various factors, including, but not limited to: the risk that we continue to incur losses and might never achieve or maintain profitability; the risk that we will need to raise additional capital to fund our operations and such capital may not be available to us; the risk that our lack of extensive experience in manufacturing and marketing products may impact our ability to manufacture and market products on a profitable and large-scale commercial basis; the risk that unit orders will not ship, be installed and/or converted to revenue, in whole or in part; the risk that a loss of one or more of our major customers could result in a material adverse effect on our financial condition; the risk that a sale of a significant number of shares of stock could depress the market price of our common stock; the risk that negative publicity related to our business or stock could result in a negative impact on our stock value and profitability; the risk of potential losses related to any product liability claims or contract disputes; the risk of loss related to an inability to maintain an effective system of internal controls; our ability to attract and maintain key personnel; the risks related to the use of flammable fuels in our products; the risk that pending orders may not convert to purchase orders, in whole or in part; the cost and timing of developing, marketing and selling our products and our ability to raise the necessary capital to fund such costs; our ability to obtain financing arrangements to support the sale or leasing of our products and services to customers; the ability to achieve the forecasted gross margin on the sale of our products; the cost and availability of fuel and fueling infrastructures for our products; the risk of elimination of government subsidies and economic incentives for alternative energy products; market acceptance of our products and services, including GenDrive units; our ability to establish and maintain relationships with third parties with respect to product development, manufacturing, distribution and servicing and the supply of key product components; the cost and availability of components and parts for our products; our ability to develop commercially viable products; our ability to reduce product and manufacturing costs; our ability to successfully market, distribute and service our products and services internationally; our ability to improve system reliability for our products; competitive factors, such as price competition and competition from other traditional and alternative energy companies; our ability to protect our intellectual property; the cost of complying with current and future federal, state and international governmental regulations; the risks associated with potential future acquisitions; the volatility of our stock price; and other risks and uncertainties discussed under Item IA—Risk Factors in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016, as filed March 10, 2017.  Readers should not place undue reliance on our forward-looking statements. These forward-looking statements speak only as of the date on which the statements were made and are not guarantees of future performance. Except as may be required by applicable law, we do not undertake or intend to update any forward-looking statements after the date of this Form 10-Q.

 

Overview

 

Plug Power Inc., or the Company, is a leading provider of alternative energy technology focused on the design, development, commercialization and manufacture of hydrogen fuel cell systems used primarily for the material handling and stationary power market.

 

We are focused on proton exchange membrane, or PEM, fuel cell and fuel processing technologies, fuel cell/battery hybrid technologies, and associated hydrogen storage and dispensing infrastructure from which multiple products are available. A fuel cell is an electrochemical device that combines hydrogen and oxygen to produce electricity and heat without combustion. Hydrogen is derived from hydrocarbon fuels such as liquid petroleum gas, or LPG, natural gas, propane, methanol, ethanol, gasoline or biofuels. Plug Power develops complete hydrogen delivery, storage and

25


 

refueling solutions for customer locations. Hydrogen can also be obtained from the electrolysis of water, or produced on-site at consumer locations through a process known as reformation.  Currently the Company obtains hydrogen by purchasing it from fuel suppliers for resale to customers.

 

We provide and continue to develop commercially-viable hydrogen and fuel cell product solutions to replace lead‑acid batteries in material handling vehicles and industrial trucks for some of the world’s largest distribution and manufacturing businesses. We are focusing our efforts on industrial mobility applications (forklifts and electric industrial vehicles) at multi‑shift high volume manufacturing and high throughput distribution sites where our products and services provide a unique combination of productivity, flexibility and environmental benefits. Additionally, we manufacture and sell fuel cell products to replace batteries and diesel generators in stationary backup power applications. These products prove valuable with telecommunications, transportation and utility customers as robust, reliable and sustainable power solutions. Our current products and services include:

GenDrive: GenDrive is our hydrogen fueled PEM fuel cell system providing power to material handling vehicles;

GenFuel:  GenFuel is our hydrogen fueling delivery system;

GenCare: GenCare is our ongoing maintenance program for GenDrive fuel cells, GenSure products and GenFuel products;

GenSure:  GenSure (formerly ReliOn) is our stationary fuel cell solution providing scalable, modular PEM fuel cell power to support the backup and grid-support power requirements of the telecommunications, transportation, and utility sectors;

GenKey: GenKey is our turn-key solution combining either GenDrive or GenSure with GenFuel and GenCare, offering complete simplicity to customers transitioning to fuel cell power;

ProGen:  ProGen is our fuel cell engine technology, under development for use in mobility and stationary fuel cell systems; and

GenFund: GenFund is a collaboration with leasing organizations to provide cost efficient and seamless financing solutions to customers.

We provide our products worldwide through our direct product sales force, and by leveraging relationships with original equipment manufacturers, or OEMs, and their dealer networks.

 

 

 

 

 

26


 

Results of Operations

Revenue, cost of revenue, gross (loss)/profit and gross margin for the three and nine months ended September 30, 2017 and 2016, were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

Nine Months Ended

 

 

 

 

September 30,

 

 

 

September 30,

 

 

    

 

Net

    

Cost of

    

Gross

    

Gross

 

 

 

Net

    

Cost of

    

Gross

    

Gross

 

 

 

Revenue

 

Revenue

 

(Loss)/Profit

 

Margin

 

 

Revenue

 

Revenue

 

(Loss)/Profit

 

Margin

 

For the periods ended September 30, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales of fuel cell systems and related infrastructure

 

$

45,179

 

$

35,671

 

$

9,508

 

21.0

%

 

$

55,936

 

$

44,398

 

$

11,538

 

20.6

%

Services performed on fuel cell systems and related infrastructure

 

 

5,842

 

 

5,766

 

 

76

 

1.3

%

 

 

16,040

 

 

17,400

 

 

(1,360)

 

(8.5)

%

Power Purchase Agreements

 

 

5,428

 

 

7,395

 

 

(1,967)

 

(36.2)

%

 

 

14,684

 

 

21,460

 

 

(6,776)

 

(46.1)

%

Fuel delivered to customers

 

 

4,850

 

 

5,810

 

 

(960)

 

(19.8)

%

 

 

12,327

 

 

15,262

 

 

(2,935)

 

(23.8)

%

Other

 

 

128

 

 

138

 

 

(10)

 

(7.8)

%

 

 

279

 

 

301

 

 

(22)

 

(7.9)

%

Provision for common stock warrants

 

 

(26,057)

 

 

 —

 

 

(26,057)

 

 —

 

 

 

(27,877)

 

 

 —

 

 

(27,877)

 

 —

 

Total

 

$

35,370

 

$

54,780

 

$

(19,410)

 

(54.9)

%

 

$

71,389

 

$

98,821

 

$

(27,432)

 

(38.4)

%

For the periods ended September 30, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales of fuel cell systems and related infrastructure

 

$

5,653

 

$

4,241

 

$

1,412

 

25.0

%

 

$

19,992

 

$

16,182

 

$

3,810

 

19.1

%

Services performed on fuel cell systems and related infrastructure

 

 

4,763

 

 

4,481

 

 

282

 

5.9

%

 

 

15,396

 

 

16,190

 

 

(794)

 

(5.2)

%

Power Purchase Agreements

 

 

3,858

 

 

4,464

 

 

(606)

 

(15.7)

%

 

 

9,626

 

 

10,961

 

 

(1,335)

 

(13.9)

%

Fuel delivered to customers

 

 

2,909

 

 

3,679

 

 

(770)

 

(26.5)

%

 

 

7,557

 

 

9,298

 

 

(1,741)

 

(23.0)

%

Other

 

 

376

 

 

313

 

 

63

 

16.8

%

 

 

779

 

 

855

 

 

(76)

 

(9.8)

%

Provision for loss contracts related to service

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 

 —

 

 

(1,071)

 

 

1,071

 

 —

 

Total

 

$

17,559

 

$

17,178

 

$

381

 

2.2

%

 

$

53,350

 

$

52,415

 

$

935

 

1.8

%

 

Our primary sources of revenue are from sales of fuel cell systems and related infrastructure, services performed on fuel cell systems and related infrastructure, PPAs, and fuel delivered to customers.  Revenue from sales of fuel cell systems and related infrastructure represents sales of our GenDrive units, GenSure stationary backup power units, as well as hydrogen fueling infrastructure. Revenue from services performed on fuel cell systems and related infrastructure represents revenue earned on our service and maintenance contracts and sales of spare parts.  Revenue from PPAs primarily represents payments received from customers who make monthly payments to access the Company’s GenKey solution.  Revenue associated with fuel delivered to customers represents the sale of hydrogen to customers that has been purchased by the Company from a third party.

