plug_Current folio_10Q

Table of Contents

.

 

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 JUNE  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 August 8, 2017 was 224,730,644.

 

 


 

Table of Contents

INDEX to FORM 10-Q

 

 

Page

 

 

PART I.   FINANCIAL INFORMATION 

 

 

 

Item 1 – Interim Consolidated Financial Statements (Unaudited) 

3

 

 

Consolidated Balance Sheets 

3

 

 

Consolidated Statements of Operations 

4

 

 

Consolidated Statements of Comprehensive Loss 

5

 

 

Consolidated Statement of Stockholders’ Equity  

6

 

 

Consolidated Statements of Cash Flows 

7

 

 

Notes to Interim Consolidated Financial Statements 

8

 

 

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

23

 

 

Item 3 – Quantitative and Qualitative Disclosures About Market Risk 

38

 

 

Item 4 – Controls and Procedures 

38

 

 

PART II.   OTHER INFORMATION 

 

 

 

Item 1 – Legal Proceedings 

38

 

 

Item 1A – Risk Factors 

38

 

 

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

39

 

 

Item 3 – Defaults Upon Senior Securities 

39

 

 

Item 4 – Mine Safety Disclosures 

39

 

 

Item 5 – Other Information 

39

 

 

Item 6 – Exhibits 

40

 

 

Signatures 

43

 

 

 

 

2


 

Table of Contents

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)

 

 

 

 

 

 

 

 

 

    

June 30,

    

December 31,

 

 

 

2017

 

2016

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

2,090

 

$

46,014

 

Restricted cash

 

 

14,830

 

 

11,219

 

Accounts receivable

 

 

15,268

 

 

11,923

 

Inventory

 

 

42,703

 

 

29,940

 

Prepaid expenses and other current assets

 

 

13,126

 

 

11,837

 

Total current assets

 

 

88,017

 

 

110,933

 

 

 

 

 

 

 

 

 

Restricted cash

 

 

37,202

 

 

43,403

 

Property, plant, and equipment, net of accumulated depreciation of $30,594 and $29,666, respectively

 

 

8,375

 

 

8,246

 

Leased property, net of accumulated depreciation of $7,799 and $4,544, respectively

 

 

70,293

 

 

54,060

 

Goodwill

 

 

9,006

 

 

8,291

 

Intangible assets, net of accumulated amortization of $1,382 and $1,032, respectively

 

 

3,926

 

 

3,933

 

Other assets

 

 

11,761

 

 

11,966

 

Total assets

 

$

228,580

 

$

240,832

 

 

 

 

 

 

 

 

 

Liabilities, Redeemable Preferred Stock, and Stockholders’ Equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

28,149

 

$

32,112

 

Accrued expenses

 

 

6,336

 

 

8,519

 

Accrual for loss contracts related to service

 

 

 —

 

 

752

 

Deferred revenue

 

 

5,050

 

 

5,736

 

Finance obligations

 

 

21,197

 

 

14,787

 

Current portion of long-term debt

 

 

5,383

 

 

2,964

 

Other current liabilities

 

 

995

 

 

1,615

 

Total current liabilities

 

 

67,110

 

 

66,485

 

Deferred revenue

 

 

17,312

 

 

17,413

 

Common stock warrant liability

 

 

3,779

 

 

11,387

 

Finance obligations

 

 

22,743

 

 

29,767

 

Long-term debt

 

 

17,955

 

 

20,829

 

Other liabilities

 

 

261

 

 

241

 

Total liabilities

 

 

129,160

 

 

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: 5,231 at June 30, 2017 and December 31, 2016

 

 

1,153

 

 

1,153

 

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

 

 

 —

 

 

8,469

 

Stockholders’ equity:

 

 

 

 

 

 

 

Common stock, $0.01 par value per share; 450,000,000 shares authorized; Issued (including shares in treasury): 225,295,596 at June 30, 2017 and 191,723,974 at December 31, 2016

 

 

2,253

 

 

