Table of Contents
UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington
, D.C. 20549
FORM 10-Q
(Mark One)
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2011
OR
o
|
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
Incorporation or Organization)
|
|
(I.R.S. Employer
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
x
No
o
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
x
No
o
Indicate by check mark whether the registrant is a
large accelerated filer, an accelerated filer, a non-accelerated filer, or a
smaller reporting company. See the definitions of “large accelerated
filer,” “accelerated filer,” and “smaller reporting
company” in Rule 12b-2 of the Exchange Act. (Check one):
|
|
|
|
|
|
|
Large
accelerated filer
o
|
|
Accelerated
filer
o
|
|
Non-accelerated
filer
x
|
|
Smaller
reporting company
o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b
2 of the Exchange Act). Yes
o
No
x
The
number of shares of common stock, par value of $.01 per share, outstanding as
of August 5, 2011 was 22,665,240.
Table of Contents
PLUG POWER INC.
INDEX
to FORM 10-Q
2
Table of Contents
PART
1. FINANCIAL INFORMATION
Item
1 – Interim Financial Statements (Unaudited)
Plug Power Inc. and Subsidiaries
|
Condensed Consolidated
Balance Sheets
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
|
|
|
2011
|
|
2010
|
|
|
Assets
|
Current assets:
|
|
|
|
|
Cash and cash equivalents
|
$
|
27,151,258
|
|
$
|
10,955,403
|
|
Available-for-sale securities
|
-
|
|
10,403,315
|
|
Accounts receivable, less allowance of $10,160 in 2011 and $10,160 in 2010
|
4,130,940
|
|
4,196,361
|
|
Inventory
|
7,628,018
|
|
10,539,116
|
|
Assets held for sale
|
-
|
|
1,000,000
|
|
Prepaid expenses and other current assets
|
1,357,134
|
|
1,584,466
|
|
|
Total current assets
|
40,267,350
|
|
38,678,661
|
Restricted cash
|
525,000
|
|
525,000
|
Property, plant and equipment, net
|
9,506,063
|
|
9,838,631
|
Investment in leased property, net
|
-
|
|
263,239
|
Intangible assets, net
|
8,848,390
|
|
9,871,394
|
|
|
Total assets
|
$
|
59,146,803
|
|
$
|
59,176,925
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders' Equity
|
Current liabilities:
|
|
|
|
|
Accounts payable
|
$
|
1,208,218
|
|
$
|
3,560,048
|
|
Accrued expenses
|
3,644,267
|
|
4,336,229
|
|
Product warranty reserve
|
971,100
|
|
862,480
|
|
Current portion long term debt
|
-
|
|
9,956
|
|
Deferred revenue
|
3,748,253
|
|
4,349,749
|
|
Other current liabilities
|
70,698
|
|
1,901,372
|
|
|
Total current liabilities
|
9,642,536
|
|
15,019,834
|
|
Warrant liability
|
6,977,623
|
|
-
|
|
Other liabilities
|
1,273,575
|
|
1,243,728
|
|
|
Total liabilities
|
17,893,734
|
|
16,263,562
|
Stockholders' equity:
|
|
|
|
|
Common stock, $0.01 par value per share; 245,000,000 shares authorized;
|
|
|
|
|
Issued (including shares in treasury):
|
|
|
|
|
22,574,555 at June 30, 2011 and 13,369,924 at December 31, 2010
|
225,745
|
|
1,336,992
|
|
Additional paid-in capital
|
782,834,787
|
|
769,659,871
|
|
Accumulated other comprehensive income
|
1,070,402
|
|
965,868
|
|
Accumulated deficit
|
(741,325,726)
|
|
(727,329,858)
|
|
Less common stock in treasury:
|
|
|
|
|
165,741 shares at June 30, 2011 and 180,449 shares at December 31, 2010
|
(1,552,139)
|
|
(1,719,510)
|
|
|
Total stockholders' equity
|
41,253,069
|
|
42,913,363
|
|
|
Total liabilities and stockholders' equity
|
$
|
59,146,803
|
|
$
|
59,176,925
|
|
|
|
|
|
|
Note - Share and per share
information for the prior periods has been retroactively adjusted to reflect the
May 19, 2011 one-for-ten reverse stock split of the Company’s common
stock.