 

Revenue – sales of fuel cell systems and related infrastructure. Revenue from sales of fuel cell systems and related infrastructure represents revenue from the sale of our fuel cells, such as GenDrive units and GenSure stationary backup power units, as well as hydrogen fueling infrastructure referred to at the site level as hydrogen installations.

Revenue from sales of fuel cell systems and related infrastructure for the three months ended September 30, 2017 increased $39.5 million or 699.2%, to $45.2 million from $5.7 million for the three months ended September 30, 2016. There were 2,239 units recognized as revenue for the three months ended September 30, 2017, compared to 189 for the

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three months ended September 30, 2016.  The significant increase in revenue relates to eight sites deployed during the 3rd quarter of 2017. An additional 337 units were shipped during the three months ended September 30, 2017 and held as leased assets. As such, the Company will recognize revenue on these units over the life of the related PPA under “Power Purchase Agreements” in the Consolidated Statement of Operations. The eight sites also had hydrogen installations during the three months ended September 30, 2017.  In addition, one additional site was constructed and held as leased assets. There was one sale associated with hydrogen installations for the three months ended September 30, 2016. In addition, three additional sites were constructed and held as leased property during the three months ended September 30, 2016, also because they were associated with sale/leaseback transactions accounted for capital leases.

 

Revenue from sales of fuel cell systems and related infrastructure for the nine months ended September 30, 2017 increased $35.9 million, or 179.8%, to $55.9 million from $20.0 million for the nine months ended September 30, 2016.  The main driver for the increased revenue is related to the 3rd quarter deployment volume as well as a few other smaller sites. There were 2,580 units recognized as revenue for the nine months ended September 30, 2017, compared to 603 for the nine months ended September 30, 2016. An additional 1,265 units were shipped during the nine months ended September 30, 2017 and held as leased assets. As such, the Company will recognize revenue on these units over the life of the related PPA under “Power Purchase Agreements” in the Consolidated Statement of Operations. Ten sales associated with hydrogen installations occurred during the nine months ended September 30, 2017.  In addition, five additional sites were constructed and held as leased assets. There were four sales associated with hydrogen installations for the nine months ended September 30, 2016.  In addition, nine additional sites were constructed and held as leased property during the nine months ended September 30, 2016, also because they were associated with sale/leaseback transactions accounted for as capital leases.

 

Revenue – services performed on fuel cell systems and related infrastructure.  Revenue from services performed on fuel cell systems and related infrastructure represents revenue earned on our service and maintenance contracts and sales of spare parts.  At September 30, 2017, there were 10,670 fuel cell units and 40 hydrogen installations under extended maintenance contracts, increases of 23.1% and 48.1% from 8,665 and 27 at September 30, 2016, respectively.

 

Revenue from services performed on fuel cell systems and related infrastructure for the three months ended September 30, 2017 increased $1.1 million, or 22.7%, to $5.8 million from $4.8 million for the three months ended September 30, 2016. The positive change is related to higher number of fuel cell units as well as related infrastructure being serviced than compared to the comparable quarter in the prior year.

 

Revenue from services performed on fuel cell systems and related infrastructure for the nine months ended September 30, 2017 increased $644 thousand, or 4.2%, to $16.0 million from $15.4 million for the nine months ended September 30, 2016. The increase in service revenues was not as significant as the increase in number of units under service contracts due to less billable incidents and nonrecurring revenue.

 

Revenue – Power Purchase Agreements.  Revenue from PPAs represents payments received from customers for power generated through the provision of equipment and service.  The equipment and service can be associated with sale/leaseback transactions in which the Company sells fuel cell systems and related infrastructure to a third-party, leases them back and operates them at customers’ locations who are parties to PPAs with the Company.  Alternatively, the Company can retain the equipment as leased property and provide it to customers under PPAs.  At September 30, 2017, there were 30 GenKey sites associated with PPAs, as compared to 23 at September 30, 2016.

 

Power Purchase Agreements for the three months ended September 30, 2017 increased $1.6 million, or 40.7%, to $5.4 million from $3.9 million for the three months ended September 30, 2016. The increase is due to the increased number of sites the Company has deployed with these types of arrangements.

 

Power Purchase Agreements for the nine months ended September 30, 2017 increased $5.1 million, or 52.5%, to $14.7 million from $9.6 million for the nine months ended September 30, 2016. The increase is due to the increased number of sites the Company has deployed with these types of arrangements.

 

Revenue – fuel delivered to customers.  Revenue associated with fuel delivered to customers represents the sale of hydrogen to customers that has been purchased by the Company from a third party.  As part of the GenKey solution, the Company contracts with fuel suppliers to purchase liquid hydrogen, which is then sold to its customers.  At September

28


 

30, 2017, there were 55 sites associated with fuel contracts, as compared to 35 at September 30, 2016.  The sites generally are the same as those which had purchased hydrogen installations within the GenKey solution.

 

Revenue associated with fuel delivered to customers for the three months ended September 30, 2017 increased $1.9 million, or 66.7%, to $4.9 million from $2.9 million for the three months ended September 30, 2016. The increase in revenue is due to an increase of sites taking fuel deliveries at September 30, 2017, compared to September 30, 2016.

 

Revenue associated with fuel delivered to customers for the nine months ended September 30, 2017 increased $4.8 million, or 63.1%, to $12.3 million from $7.6 million for the nine months ended September 30, 2016. The increase in revenue is due to an increase of sites taking fuel deliveries at September 30, 2017, compared to September 30, 2016.

 

Revenue – other. Other revenue primarily represents cost reimbursement research and development contracts associated with the development of PEM fuel cell technology. We generally share in the cost of these programs with our cost-sharing percentages ranging from 30% to 50% of total project costs. Revenue from time and material contracts is recognized on the basis of hours expended plus other reimbursable contract costs incurred during the period. We expect to continue certain research and development contract work that is related to our current product development efforts.  Other miscellaneous revenue is recognized from time to time.

 

Other revenue for the three months ended September 30, 2017 decreased $248 thousand, or 66.0%, to $128 thousand from $376 thousand for the three months ended September 30, 2017. During the three months ended September 30, 2017, the Company’s other revenue was associated with a research & development project with the European Union. The Company had no revenue associated with a customer stack development program as it did in the three months ended September 30, 2016 which was for $125 thousand.

 

Other revenue for the nine months ended September 30, 2017 decreased $500 thousand, or 64.2%, to $279 thousand from $779 thousand for the nine months ended September 30, 2017. During the nine months ended September 30, 2017, the Company’s other revenue was associated with a research & development project with the European Union. The Company had no revenue associated with a customer stack development program as it did in the nine months ended September 30, 2016 which was for $375 thousand.