1,917

 

Additional paid-in capital

 

 

1,215,879

 

 

1,137,482

 

Accumulated other comprehensive income

 

 

1,403

 

 

247

 

Accumulated deficit

 

 

(1,118,177)

 

 

(1,051,467)

 

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

 

 

(3,091)

 

 

(3,091)

 

Total stockholders’ equity

 

 

98,267

 

 

85,088

 

Total liabilities, redeemable preferred stock, and stockholders’ equity

 

$

228,580

 

$

240,832

 

 

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

 

3


 

Table of Contents

Plug Power Inc. and Subsidiaries

Consolidated Statements of Operations

(In thousands, except share and per share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six months ended

 

 

 

June 30,

 

June 30,

 

 

    

2017

    

2016

    

2017

    

2016

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales of fuel cell systems and related infrastructure

 

$

8,560

 

$

9,121

 

$

10,757

 

$

14,339

 

Services performed on fuel cell systems and related infrastructure

 

 

5,049

 

 

5,360

 

 

10,198

 

 

10,633

 

Power Purchase Agreements

 

 

4,945

 

 

3,062

 

 

9,256

 

 

5,768

 

Fuel delivered to customers

 

 

3,986

 

 

2,638

 

 

7,477

 

 

4,648

 

Other

 

 

64

 

 

278

 

 

151

 

 

403

 

Gross revenue

 

 

22,604

 

 

20,459

 

 

37,839

 

 

35,791

 

Provision for common stock warrants

 

 

(1,820)

 

 

 —

 

 

(1,820)

 

 

 —

 

Net revenue

 

 

20,784

 

 

20,459

 

 

36,019

 

 

35,791

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales of fuel cell systems and related infrastructure

 

 

6,441

 

 

8,043

 

 

8,727

 

 

11,941

 

Services performed on fuel cell systems and related infrastructure

 

 

5,068

 

 

5,926

 

 

11,634

 

 

11,709

 

Provision for loss contracts related to service

 

 

 —

 

 

(1,071)

 

 

 —

 

 

(1,071)

 

Power Purchase Agreements

 

 

7,450

 

 

3,616

 

 

14,065

 

 

6,497

 

Fuel delivered to customers

 

 

5,303

 

 

3,208

 

 

9,452

 

 

5,619

 

Other

 

 

65

 

 

353

 

 

163

 

 

542

 

Total cost of revenue

 

 

24,327

 

 

20,075

 

 

44,041

 

 

35,237

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross (loss) profit

 

 

(3,543)

 

 

384

 

 

(8,022)

 

 

554

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

6,625

 

 

5,201

 

 

12,623

 

 

10,031

 

Selling, general and administrative

 

 

17,904

 

 

8,559

 

 

27,049

 

 

16,849

 

Total operating expenses

 

 

24,529

 

 

13,760

 

 

39,672

 

 

26,880

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating loss

 

 

(28,072)

 

 

(13,376)

 

 

(47,694)

 

 

(26,326)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and other expense, net

 

 

(2,251)

 

 

(1,208)

 

 

(4,388)

 

 

(1,682)

 

Change in fair value of common stock warrant liability

 

 

(12,296)

 

 

1,456

 

 

(14,576)

 

 

2,734

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss before income taxes

 

$

(42,619)

 

$

(13,128)

 

$

(66,658)

 

$

(25,274)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax benefit

 

 

 —

 

 

 —

 

 

 —

 

 

392

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to the Company

 

$

(42,619)

 

$

(13,128)

 

$

(66,658)

 

$

(24,882)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stock dividends declared and accretion of discount

 

 

(26)

 

 

(26)

 

 

(3,061)

 

 

(52)

 

Net loss attributable to common shareholders

 

$

(42,645)

 

$

(13,154)

 

$

(69,719)

 

$

(24,934)

 

Net loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

$

(0.19)

 

$

(0.07)

 

$

(0.34)

 

$

(0.14)

 

Weighted average number of common shares outstanding

 