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
3
Table of Contents
Plug Power Inc. and Subsidiaries
|
Condensed Consolidated
Statements of Operations
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Six months ended
|
|
|
June 30,
|
|
June 30,
|
|
|
2011
|
|
2010
|
|
2011
|
|
2010
|
Product and service revenue
|
|
$
|
2,620,845
|
|
$
|
2,325,769
|
|
$
|
7,614,250
|
|
$
|
5,488,946
|
Research and development contract revenue
|
|
1,562,719
|
|
778,017
|
|
2,347,943
|
|
1,985,991
|
Licensed technology revenue
|
|
163,125
|
|
-
|
|
326,250
|
|
-
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
4,346,689
|
|
3,103,786
|
|
10,288,443
|
|
7,474,937
|
|
|
|
|
|
|
|
|
|
Cost of product and service revenue
|
|
4,931,170
|
|
4,542,373
|
|
11,621,623
|
|
7,830,226
|
Cost of research and development contract revenue
|
|
2,473,516
|
|
1,679,372
|
|
3,810,596
|
|
3,560,886
|
Research and development expense
|
|
1,106,248
|
|
4,381,814
|
|
2,168,974
|
|
9,868,531
|
Selling, general and administrative expenses
|
|
3,882,917
|
|
10,540,814
|
|
7,444,515
|
|
14,398,531
|
Amortization of intangible assets
|
|
588,473
|
|
566,880
|
|
1,169,962
|
|
1,129,055
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
(8,635,635)
|
|
(18,607,467)
|
|
(15,927,227)
|
|
(29,312,292)
|
Interest and other income and net realized losses
|
|
|
|
|
|
|
|
|
from available-for-sale securities
|
|
87,224
|
|
268,622
|
|
121,122
|
|
610,661
|
Change in fair value of warrant liability
|
|
1,790,520
|
|
-
|
|
1,790,520
|
|
-
|
Change in fair value of auction rate securities repurchase agreement
|
|
-
|
|
(2,469,113)
|
|
-
|
|
(3,135,032)
|
Net trading gain
|
|
-
|
|
2,469,113
|
|
-
|
|
3,135,032
|
Interest and other expense and foreign currency gain (loss)
|
|
5,223
|
|
(177,110)
|
|
19,717
|
|
(373,074)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(6,752,668)
|
|
$
|
(18,515,955)
|
|
$
|
(13,995,868)
|
|
$
|
(29,074,705)
|
|
|
|
|
|
|
|
|
|
Loss per share:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.41)
|
|
$
|
(1.41)
|
|
$
|
(0.95)
|
|
$
|
(2.22)
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares
|
|
|
|
|
|
|
|
|
outstanding
|
|
16,320,235
|
|
13,116,175
|
|
14,781,215
|
|
13,080,315
|
|
|
|
|
|
|
|
|
|
Note - Share and per share
information for the prior periods has been retroactively adjusted to reflect
the May 19, 2011 one-for-ten reverse stock split of the Company’s common
stock.
The accompanying notes are an integral part of these
unaudited condensed consolidated financial statements.
4
Table of Contents
Plug Power Inc. and Subsidiaries
|
Condensed Consolidated
Statements of Cash Flows
|
(Unaudited)
|
|
Six months ended
|
|
June 30,
|
|
2011
|
|
2010
|
Cash Flows From Operating Activities:
|
|
|
|
Net loss
|
$
|
(13,995,868)
|
|
$
|
(29,074,705)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
Depreciation of property, plant and equipment, and investment in leased property
|
1,053,465
|
|
1,612,944
|
Amortization of intangible assets
|
1,169,962
|
|
1,129,055
|
Stock-based compensation
|
1,002,824
|
|
892,410
|
Loss on disposal of property, plant and equipment
|
308,891
|
|
42,340
|
Provision for bad debts
|
-
|
|
10,160
|
Realized loss on available for sale securities
|
22,421
|
|
-
|
Net unrealized gains on trading securities
|
-
|
|
(3,135,032)
|
Change in fair value of auction rate debt securities repurchase agreement
|
-
|
|
3,135,032
|
Change in fair value of warrant liability
|
(1,790,520)
|
|
-
|
Changes in assets and liabilities:
|
|
|
|
Accounts receivable
|
66,054
|
|
(1,075,248)
|
Inventory
|
4,164,884
|
|
(3,751,612)
|
Prepaid expenses and other current assets
|
227,216
|
|
1,822,181
|
Accounts payable and accrued expenses
|
(4,799,707)
|
|
4,051,074
|
Deferred revenue
|
(601,496)
|
|
(162,346)
|
Net cash used in operating activities
|
(13,171,874)
|
|
(24,503,747)
|
|
|
|
|
Cash Flows From Investing Activities:
|
|
|
|
Purchase of property, plant and equipment
|
(1,065,335)
|
|
(1,214,992)
|
Investment in leased property, net
|
-
|
|
(283,561)
|
Restricted cash
|
-
|
|
(72)
|
Proceeds from disposal of property, plant and equipment
|
45,000
|
|
35,000
|
Proceeds from trading securities
|
-
|
|
33,925,001
|
Proceeds from maturities and sales of available-for-sale securities
|
10,399,396
|
|
45,904,306
|
Purchases of available-for-sale securities
|
-
|
|
(30,011,638)
|
Net cash provided by investing activities
|
9,379,061
|
|
48,354,044
|
|
|
|
|
Cash Flows From Financing Activities:
|
|
|
|
Purchase of treasury stock
|
(158,492)
|
|
(441,506)
|
Proceeds from issuance of common stock and warrants
|
22,027,166
|
|
-
|
Stock issuance costs
|
(1,862,293)
|
|
-
|
Repayment of borrowings under line of credit
|
-
|
|
(33,925,000)
|
Principal payments on long-term debt
|
(9,956)
|
|
(207,751)
|
Net cash provided by (used in) financing activities
|
19,996,425
|
|
(34,574,257)
|
|
|
|
|
Effect of exchange rate changes on cash
|
(7,757)
|
|
(67,709)
|
Increase (decrease) in cash and cash equivalents
|
16,195,855
|
|
(10,791,669)
|
Cash and cash equivalents, beginning of period
|
10,955,403
|
|
14,580,983
|
Cash and cash equivalents, end of period
|
$
|
27,151,258
|
|
$
|
3,789,314
|
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
5
Table of Contents
Plug Power Inc.