 

Revenue – provision for common stock warrants.    In 2017, the Company entered into two Transaction Agreements (the “Amazon Transaction Agreement”) with Amazon.com, Inc. (“Amazon”) and (the “Walmart Transaction Agreement”) with Wal-Mart Stores, Inc. (“Walmart”).  The Company records a portion of the estimated fair value of common stock warrants issued as part of the Amazon Transaction Agreement and the Walmart Transaction Agreement as a reduction of revenue based upon the projected number of common stock warrants expected to vest, the proportion of purchases by Amazon, Walmart and their affiliates within the period relative to the aggregate purchase levels required for the Amazon Warrant Shares and the Walmart Warrant Shares to vest and the then-current fair value of the related common stock warrants.  The amount of provision for common stock warrants  recorded as a reduction of revenue during the three and nine months ended September 30, 2017 was $26.1 million and $27.9 million, respectively.

 

Cost of revenue – sales of fuel cell systems and related infrastructure.  Cost of revenue from sales of fuel cell systems and related infrastructure includes direct materials, labor costs, and allocated overhead costs related to the manufacture of our fuel cells such as GenDrive units and GenSure stationary backup power units, as well as hydrogen fueling infrastructure referred to at the site level as hydrogen installations.

 

Cost of revenue from sales of fuel cell systems and related infrastructure for the three months ended September 30, 2017 increased 741.1%, or $31.4 million, compared to the three months ended September 30, 2016, driven by a greater number of units recognized as revenue.  Gross margin generated from sales of fuel cell systems and related infrastructure was 21.0% for the three months ended September 30, 2017, down from 25.0% for the three months ended September 30, 2016, due to product and site mix changes during the three months ended September 30, 2017 compared to the same period in 2016.

Cost of revenue from sales of fuel cell systems and related infrastructure for the nine months ended September 30, 2017 increased 174.4%, or $28.2 million, compared to the nine months ended September 30, 2016, driven by driven by the previously stated greater number of units recognized as revenue.  Gross margin generated from sales of fuel cell

29


 

systems and related infrastructure was 20.6% for the nine months ended September 30, 2017, up from 19.1% for the nine months ended September 30, 2016, due to product and site mix changes in prior 2017 quarters during the nine months ended September 30, 2017 compared to the same period in 2016.

Cost of revenue – services performed on fuel cell systems and related infrastructure. Cost of revenue from services performed on fuel cell systems and related infrastructure includes the labor, material costs and allocated overhead costs incurred for our product service and hydrogen site maintenance contracts and spare parts.  On September 30, 2017, there were 10,670 fuel cell units and 40 hydrogen installations under extended maintenance contracts, an increase of 16.8% and 48.1% from 8,665 and 27 on September 30, 2016, respectively.

Cost of revenue from services performed on fuel cell systems and related infrastructure for the three months ended September 30, 2017 increased 28.7%, or $1.3 million, to $5.8 million, compared to the three months ended September 30, 2016 of $4.5 million.  Gross margin decreased to 1.3% for the three months ended September 30, 2017 from 5.9% for the three months ended September 30, 2016.  The change versus the prior year is due to ramp up and commercialization costs associated with the launch of new configurations developed in 2016, offset by a reduction in costs resulting from changes in product configuration rolled out to new key accounts and leverage of the existing fixed costs in the field.

Cost of revenue from services performed on fuel cell systems and related infrastructure for the nine months ended September 30, 2017 increased 7.5%, or $1.2 million, to $17.4 million, compared to the nine months ended September 30, 2016 of $16.2 million.  Gross margin worsened to (8.5%) for the nine months ended September 30, 2017 from (5.2%) for the nine months ended September 30, 2016.  The change versus the prior year is due to ramp up and commercialization costs associated with the launch of new configurations developed in 2016, offset by a reduction in costs resulting from changes in product configuration rolled out to new key accounts and leverage of the existing fixed costs in the field.

Cost of revenue – Power Purchase Agreements.  Cost of revenue from PPAs includes payments made to financial institutions for leased equipment and service used to fulfill the PPAs.  Leased units are primarily associated with sale/leaseback transactions in which the Company sells fuel cell systems and related infrastructure to a third-party, leases them back, and operates them at customers’ locations who are parties to PPAs with the Company.  Alternatively, the Company can hold the equipment for investment and recognize the depreciation and service cost of the assets as cost of revenue from PPAs.  At September 30, 2017, there were 30 GenKey sites associated with PPAs, as compared to 23 at September 30, 2016.

Cost of revenue from Power Purchase Agreements for the three months ended September 30, 2017 increased $2.9 million, or 65.7%, to $7.4 million from $4.5 million for the three months ended September 30, 2016. The increase was a result of the increase in the number of customer sites party to these agreements. Gross margin declined to (36.2%) for the three months ended September 30, 2017 from (15.7%) for the three months ended September 30, 2016, due primarily to ramp up and commercialization costs incurred that are associated with the launch of new configurations in late 2016.

Cost of revenue from Power Purchase Agreements for the nine months ended September 30, 2017 increased $10.5 million, or 95.8%, to $21.5 million from $11.0 million for the nine months ended September 30, 2016. The increase was a result of the increase in the number of customer sites party to these agreements. Gross margin declined to (15.7%) for the nine months ended September 30, 2017 from (13.9%) for the nine months ended September 30, 2016, due primarily to ramp up and commercialization costs incurred that are associated with the launch of new configurations in late 2016.

Cost of revenue – fuel delivered to customers.  Cost of revenue from fuel delivered to customers represents the purchase of hydrogen from suppliers that ultimately is sold to customers.  As part of the GenKey solution, the Company contracts with fuel suppliers to purchase liquid hydrogen and separately sells to its customers upon delivery.  As of September 30, 2017, there were 55 sites under contract receiving molecule delivery, as compared to 35 at September 30, 2016.  The sites generally are the same as those which had purchased hydrogen installations within the GenKey solution.

Cost of revenue from fuel delivered to customers for the three months ended September 30, 2017 increased $2.1 million, or 57.9%, to $5.8 million from $3.7 million for the three months ended September 30, 2016.  The increase is due primarily to higher volume of liquid hydrogen delivered to customer sites as a result of an increase in the number of

30


 

hydrogen installations completed under GenKey agreements and higher fuel costs.  Gross margin percent increased to (19.8%) during the three months ended September 30, 2017 from (26.5%) during the three months ended September 30, 2016 due to improved operating dispensing efficiencies and higher fees charged to customers for new sites.

Cost of revenue from fuel delivered to customers for the nine months ended September 30, 2017 increased $6.0 million, or 64.1%, to $15.3 million from $9.3 million for the nine months ended September 30, 2016.  The increase is due primarily to higher volume of liquid hydrogen delivered to customer sites as a result of an increase in the number of hydrogen installations completed under GenKey agreements and higher fuel costs.  Gross margin percent was relatively consistent to (23.8%) during the nine months ended September 30, 2017 compared to (23.0%) during the nine months ended September 30, 2016.

Cost of revenue – other.  Other cost of revenue primarily represents costs associated with research and development contracts including: cash and non-cash compensation and benefits for engineering and related support staff, fees paid to outside suppliers for subcontracted components and services, fees paid to consultants for services provided, materials and supplies used and other directly allocable general overhead costs allocated to specific research and development contracts.

Cost of other revenue for the three months ended September 30, 2017 decreased $175 thousand, or 55.9%, to $138 thousand from $313 thousand for the nine months ended September 30, 2016.  The Company had no costs associated with a customer stack development program as it did in the three months ended September 30, 2016. The entire cost of other revenue in the period is related to the research & development project with the European Union.

Cost of other revenue for the nine months ended September 30, 2017 decreased $554 thousand, or 64.8%, to $301 thousand from $855 thousand for the nine months ended September 30, 2016.  The Company had no costs associated with a customer stack development program as it did in the nine months ended September 30, 2016. The entire cost of other revenue in the period is related to the research & development project with the European Union.

Cost of revenue – provision for loss contracts related to service.     In 2015, the Company recognized a $10.1 million provision for loss contracts related to service. This provision represents extended maintenance contracts that have projected costs over the remaining life of the contracts that exceed contractual revenues.  During the three and nine months ended September 30, 2017 and 2016, the Company did not have a provision for loss contracts related to service.   During the three and nine months ended September 30, 2016, the Company renegotiated one of its service contracts and replaced 96 of the older fuel cell systems in service at that particular customer.  As a result, the projected costs over the remaining life of the amended contract were estimated to be reduced as compared to the previous estimate, resulting in a lower necessary accrual.  The change in estimate was recorded as a  gain within cost of revenue where the original charge was recorded.  