 

220,310,678

 

 

180,282,904

 

 

205,748,184

 

 

180,204,334

 

 

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

 

 

 

4


 

Table of Contents

Plug Power Inc. and Subsidiaries

Consolidated Statements of Comprehensive Loss

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended 

 

Six months ended

 

 

 

June 30,

 

June 30,

 

 

    

2017

    

2016

    

2017

    

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to the Company

 

$

(42,619)

 

$

(13,128)

 

$

(66,658)

 

$

(24,882)

 

Other comprehensive income (loss) - foreign currency translation adjustment

 

 

936

 

 

(289)

 

 

1,156

 

 

294

 

Comprehensive loss

 

$

(41,683)

 

$

(13,417)

 

$

(65,502)

 

$

(24,588)

 

 

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

 

5


 

Table of Contents

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

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(66,658)

 

 

(66,658)

 

Other comprehensive income

 

 —

 

 

 —

 

 

 —

 

 

1,156

 

 

 —

 

 

 —

 

 

 —

 

 

1,156

 

Stock-based compensation

 

69,254

 

 

 1

 

 

4,791

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

4,792

 

Stock dividend

 

37,809

 

 

 —

 

 

52

 

 

 —

 

 

 —

 

 

 —

 

 

(52)

 

 

 —

 

Public offerings, common stock, net

 

9,314,666

 

 

93

 

 

20,591

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

20,684

 

Conversion of preferred stock

 

9,548,393

 

 

96

 

 

7,682

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

7,778

 

Stock option exercises

 

100,000

 

 

 1

 

 

36

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

37

 

Exercise of warrants, net of warrants issued

 

14,501,500

 

 

145

 

 

39,741

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

39,886

 

Provision for common stock warrants

 

 —

 

 

 —

 

 

8,513

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

8,513

 

Accretion of discount

 

 —

 

 

 —

 

 

(3,009)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(3,009)

 

June 30, 2017

 

225,295,596

 

$

2,253

 

$

1,215,879

 

$

1,403

 

 

582,328

 

$

(3,091)

 

$

(1,118,177)

 

$

98,267

 

 

 

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

6


 

Table of Contents

Plug Power Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended

 

 

 

June 30,

 

 

    

2017

    

2016

 

Cash Flows From Operating Activities:

 

 

 

 

 

 

 

Net loss attributable to the Company

 

$

(66,658)

 

$

(24,882)

 

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

 

 

 

 

 

 

 

Depreciation of property, plant and equipment, and leased property

 

 

4,183

 

 

1,528

 

Amortization of intangible assets

 

 

290

 

 

295

 

Stock-based compensation

 

 

4,792

 

 

4,377

 

Amortization of debt issuance costs

 

 

296

 

 

307

 

Provision for common stock warrants

 

 

8,513

 

 

 —

 

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

 

 

14,576

 

 

(2,734)

 

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

 

 

 

 

 

 

 

Accounts receivable

 

 

(3,345)

 

 

9,973

 

Inventory

 

 

(12,763)

 

 

(2,176)

 

Prepaid expenses and other assets

 

 

66

 

 

(2,523)

 

Accounts payable, accrued expenses, and other liabilities

 

 

(6,746)

 

 

6,577

 

Accrual for loss contracts related to service

 

 

(752)

 

 

(3,559)

 

Deferred revenue

 

 

(787)

 

 

(1,914)

 

Net cash used in operating activities

 

 

(58,335)

 

 

(15,761)

 

Cash Flows From Investing Activities:

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

 

(1,057)

 

 

(2,525)

 

Purchases for construction of leased property

 

 

(19,488)

 

 

(26,317)

 

Net cash used in investing activities

 

 

(20,545)

 

 

(28,842)

 

Cash Flows From Financing Activities:

 

 

 

 

 

 

 

Change in restricted cash

 

 

2,590

 

 

(60)

 

Proceeds from exercise of warrants, net of transaction costs

 

 

17,702

 

 