Research and development expense. Research and development expense includes: materials to build development and prototype units, cash and non-cash compensation and benefits for the engineering and related staff, expenses for contract engineers, fees paid to consultants for services provided, materials and supplies consumed, facility related costs such as computer and network services, and other general overhead costs associated with our research and development activities.

Research and development expense for the three months ended September  30, 2017 increased $2.4 million, or 48.7% to $7.4 million, from $5.0 million for the three months ended September  30, 2016.  This increase was primarily related to an increase in development of ProGen, and personnel related expenses from higher headcount, focused on refinement of hydrogen infrastructure design, multiple product cost-down programs and prototyping for stack performance enhancement.

Research and development expense for the nine months ended September 30, 2017 increased $5.0 million, or 33.4% to $20.1 million, from $15.0 million for the nine months ended September 30, 2016.  This increase was primarily related to an increase in development of ProGen, and personnel related expenses from higher headcount, focused on refinement of hydrogen infrastructure design, multiple product cost-down programs and prototyping for stack performance enhancement.

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Selling, general and administrative expenses.  Selling, general and administrative expenses includes cash and non-cash compensation, benefits, amortization of intangible assets and related costs in support of our general corporate functions, including general management, finance and accounting, human resources, selling and marketing, information technology and legal services.

On April 4, 2017, the Company and Amazon entered into the Amazon Transaction Agreement, pursuant to which the Company agreed to issue to Amazon warrants to acquire up to 55,286,696 shares of common stock, subject to certain vesting events. The first tranche of 5,819,652 warrant shares vested upon the execution of the Amazon Transaction Agreement, and as a result, $7.1 million, the fair value of the first tranche warrant shares, including legal and other fees associated with the negotiation and completion of the agreement was recognized as selling, general and administrative expense on the accompanying unaudited interim consolidated statement of operations for the nine month periods ended September 30, 2017.

Selling, general and administrative expenses for the three months ended September 30, 2017, increased $0.9 million, or 10.4%, to $9.5 million from $8.6 million for the three months ended September 30, 2016.  This increase is primarily due to costs associated with increased headcount and increased insurance costs.

Selling, general and administrative expenses for the nine months ended September 30, 2017, increased $11.1 million, or 43.6%, to $36.6 million from $25.5 million for the nine months ended September 30, 2016.  This increase primarily is due to the aforementioned provision for common stock warrants associated with the Amazon Transaction Agreement, costs associated with increased headcount and increased insurance costs.

Interest and other expense (income), net. Interest and other expense, net consists of interest and other expenses related to interest on our short-term borrowing, long-term debt, obligations under capital lease and our finance obligations, as well as foreign currency exchange gain (loss), offset by interest and other income consisting primarily of interest earned on our cash and cash equivalents, note receivable, and other income.  During 2016, the Company entered into a series of capital leases with Generate Lending LLC. In December 2016, the Company entered into a loan and security agreement with NY Green Bank.

Net interest and other expense for the three months ended September  30, 2017, increased $0.6 million as compared to the three months ended September 30, 2016.  The increase is attributed to interest on the various financing structures described above, offset by interest and other income which remained relatively insignificant for the three months ended September  30, 2017.

Net interest and other expense for the nine months ended September 30, 2017, increased $3.3 million as compared to the nine months ended September 30, 2016.  The increase is attributed to interest on the various financing structures described above, offset by interest and other income which remained relatively insignificant for the nine months ended September 30, 2017.

Change in fair value of common stock warrant liability. The Company accounts for common stock warrants as common stock warrant liability with changes in the fair value reflected in the consolidated statement of operations as change in the fair value of common stock warrant liability.

 

The change in fair value of common stock warrant liability for the three months ended September  30, 2017 resulted in an increase in the associated warrant liability of $1.9 million as compared to a decrease of $2.0 million for the three months ended September  30, 2016.  These variances are primarily due to changes in the number of warrants outstanding, the average term, the Company’s common stock share price, and changes in volatility of our common stock, which are significant inputs to the Black-Scholes valuation model.

 

The change in fair value of common stock warrant liability for the nine months ended September 30, 2017 resulted in an increase in the associated warrant liability of $16.5 million as compared to a decrease of $4.7 million for the nine months ended September 30, 2016.  These variances are primarily due to changes in the number of warrants outstanding, the average term, the Company’s common stock share price, and changes in volatility of our common stock, which are significant inputs to the Black-Scholes valuation model.

 

32


 

Income taxes. The deferred tax asset generated from our net operating loss has been offset by a full valuation allowance because it is more likely than not that the tax benefits of the net operating loss carry forward will not be realized. The Company also recognizes accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense.

 

Liquidity and Capital Resources

 

Our cash requirements relate primarily to working capital needed to operate and grow our business, including funding operating expenses, growth in inventory to support both shipments of new units and servicing the installed base, growth in equipment leased to customers under long-term arrangements, funding the growth in our GenKey “turn-key” solution, which includes the installation of our customers’ hydrogen infrastructure as well as delivery of the hydrogen fuel,  continued development and expansion of our products, payment of lease obligations under sale/leaseback financings, and the repayment or refinancing of our long-term debt. Our ability to achieve profitability and meet future liquidity needs and capital requirements will depend upon numerous factors, including the timing and quantity of product orders and shipments; attaining and expanding positive gross margins across all product lines; the timing and amount of our operating expenses; the timing and costs of working capital needs; the timing and costs of building a sales base; the ability of our customers to obtain financing to support commercial transactions; our ability to obtain financing arrangements to support the sale or leasing of our products and services to customers and to repay or refinance our long-term debt, and the terms of such agreements that may require us to pledge or restrict substantial amounts of our cash to support these financing arrangements; the timing and costs of developing marketing and distribution channels; the timing and costs of product service requirements; the timing and costs of hiring and training product staff; the extent to which our products gain market acceptance; the timing and costs of product development and introductions; the extent of our ongoing and new research and development programs; and changes in our strategy or our planned activities. If we are unable to fund our operations with positive cash flows and cannot obtain external financing, we may not be able to sustain future operations.  As a result, we may be required to delay, reduce and/or cease our operations and/or seek bankruptcy protection.

 

We have experienced and continue to experience negative cash flows from operations and net losses.  The Company incurred net losses attributable to common shareholders of $110.7 million for the nine months ended September 30, 2017 and $57.6 million, $55.8 million, and $88.6 million for the years ended December 31, 2016, 2015, and 2014, respectively, and has an accumulated deficit of $1.2 billion at September 30, 2017.

 

During the nine months ended September 30, 2017, cash used in operating activities was $81.3 million, consisting primarily of a net loss attributable to the Company of $107.6 million and net outflows from fluctuations in working capital and other assets and liabilities of $39.5 million, offset by the impact of noncash charges/gains of $65.8 million. The changes in working capital primarily were related to building of inventory and an increase in accounts receivable offset by, an increase of accounts payable, and increases in deferred revenue. As of September 30, 2017, we had cash and cash equivalents of $8.0 million and net working capital of $30.0 million. By comparison, at December 31, 2016, we had cash and cash equivalents of $46.0 million and net working capital of $44.4 million.

 

Net cash used in investing activities for the nine months ended September 30, 2017, totaled $28.3 million and included purchases of property, plant and equipment and outflows associated with materials, labor, and overhead necessary to construct new leased property. Cash outflows related to equipment that we sell and equipment we lease directly to customers are included in net cash used in operating activities and net cash used in investing activities, respectively. Net cash provided by financing activities for the nine months ended September 30, 2017 totaled $71.2 million and primarily resulted from net proceeds of $20.7 million pursuant to public offerings of common stock, net proceeds from borrowing of long-term debt of $20.6 million, net proceeds of $17.6 million pursuant to exercise of warrants, an increase in finance obligations of $14.7 million and a decrease in restricted cash, offset by redemption of Series D preferred stock and principal payments of long-term debt. 

 

In connection with the consummation of the Walmart Transaction Agreement described below, the Company entered into a master lease agreement (the “Wells Fargo MLA”) with Wells Fargo to facilitate the Company’s commercial transactions with Walmart. Pursuant to the Wells Fargo MLA, the Company sells fuel cell systems and hydrogen infrastructure to Wells Fargo and then leases them back and operates them at Walmart sites.  Also, in connection with the consummation of the Amended Loan Agreement, the Company entered into an amended and restated master lease agreement (the “Generate Capital MLA”) with Generate Capital to facilitate the aforementioned

33


 

Company’s commercial transactions with Walmart. During July 2017, proceeds from transactions under this program, which are accounted for as capital leases, were $17.7 million.

 

The combination of (i) the Amazon Transaction Agreement, as described below under Amazon.com, Inc., Transaction Agreement; (ii) the Walmart Transaction Agreement, as described below under Wal-Mart Stores, Inc. Transaction Agreement; (iii)the Amended Loan Agreement, as described below under NY Green Bank Loan; (iv) the Wells Fargo MLA and (v) the Generate Capital MLA significantly improves the Company’s liquidity and ability to manage working capital.

 

In previous years, the Company signed sale/leaseback agreements with various financial institutions to facilitate the Company’s commercial transactions with key customers. The Company had sold certain fuel cell systems and hydrogen infrastructure to the financial institutions, and leased the equipment back to support certain customer locations and to fulfill its varied PPAs.  In connection with these operating leases, the financial institutions require the Company to maintain cash balances in restricted accounts securing the Company’s lease obligations. Cash received from customers under the PPAs is used to make lease payments.  As the Company performs under these agreements, the required restricted cash balances are released, according to a set schedule. The total remaining lease payments to financial institutions under these agreements was $36.0 million, which has been fully secured with restricted cash and pledged service escrows.

 

We have historically funded our operations primarily through public and private offerings of common and preferred stock, as well as short-term borrowings, long-term debt, project financing and warrant exercises.  The Company believes that its current working capital and cash anticipated to be generated from future operations, as well as borrowings from lending and project financing sources and proceeds from equity offerings, will provide sufficient liquidity to fund operations for at least one year after the date that the financial statements are issued. There is no guarantee that future funding will be available if and when required or at terms acceptable to the Company.  This projection is based on our current expectations regarding new project financing and product sales and service, cost structure, cash burn rate and other operating assumptions.

 

Several key indicators of liquidity are summarized in the following table (in thousands):

 

 

 

 

 

 

 

 

 

 

 

Nine months

 

Year

 

 

 

ended or at

 

ended or at

 

 

    

September 30, 2017

    

December 31, 2016

 

Cash and cash equivalents at end of period

 

$

7,957

 

$

46,014

 

Restricted cash at end of period

 

 

48,570

 

 

54,622

 

Working capital at end of period

 

 

30,025

 

 

44,448

 

Net loss attributable to common shareholders

 

 

110,727

 

 

57,591

 

Net cash used in operating activities

 

 

81,294

 

 

29,636

 

Purchases of property, plant and equipment and leased property

 

 

28,291

 

 

58,075

 

Net cash provided by financing activities

 

 

71,242

 

 

69,885

 

 

Amazon.com, Inc., Transaction Agreement

 

On April 4, 2017, the Company and Amazon.com, Inc. (“Amazon”) entered into a Transaction Agreement (the “Amazon Transaction Agreement”), pursuant to which the Company agreed to issue to Amazon.com NV Investment Holdings LLC, a wholly owned subsidiary of Amazon, warrants to acquire up to 55,286,696 shares of the Company’s common stock (the “Amazon Warrant Shares”), subject to certain vesting events described below. The Company and Amazon entered into the Amazon Transaction Agreement in connection with existing commercial agreements between the Company and Amazon with respect to the deployment of the Company’s GenKey fuel cell technology at Amazon distribution centers. The existing commercial agreements contemplate, but do not guarantee, future purchase orders for the Company’s fuel cell technology. Additionally, Amazon and Plug Power will begin working together on technology collaboration, exploring the expansion of applications for Plug Power’s line of ProGen fuel cell engines.  The vesting of the Amazon Warrant Shares is linked to payments made by Amazon or its affiliates (directly or indirectly through third parties) pursuant to the existing commercial agreements.

 

34


 

The majority of the Amazon Warrant Shares will vest based on Amazon’s payment of up to $600.0 million to the Company in connection with Amazon’s purchase of goods and services from the Company. The first tranche of 5,819,652 Amazon Warrant Shares vested upon the execution of the Amazon Transaction Agreement.  Accordingly, $6.7 million, the fair value of the first tranche of Amazon Warrant Shares, was recognized as selling, general and administrative expense on the accompanying unaudited interim consolidated statement of operations for the nine months ended September 30, 2017. The second tranche of 29,098,260 Amazon Warrant Shares will vest in four installments of 7,274,565 Amazon Warrant Shares each time Amazon or its affiliates, directly or indirectly through third parties, make an aggregate of $50.0 million in payments for goods and services to the Company, up to payments totaling $200.0 million in the aggregate. The exercise price for the first and second tranches of Amazon Warrant Shares will be $1.1893 per share. After Amazon has made payments to the Company totaling $200.0 million, the third tranche of 20,368,784 Amazon Warrant Shares will vest in eight installments of 2,546,098 Amazon Warrant Shares each time Amazon or its affiliates, directly or indirectly through third parties, make an aggregate of $50.0 million in payments for goods and services to the Company, up to payments totaling $400.0 million in the aggregate. The exercise price of the third tranche of Amazon Warrant Shares will be an amount per share equal to ninety percent (90%) of the 30-day volume weighted average share price of the common stock as of the first vesting date of the second tranche of Amazon Warrant Shares. The Amazon Warrant Shares are exercisable through April 4, 2027.

 

The Amazon Warrant Shares provide for net share settlement that, if elected by the holders, will reduce the number of shares issued upon exercise to reflect net settlement of the exercise price. The Amazon Warrant Shares provide for certain adjustments that may be made to the exercise price and the number of shares of common stock issuable upon exercise due to customary anti-dilution provisions based on future events.  Vested warrants are classified as equity instruments.

 

Because the Amazon Warrant Shares contain performance criteria (i.e. aggregate purchase levels), which Amazon must achieve for the Amazon Warrant Shares to vest, as detailed above, the final measurement date for the Amazon Warrant Shares is the date on which the Amazon Warrant Shares vest. Prior to the final measurement, when achievement of the performance criteria has been deemed probable, the estimated fair value of Amazon Warrant Shares is being recorded as a reduction to revenue and an addition to additional paid-in capital based on the projected number of Amazon Warrant Shares expected to vest, the proportion of purchases by Amazon and its affiliates within the period relative to the aggregate purchase levels required for the Amazon Warrant Shares to vest and the then-current fair value of the related Amazon Warrant Shares. To the extent that projections change in the future as to the number of Amazon Warrant Shares that will vest, as well as changes in the fair value of the Amazon Warrant Shares, a cumulative catch-up adjustment will be recorded in the period in which the estimates change.

 

At September 30, 2017, 5,819,652 of the Amazon Warrant Shares have vested.  The amount of selling, general and administrative expense attributed to this first tranche recorded in April 2017 was $7.1 million, including legal and other fees associated with the negotiation and completion of the agreement.  The amount of provision for common stock warrants recorded as a reduction of revenue during the three and nine months ended September 30, 2017 was $14.2 million and $16.1 million, respectively. 