111

 

Proceeds from exercise of stock options

 

 

37

 

 

19

 

Payments for redemption of preferred stock

 

 

(3,700)

 

 

 —

 

Proceeds from public offerings, net of transaction costs

 

 

19,534

 

 

 —

 

Proceeds from short-term borrowing, net of transaction costs

 

 

 —

 

 

23,874

 

Principal payments on short-term borrowing

 

 

 —

 

 

(25,000)

 

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

 

 

621

 

 

23,875

 

Principal payments on long-term debt

 

 

(1,278)

 

 

 —

 

(Decrease) increase in finance obligations

 

 

(708)

 

 

23,795

 

Net cash provided by financing activities

 

 

34,798

 

 

46,614

 

Effect of exchange rate changes on cash

 

 

158

 

 

68

 

(Decrease) increase in cash and cash equivalents

 

 

(43,924)

 

 

2,079

 

Cash and cash equivalents, beginning of period

 

 

46,014

 

 

63,961

 

Cash and cash equivalents, end of period

 

$

2,090

 

$

66,040

 

Other Supplemental Cash Flow Information:

 

 

 

 

 

 

 

Cash paid for interest

 

$

1,946

 

$

1,311

 

 

 

 

 

 

 

 

 

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

 

$

7,778

 

 

 —

 

 

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.

 

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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 $69.7 million for the six months ended June  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 $1.1 billion at June 30, 2017.

 

During the six months ended June 30, 2017, cash used in operating activities was $58.3 million, consisting primarily of a net loss attributable to the Company of $66.7 million and net outflows from fluctuations in working capital and other assets and liabilities of $24.3 million, offset by the impact of noncash charges/gains of $32.7 million. The changes in working capital primarily were related to building of inventory, an increase in accounts receivables and decreases of accounts payable. As of June 30, 2017, we had cash and cash equivalents of $2.1 million and net working capital of $20.9 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 six months ended June 30, 2017, totaled $20.5 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 six months ended June  30, 2017 primarily resulted from net proceeds of $19.5 million pursuant to public offerings of common stock,  net proceeds of $17.7 million pursuant to exercise of warrants, and a decrease in restricted cash, offset by redemption of Series D preferred stock, principal payments of long-term debt and decreases in finance obligations. 

 

During July 2017, the Company completed a series of sale/leaseback agreements with Wells Fargo, the purpose of which were to provide project financing of leased property operated at Walmart.  The proceeds of these transactions, which will be accounted for as capital leases, were $13.6 million, as described in Note 14, Subsequent Events.    

 

Also during July 2017, the Company and NY Green Bank announced an amendment to the Term Loan Facility, as described in Note  7, Long-term Debt, and Note 14 Subsequent Events.  The amendment provided an additional $20.0

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million of working capital financing. As a result, the Company borrowed the additional $20.0 million of working capital financing in July 2017.  To facilitate the amendment of the Term Loan Facility, the Company amended and restated the master lease agreement with Generate Capital, the purpose of which was to provide project financing of leased property through the Company’s wholly-owned subsidiary Proton GCI SPVI LLC.

 

The combination of the Amazon Transaction Agreement, as described in Note 4, Amazon.com Transaction Agreement, the improved Walmart financing, as described in Note 14, Subsequent Events, the amended Term Loan Facility with NY Green Bank, as described in Notes 7 and 14, Long-term Debt and Subsequent Events, respectively, the Wells Fargo master lease agreement, and the Generate Capital amended master lease agreement, each of which is described in Note 14, Subsequent Events, 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 $38.6 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.

 

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

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.

 

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

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

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.

 

Power Purchase Agreements

 

When fuel cell systems and related infrastructure are provided to customers through a 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 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 June  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.

 

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

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.

 

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. as discussed in Note 4.  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, as described in Note 4, Amazon.com Transaction Agreement 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 

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early adopted this accounting update during the three months ended June 30, 2017. The adoption of this accounting update did not have a significant effect on the Company’s consolidated financial statements.