 

Wal-Mart Stores Inc., Transaction Agreement

 

On July 20, 2017, the Company and Wal-Mart Stores, Inc. (“Walmart”) entered into a Transaction Agreement (the “Walmart Transaction Agreement”), pursuant to which the Company agreed to issue to Walmart a warrant to acquire up to 55,286,696 shares of the Company’s common stock, subject to certain vesting events (the “Walmart Warrant Shares”). The Company and Walmart entered into the Walmart Transaction Agreement in connection with existing commercial agreements between the Company and Walmart with respect to the deployment of the Company’s GenKey fuel cell technology across various Walmart distribution centers. The existing commercial agreements contemplate, but do not guarantee, future purchase orders for the Company’s fuel cell technology. The vesting of the warrant shares, is linked to payments made by Walmart or its affiliates (directly or indirectly through third parties) pursuant transactions entered into after January 1, 2017 under existing commercial agreements.

 

 

35


 

The majority of the Walmart Warrant Shares will vest based on Walmart’s payment of up to $600.0 million to the Company in connection with Walmart’s purchase of goods and services from the Company. The first tranche of 5,819,652 Walmart Warrant Shares vested upon the execution of the Walmart Transaction Agreement.  Accordingly, $10.9 million, the fair value of the first tranche of Walmart Warrant Shares, was recorded as a provision for common stock warrants and presented as a reduction to revenue on the accompanying unaudited interim consolidated statement of operations for the three and nine month periods ended September 30, 2017. The second tranche of 29,098,260 Walmart Warrant Shares will vest in four installments of 7,274,565 Walmart Warrant Shares each time Walmart or its affiliates, directly or indirectly through third parties, make an aggregate of $50.0 million in payments for goods and services to the Company, up to payments totaling $200.0 million in the aggregate. The exercise price for the first and second tranches of Walmart Warrant Shares will be $2.1231 per share. After Walmart has made payments to the Company totaling $200.0 million, the third tranche of 20,368,784 Walmart Warrant Shares will vest in eight installments of 2,546,098 Walmart Warrant Shares each time Walmart or its affiliates, directly or indirectly through third parties, make an aggregate of $50.0 million in payments for goods and services to the Company, up to payments totaling $400.0 million in the aggregate. The exercise price of the third tranche of Walmart Warrant Shares will be an amount per share equal to ninety percent (90%) of the 30-day volume weighted average share price of the common stock as of the first vesting date of the second tranche of Walmart Warrant Shares, provided that, with limited exceptions, the exercise price for the third tranche will be no lower than $1.1893. The Walmart Warrant Shares are exercisable through July 20, 2027.

 

The Walmart Warrant Shares provide for net share settlement that, if elected by the holders, will reduce the number of shares issued upon exercise to reflect net settlement of the exercise price. The Walmart Warrant Shares provide for certain adjustments that may be made to the exercise price and the number of shares of common stock issuable upon exercise due to customary anti-dilution provisions based on future events.  Vested warrants are classified as equity instruments.

 

Because the Walmart Warrant Shares contain performance criteria (i.e. aggregate purchase levels), which Walmart must achieve for the Walmart Warrant Shares to vest, as detailed above, the final measurement date for the Walmart Warrant Shares is the date on which the Walmart Warrant Shares vest. Prior to the final measurement, when achievement of the performance criteria has been deemed probable, the estimated fair value of Walmart Warrant Shares is being recorded as a reduction to revenue and an addition to additional paid-in capital based on the projected number of Walmart Warrant Shares expected to vest, the proportion of purchases by Walmart and its affiliates within the period relative to the aggregate purchase levels required for the Walmart Warrant Shares to vest and the then-current fair value of the related Walmart Warrant Shares. To the extent that projections change in the future as to the number of Walmart Warrant Shares that will vest, as well as changes in the fair value of the Walmart Warrant Shares, a cumulative catch-up adjustment will be recorded in the period in which the estimates change.

 

At September 30, 2017, 5,819,652 of the Walmart Warrant Shares have vested.  The amount of provision for common stock warrants recorded as a reduction to revenue during the three and nine months ended September 30, 2017 was $11.8 million.

 

NY Green Bank Loan

 

On December 23, 2016, the Company, and its subsidiaries Emerging Power Inc. and Emergent Power Inc. entered into a loan and security agreement with NY Green Bank, a Division of the New York State Energy Research & Development Authority (NY Green Bank), pursuant to which NY Green Bank made available to the Company a secured term loan facility in the amount of $25.0 million (Term Loan Facility), subject to certain terms and conditions.  The Company borrowed $25.0 million upon closing and incurred closing costs of $1.2 million.  On July 21, 2017, the Company and NY Green Bank entered into an amendment to the Term Loan Facility (Amended Loan Agreement), which among other things, provided for an additional $20.0 million term loan, increasing the size of the total commitment to $45.0 million, amended the interest rate, prepayment penalty and product deployment and employment targets.  The maturity date of the Amended Loan Agreement will remain at December 23, 2019.  As with the existing facility, the up-sized facility will be repaid primarily as the Company’s various restricted cash reserves are released over the term of the facility. During the three months ended September 2017, the Company borrowed the additional $20.0 million of working capital financing and incurred closing costs of $0.5 million. At September 30, 2017, the outstanding principal balance under the Term Loan Facility was $40.8 million.  The fair value of the Term Loan Facility approximates the carrying value as of September 30, 2017. 

36


 

 

Advances under the Term Loan Facility bear interest at a rate equal to the sum of (i) the LIBOR rate for the applicable interest period, plus applicable margin. The interest rate at September 30, 2017 was approximately 10.8%.  The term of the loan is three years, with a maturity date of December 23, 2019.  As of September 30, 2017, estimated remaining principal payments will approximately be $8.0 million, $19.1 million, and $13.7 million during the years ended December 31, 2017, 2018, and 2019, respectively.  These payments will be funded by restricted cash released, as described in Note 14, Commitments and Contingencies.

 

Interest and a varying portion of the principal amount is payable on a quarterly basis and the entire then outstanding principal balance of the Term Loan Facility, together with all accrued and unpaid interest, is due and payable on the maturity date.  On the maturity date, the Company may also be required to pay additional fees of up to $1.8 million if the Company is unable to meet certain goals related to the deployment of fuel cell systems in the State of New York and increasing the Company’s number of full-time employees in the State of New York.  The Company is currently on track to meet those goals.

 

Redeemable Convertible Preferred Stock

 

In December 2016, the Company completed an offering of an aggregate of 18,500 shares of the Company’s Series D Redeemable Preferred Stock, par value $0.01 per share (the “Series D Preferred Stock”) to purchase 7,381,500 shares of the Company’s common stock, par value $0.01 per share (the “Common Stock”), resulting in aggregate proceeds of approximately $15.6 million.  During the nine months ended September 30, 2017, the Company redeemed 3,700 shares of the Series D Preferred Stock, at an aggregate redemption price of approximately $3.7 million.  On April 5, 2017, all of the remaining outstanding shares of the Series D Preferred Stock were converted into an aggregate of 9,548,393 shares of common stock at a conversion price of $1.55.  The conversion was done at the election of the holder in accordance with the terms of the offering. No shares of Series D Preferred Stock remain outstanding.

 

On January 26, 2017, Air Liquide sold an aggregate of 2,620 shares of the Company’s Series C Redeemable Preferred Stock, par value $0.01 per share (the “Series C Preferred Stock”) to FiveT Capital Holding AG and FiveMore Special Situations Fund Limited.  Following the sale, Air Liquide owned 2,611 shares of Series C Preferred Stock, Five T Capital Holding AG owns 1,750 shares of Series C Preferred Stock and FiveMore Special Situations Fund Limited owns 870 shares of Series C Preferred Stock. On August 28, 2017, Air Liquide acquired 2,772,518 shares of Common Stock by converting all 2,611 shares of Series C Preferred Stock at the conversion price of $0.2343.  Following the conversion, Five T Capital Holding AG and FiveMore Special Situations Fund Limited continue to own 1,750 and 870 shares of Series C Preferred Stock, respectively.

 

Operating Leases

As of September  30, 2017, the Company has several non-cancelable operating leases (as lessor and as lessee), primarily associated with sale/leaseback transactions that are partially secured by restricted cash as summarized below.  These leases expire over the next six years. Minimum rent payments under operating leases are recognized on a straight‑line basis over the term of the lease.  Leases where the Company is the lessor contain termination clauses with associated penalties, the amount of which cause the likelihood of cancelation to be remote.

Future minimum lease payments under non-cancelable operating leases (with initial or remaining lease terms in excess of one year) as of September  30, 2017 are (in thousands):

 

 

 

 

 

 

 

 

 

As Lessor

 

As Lessee

Remainder of 2017

 

$

5,585

 

$

3,271

2018

 

 

22,339

 

 

12,920

2019

 

 

22,143

 

 

11,789

2020

 

 

20,987

 

 

10,633

2021

 

 

16,751

 

 

6,346

Thereafter

 

 

8,639

 

 

1,962

Total future minimum lease payments

 

$

96,444

 

$

46,921

 

37


 

Finance Obligations

 

During the nine months ended September 30, 2017, the Company entered into a sale/leaseback transaction, which was accounted for as a capital lease and reported as part of finance obligations on the Company’s unaudited interim consolidated balance sheet.  The outstanding balance of finance obligations related to sale/leaseback transactions at September 30, 2017 was $45.9 million.  The fair value of the finance obligation approximates the carrying value as of September 30, 2017.

 

Future minimum lease payments under non-cancelable capital leases related to sale/leaseback transactions (with initial or remaining lease terms in excess of one year) as of September 30, 2017 are (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

Imputed

 

Net Present

 

    

Payments

    

Interest

    

Value

Remainder of  2017

 

$

12,389

 

$

1,501

 

$

10,888

2018

 

 

14,632

 

 

2,916

 

 

11,716

2019

 

 

5,540

 

 

2,078

 

 

3,462

2020

 

 

5,540

 

 

1,668

 

 

3,872

2021

 

 

5,540

 

 

1,199

 

 

4,341

2022 and thereafter

 

 

13,058

 

 

1,418

 

 

11,640

Total future minimum lease payments

 

$

56,699

 

$

10,780

 

$

45,919

 

In prior years, the Company received cash for future services to be performed associated with certain sale/leaseback transactions and recorded the balance as a finance obligation.  The outstanding balance of this obligation at September 30, 2017 and December 31, 2016 is $11.1 million and $12.8 million, respectively.  The amount is amortized using the effective interest method.  The fair value of this finance obligation approximates the carrying value as of September 30, 2017.

 

The Company has a capital lease associated with its property in Latham, New York.  Liabilities relating to this agreement of $2.3 million and $2.4 million have been recorded as a finance obligation, in the accompanying unaudited interim consolidated balance sheets as of September 30, 2017 and December 31, 2016, respectively.  The fair value of this finance obligation approximates the carrying value as of September 30, 2017.

 

Restricted Cash

 

The Company has entered into sale/leaseback agreements associated with its products and services.  In connection with these agreements, cash of $47.6 million is required to be restricted as security and will be released over the lease term. The Company has additional letters of credit backed by security deposits as disclosed in the Operating Leases section above.

 

The Company also has letters of credit in the aggregate amount of $1.0 million associated with an agreement to provide hydrogen infrastructure and hydrogen to a customer at its distribution center and with a finance obligation from the sale/leaseback of its building.  Cash collateralizing these letters of credit is also considered restricted cash.

 

Critical Accounting Estimates

 

Management’s discussion and analysis of our financial condition and results of operations are based upon our unaudited interim consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these unaudited interim consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of and during the reporting period. On an on-going basis, we evaluate our estimates and judgments, including those related to revenue recognition for multiple element arrangements, bad debts, inventories, intangible assets, valuation of long-lived assets, accrual for loss contracts on service, product warranty reserves, unbilled revenue, common stock warrants, income taxes, stock-based compensation, contingencies, and purchase accounting. We base our estimates and judgments on historical experience and on various other factors and assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about

38


 

(1) the carrying values of assets and liabilities and (2) the amount of revenue and expenses realized that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

We refer to the policies and estimates set forth in the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Estimates”, as well as a discussion of significant accounting policies included in Note 2, Summary of Significant Accounting Policies, of the consolidated financial statements, both of which are included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

 

Recent Accounting Pronouncements

 

In July 2017, an accounting update was issued to address narrow issues identified as a result of the complexity associated with applying generally accepted accounting principles (GAAP) for certain financial instruments with characteristics of liabilities and equity. This update addresses the complexity of accounting for certain financial

instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. The Company early adopted this accounting update during the three months ended June 30, 2017. The adoption of this accounting update was considered in determining that warrants issued during the second quarter of 2017 (see note 4) were equity classified.

 

In May 2017, an accounting update was issued to provide clarity and reduce both diversity in the practice and cost and complexity when applying the guidance under Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 718, Compensation-Stock Compensation, to a change to the terms or conditions of a share-based payment award.  The amendments in this update provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting.  This accounting update is effective for annual periods and interim periods within those annual periods, beginning after December 15, 2017.  Early adoption is permitted, including adoption in any interim period. The amendments in this update should be applied prospectively to an award modified on or after the adoption date.

 

In January 2017, an accounting update was issued to simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test.  Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. This accounting update is effective for years beginning after December 15, 2019.  Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is evaluating the impact this update will have on the consolidated financial statements.

 

In November 2016, an accounting update was issued to reduce the existing diversity in the classification and presentation of changes in restricted cash on the statement of cash flows. This accounting update is effective for years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company is evaluating the impact this update will have on the consolidated financial statements.

 

In October 2016, an accounting update was issued to simplify how an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs.  Consequently, the amendments in this update eliminate the exception for an intra-entity transfer of an asset other than inventory.  Two common examples of assets included in the scope of this update are intellectual property and property, plant, and equipment.  This accounting update is effective for the annual periods beginning after December 15, 2017 and interim periods within those years. The Company does not expect the adoption of this update to have a significant effect on the consolidated financial statements.

 

In August 2016, an accounting update was issued to reduce the existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows.  This accounting update is effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period.  The Company is evaluating the impact this update will have on the consolidated financial statements.

 

39


 

In February 2016, an accounting update was issued which requires balance sheet recognition for operating leases, among other changes to previous lease guidance.  This accounting update is effective for fiscal years beginning after December 15, 2018.  The Company is evaluating the impact this update will have on the consolidated financial statements.

 

In June 2014, an accounting update was issued that replaces the existing revenue recognition framework regarding contracts with customers.  In July 2015, the FASB announced a one year delay in the required adoption date from January 1, 2017 to January 1, 2018.  The Company has established an internal implementation team to oversee the adoption of the new standard.  To date the Company has identified relevant arrangements and performance obligations and does not believe adoption of the standard will have a significant impact on the timing and amount of revenue recognized, as well as the amount of revenue allocated to the identified performance obligations.  The Company anticipates providing further information about the impacts of adoption at year end.  The Company is planning on accounting for the transition using the modified retrospective basis method.

 

Item 3 — Quantitative and Qualitative Disclosures about Market Risk

 

From time to time, we may invest our cash in government, government backed and interest-bearing investment-grade securities that we generally hold for the duration of the term of the respective instrument. We do not utilize derivative financial instruments, derivative commodity instruments or other market risk sensitive instruments, positions or transactions in any material fashion. We are not subject to any material risks arising from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices or other market changes that affect market risk sensitive instruments.