 

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 is assessing the impact of the new guidance.  The Company is currently evaluating the impact that adoption of the new standard will have on the timing and amount of revenue recognized, as compared to current accounting practices.  The Company anticipates providing further information about the impacts of adoption in the coming quarters.  The Company

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is also evaluating whether to adopt the guidance using the full or modified retrospective basis, and will make that determination during the second half of 2017.

 

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 June 30,

 

 

    

2017

 

2016

    

Stock options outstanding (1)

 

15,016,609

 

11,752,286

 

Restricted stock outstanding

 

248,077

 

204,444

 

Common stock warrants (2)

 

60,537,546

 

4,000,100

 

Preferred stock (3)

 

5,554,594

 

5,554,594

 

Number of dilutive potential common shares

 

81,356,826

 

21,511,424

 


(1)

During the three months ended June 30, 2017 and 2016, the Company granted 314,511 and 265,000 stock options, respectively.  During the six months ended June 30, 2017 and 2016, the Company granted 450,863 and 280,000 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 June 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 9, 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, all 10,501,500 warrants were exercised during the three months ended June 30, 2017, as described in Note 9, 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 9, Stockholders’ Equity.  Of these warrants issued in April 2017, none have been exercised as of June 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 June 30, 2017.

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(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 June 30, 2017 and 2016, respectively.  Of the 10,431 Series C redeemable preferred stock issued in May 16, 2013, 5,200 had been converted to common stock during the year ended December 31, 2013, 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 as of June 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 was recognized as selling, general and administrative expense on the accompanying unaudited interim consolidated statement of operations for the three and six month periods ended June 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 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

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fair value of the Amazon Warrant Shares, a cumulative catch-up adjustment will be recorded in the period in which the estimates change.

 

At June 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 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 six months ended June 30, 2017 was $1.8 million. 

 

5.  Inventory

 

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

 

 

 

 

 

 

 

 

 

 

    

June 30, 2017

    

December 31, 2016

 

Raw materials and supplies

 

$

31,041

 

$

26,298

 

Work-in-process

 

 

8,840

 

 

1,865

 

Finished goods

 

 

2,822

 

 

1,777

 

 

 

$

42,703

 

$

29,940

 

 

Raw materials and supplies includes spare parts inventory held at service locations valued at $8.1 million and $3.3 million as of June 30, 2017 and December 31, 2016, respectively.

 

 

6. Leased Property

 

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

 

 

 

 

 

 

 

 

 

 

    

June 30,

    

December 31,

 

 

 

2017

 

2016

 

Leased property

 

$

78,092

 

$

58,604

 

Less: accumulated depreciation

 

 

(7,799)

 

 

(4,544)

 

Leased property, net

 

$

70,293

 

$

54,060

 

 

Depreciation expense related to leased property was $1.7 million and $0.5 million for the three months ended June 30, 2017 and 2016, respectively.  Depreciation expense related to leased property was $3.3 million and $0.7 million for the six months ended June 30, 2017 and 2016, respectively.

 

7.  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.  At June 30, 2017, the outstanding principal balance under the Term Loan Facility was $23.8 million.  The fair value of the Term Loan Facility approximates the carrying value as of June 30, 2017.    During July 2017, the Company and NY Green Bank announced an amendment to the Term Loan Facility, as described in Note 14, Subsequent Events.  The amendment provided an additional $20.0 million of working capital financing. 

 

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 (ii) the credit default swap index coupon for the applicable interest period, plus (iii) 6.00% per annum. The interest rate at June 30, 2017 was approximately 11.2%.  The term of the loan is three years, with a maturity

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date of December 23, 2019.  As of June 30, 2017, and prior to the amendment mentioned above, estimated remaining principal payments will approximately be $4.8 million, $9.0 million, and $10.0 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 13, 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.