 

Our exposure to changes in foreign currency rates is primarily related to sourcing inventory from foreign locations and operations of HyPulsion. This practice can give rise to foreign exchange risk resulting from the varying cost of inventory to the receiving location. The Company reviews the level of foreign content as part of its ongoing evaluation of overall sourcing strategies and considers the exposure to be not significant.  Our HyPulsion exposure presently is mitigated by low levels of operations and its sourcing is primarily intercompany in nature and denominated in U.S. dollar.

 

Item 4 — Controls and Procedures

 

(a)  Disclosure controls and procedures.

 

The chief executive officer and chief financial officer, based on their evaluation of disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q, have concluded that the Company’s disclosure controls and procedures are effective for ensuring that information required to be disclosed in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in filed or submitted reports is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer as appropriate, to allow timely decisions regarding required disclosure.

 

(b)  Changes in internal control over financial reporting.

 

There were no changes in the Company’s internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

40


 

PART II.  OTHER INFORMATION

 

Item 1 — Legal Proceedings

 

An action has been brought in New York State Supreme Court by General Electric Co. (GE) and an affiliate against the Company seeking $1 million that GE claims is due under an indemnification agreement between GE and the Company.  GE seeks indemnification for funds it paid to settle a claim with Soroof Trading Development Co., an entity that had paid funds to GE to become a distributor of the Company’s products.  The Company is vigorously defending the action.

 

Item 1A - Risk Factors

 

Part I, Item 1A, “Risk Factors” of our most recently filed Annual Report on Form 10-K, filed with the Securities and Exchange Commission for the fiscal year ended December 31, 2016, sets forth information relating to important risks and uncertainties that could materially adversely affect our business, financial condition and operating results. Except to the extent that information disclosed elsewhere in this Quarterly Report on Form 10-Q relates to such risk factors (including, without limitation, the matters described in Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”), there have been no material changes to our risk factors disclosed in our most recently filed Annual Report on Form 10-K. However, those risk factors continue to be relevant to an understanding of our business, financial condition and operating results and, accordingly, you should review and consider such risk factors in making any investment decision with respect to our securities.

 

Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds

 

(a)  None.

 

(b)  Not applicable.

 

(c)  None.

 

Item 3 — Defaults Upon Senior Securities

 

None.

 

Item 4 — Mine Safety Disclosures

 

None.

 

Item 5 — Other Information

 

(a)  None.

 

(b)  None.

 

41


 

Item 6 — Exhibits

 

 

 

3.1

Amended and Restated Certificate of Incorporation of Plug Power. (1)

 

 

3.2

Certificate of Amendment to Amended and Restated Certificate of Incorporation of Plug Power Inc. (1)

 

 

3.3

Second Certificate of Amendment of Amended and Restated Certificate of Incorporation of Plug Power Inc. (2)

 

 

3.4

Third Certificate of Amendment to Amended and Restated Certificate of Incorporation of Plug Power. (3)

 

 

3.5

Fourth Certificate of Amendment of the Amended and Restated Certificate of Incorporation of Plug Power Inc. (4)

 

 

3.6

Third Amended and Restated By-laws of Plug Power Inc. (5)

 

 

3.7

Certificate of Designations, Preferences and Rights of a Series of Preferred Stock of Plug Power Inc. classifying and designating the Series A Junior Participating Cumulative Preferred Stock. (6).

 

 

3.8

Certificate of Designations, Preferences and Rights of a Series of Preferred Stock of Plug Power Inc. classifying and designating the Series C Redeemable Convertible Preferred Stock (7)

 

 

3.9

Certificate of Designations, Preferences and Rights of a Series of Preferred Stock of Plug Power Inc. classifying and designating the Series D Redeemable Convertible Preferred Stock (8)

 

 

3.10

Certificate of Correction to Third Certificate of Amendment of Amended and Restated Certificate of Incorporation of Plug Power Inc. dated as of December 21, 2016 (9)

 

 

3.11

At Market Issuance Sales Agreement, dated April 3, 2017, by and between Plug Power Inc. and FBR Capital Markets & Co. (10)

 

 

3.12

Warrant to Purchase Common Stock, issued April 4, 2017, by and between Plug Power Inc. and Amazon.com NV Investment Holdings LLC (11)

 

 

3.13

Transaction Agreement, dated as of April 4, 2017, by between Plug Power Inc. and Amazon.com, Inc. (11)

 

 

3.14

Warrant to Purchase Common Stock, issued April 12, 2017, by and between Plug Power Inc. and Tech Opportunities LLC (12)

 

 

3.15

Warrant Exercise Agreement, dated as of April 12, 2017, by and between Plug Power Inc. and Tech Opportunities LLC (12)

 

 

3.16

Second Amended and Restated 2011 Stock Option and Incentive Plan. (4)

 

 

3.17

Warrant to Purchase Common Stock, issued July 20, 2017, by and between Plug Power Inc. and Wal-Mart Stores, Inc. (13)

 

 

3.18

Amendment No. 8, effective as of July 20, 2017, to Shareholder Rights Agreement by and between Plug Power Inc. and Broadridge Corporate Issuer Solutions, Inc., as Rights Agent. (13)

 

 

3.19

Transaction Agreement, dated as of July 20, 2017, by and between Plug Power Inc. and Wal-Mart Stores, Inc. (13)

 

 

42


 


(1)

Incorporated by reference to the Company’s Form 10-K for the period ended December 31, 2008.

 

(2)

Incorporated by reference to the Company’s current Report on Form 8-K dated May 19, 2011.

 

(3)

Incorporated by reference to the Company’s current Report on Form 8-K dated July 25, 2014.

 

(4)

Incorporated by reference to the Company’s current Report on Form 8-K dated April 12, 2017.

 

(5)

Incorporated by reference to the Company’s current Report on Form 8-K dated November 2, 2009.

 

(6)

Incorporated by reference to the Company’s current Report on Form 8-K dated June 24, 2009.

 

(7)

Incorporated by reference to the Company’s current Report on Form 8-K dated May 20, 2013.

 

(8)

Incorporated by reference to the Company’s current Report on Form 8-K dated December 21, 2016.

 

(9)

Incorporated by reference to the Company’s Form 10-K for the period ended December 31, 2016.

 

(10)

Incorporated by reference to the Company’s current Report on Form 8-K dated April 3, 2017.

 

(11)

Incorporated by reference to the Company’s current Report on Form 8-K dated April 5, 2017.

 

(12)

Incorporated by reference to the Company’s current Report on Form 8-K dated June 30, 2017.

 

43


 

(13)

Incorporated by reference to the Company’s current Report on Form 8-K dated July 21, 2017.

 

(14)

Incorporated by reference to the Company’s current Report on Form 8-K dated July 21, 2017.

 

(15)

Incorporated by reference to the Company’s current Report on Form 8-K dated July 27, 2017.

 

(16)

Filed herewith.

 

*Submitted electronically herewith. Attached as Exhibit 101 are the following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September  30, 2017, formatted in eXtensible Business Reporting Language (XBRL) and tagged as blocks of text: (i) Interim Consolidated Balance Sheets at September  30, 2017 and December 31, 2016; (ii) Interim Consolidated Statements of Operations for the Nine Months Ended September  30, 2017 and 2016; (iii) Interim Consolidated Statements of Comprehensive Loss for the Nine Months Ended September  30, 2017 and 2016; (iv) Interim Consolidated Statement of Stockholders’ Equity for the Nine Months Ended September  30, 2017; (v) Interim Consolidated Statements of Cash Flows for the Nine Months Ended September  30, 2017 and 2016; and (vi) related notes, tagged as blocks of text.

 

 

44


 

Signatures

 

Pursuant to requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

 

PLUG POWER INC.

 

 

 

Date:  November 8, 2017

By:

/s/ Andrew Marsh

 

 

Andrew Marsh

 

 

President, Chief Executive
Officer and Director (Principal
Executive Officer)

 

 

 

Date:  November 8, 2017

By:

/s/ Paul B. Middleton

 

 

Paul B. Middleton

 

 

Chief Financial Officer (Principal
Financial Officer)

 

 

 

45