 

8.  Accrual for Loss Contracts Related to Service

 

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

 

 

 

 

 

 

 

 

 

 

Six months ended

 

 

June 30, 2017

 

June 30, 2016

Beginning balance 

 

$

752

 

$

10,050

    Change in estimate

 

 

 —

 

 

(1,071)

    Reductions for losses realized

 

 

(752)

 

 

(3,559)

Ending balance 

 

$

 —

 

$

5,420

 

 

9.  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 will be exercisable beginning on 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.

 

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

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

accruals, underwriting discounts and commissions and other fees and expenses, of $20.7 million, pursuant to the Sales Agreement.

 

10.  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 six months ended June 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 owns 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. 

 

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

 

12.  Fair Value Measurements

 

The Company’s common stock warrant liability represents the only financial 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 and Monte Carlo pricing models which are 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 common stock warrants:

 

 

 

 

 

 

 

 

Six months ended

 

 

June 30, 2017

 

June 30, 2016

Risk-free interest rate

 

1.01% - 2.36%

 

0.73%  - 0.86%

Volatility

 

62.00% - 108.77%

 

59.50% - 95.23%

Expected average term

 

0.64 - 10.00

 

1.64 - 2.55

 

There was no expected dividend yield for the warrants granted. Additionally, the Monte Carlo pricing models used in the determination of the fair value of the warrants issued in connection with the Amazon Transaction Agreement also incorporate assumptions involving future revenues associated with Amazon, and related timing.

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

 

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):

 

 

 

 

 

 

 

 

 

 

 

Six months ended

 

Common stock warrant liability

 

June 30, 2017

    

June 30, 2016

 

Beginning of period

 

$

11,387

 

$

5,735

 

Change in fair value of common stock warrants

 

 

14,576

 

 

(1,278)

 

Issuance of common stock warrants

 

 

4,905

 

 

 —

 

Exercise of common stock warrants

 

 

(27,089)

 

 

(140)

 

End of period

 

$

3,779

 

$

4,317

 

 

 

13.  Commitments and Contingencies

 

Operating Leases

 

As of June  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 June 30, 2017 are (in thousands):

 

 

 

 

 

 

 

 

 

    

As Lessor

    

As Lessee

Remainder of 2017

 

$

10,152

 

$

6,164

2018

 

 

20,304

 

 

12,125

2019

 

 

20,107

 

 

10,936

2020

 

 

18,951

 

 

9,802

2021

 

 

14,715

 

 

5,535

2022 and thereafter

 

 

6,482

 

 

759

Total future minimum lease payments

 

$

90,711

 

$

45,321

 

Rental expense for all operating leases was $6.6 million and $6.4 for the six months ended June 30, 2017 and 2016, respectively.  Rental expense for all operating leases was $3.3 million and $3.4 for the three months ended June 30, 2017 and 2016, respectively.

 

At June  30, 2017 and December 31, 2016, prepaid rent and security deposits associated with sale/leaseback transactions were $11.5 million and $11.8  million, respectively.  At June 30, 2017, $1.8 million of the amount is included in prepaid expenses and other current assets and $9.7 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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Finance Obligations

 

During the six months ended June 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 June  30, 2017 was $29.8 million.  The fair value of the finance obligation approximates the carrying value as of June 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 June 30, 2017 are (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

Imputed

 

Net Present

 

    

Payments

    

Interest

    

Value

Remainder of  2017

 

$

13,025

 

$

2,019

 

$

11,006

2018

 

 

11,818

 

 

2,163

 

 

9,655

2019

 

 

3,600

 

 

1,499

 

 

2,101

2020

 

 

3,600

 

 

1,135

 

 

2,465

2021

 

 

3,600

 

 

711

 

 

2,889

2022 and thereafter

 

 

1,908

 

 

175

 

 

1,733

Total future minimum lease payments

 

$

37,551

 

$

7,702

 

$

29,849

 

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 June 30, 2017 and December 31, 2016 is $11.7 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 June 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 June 30, 2017 and December 31, 2016, respectively.  The fair value of this finance obligation approximates the carrying value as of June 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 $51.0 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 co