Notes
to Condensed 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 and is involved in the design, development, commercialization and
manufacture of fuel cell systems for the industrial off-road (forklift or
material handling) market. Plug Power has also provided product development for
the back-up and stationary power markets worldwide. Effective April 1, 2010,
the Company was no longer considered a development stage enterprise since its
principal operations began to provide more than insignificant revenues as the
Company received orders from repeat customers, increased its customer base and
had a significant backlog. Prior to April 1, 2010, the Company was considered a
development stage enterprise because substantially all of our resources and
efforts were aimed at the discovery of new knowledge that could lead to
significant improvement in fuel cell reliability and durability, and the
establishment, expansion and stability of markets for our products.
The
Company is focused on proton exchange membrane, or PEM, fuel cell and fuel
processing technologies and fuel cell/battery hybrid technologies, 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 (LPG), natural gas, propane, methanol, ethanol, gasoline or biofuels.
Hydrogen can also be obtained from the electrolysis of water. Hydrogen can be
purchased directly from industrial gas providers or can be produced on-site at
consumer locations.
The
Company concentrates its efforts on developing, manufacturing and selling our
hydrogen-fueled PEM GenDrive
®
products on commercial terms
for industrial off-road (forklift or material handling) applications, with a
focus on multi-shift high volume manufacturing and high throughput distribution
sites.
We
have previously invested in development and sales activities for
low-temperature remote-prime power GenSys
®
products and our
GenCore
®
product, which is a hydrogen fueled PEM fuel cell
system to provide back-up power for critical infrastructure. While Plug Power
will continue to service and support GenSys and/or GenCore products on a
limited basis, our main focus is our GenDrive product line.
The
Company sells its products worldwide, with a primary focus on North America,
through our direct product sales force, original equipment manufacturers (OEMs)
and their dealer networks. We sell to business, industrial and government
customers.
6
Table of Contents
The
Company was incorporated in the State of Delaware on August 13, 1999 and prior
to that time operated as a joint venture between Edison Development Corporation
and Mechanical Technology Incorporated. The Company’s common stock became
listed on The NASDAQ Stock Market on October 29, 1999. In 2007, we merged with
and acquired all the assets, liabilities and equity of Cellex Power Products,
Inc. (Cellex) and General Hydrogen Corporation (General Hydrogen). Through
these acquisitions, and our continued GenDrive product development efforts,
Plug Power became the first fuel cell company to offer a complete suite of
products: Class 1 - sit-down counterbalance trucks, Class 2 – stand-up
reach trucks and Class 3 – rider pallet trucks. The launch of our Class 2
product occurred in January of 2010.
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.
Although
the Company had a significant amount of available-for-sale securities, as
described further below, as of December 31, 2010, neither the Company nor any
of its subsidiaries was an “investment company” pursuant to the
Investment Company Act of 1940, as amended.
Liquidity
We
have experienced recurring operating losses and we anticipate incurring
substantial additional losses. Including the receipt of $20.2 million in
net proceeds from the capital raise completed in the quarter ended June 30,
2011, we had approximately $27.2 million of cash and cash equivalents at June
30, 2011 to fund our future operations. Additionally,
subsequent to June 30, 2011, we entered into a revolving credit facility
arrangement with Silicon Valley Bank (SVB) providing availability to an
additional $7 million to support working capital needs (See Note 18, Subsequent
Events, of the condensed consolidated financial statements of this Form 10-Q for
further disclosure on the credit facility with SVB). We believe that our
current cash, cash equivalents and cash generated from future sales, in
conjunction with the availability of the credit facility, will provide
sufficient liquidity to fund operations through the end of 2012. This
projection is based on our current expectations regarding product sales, cost
structure, cash burn rate and operating assumptions (including those specified
in the May 2010 restructuring plan). In the event that our operating expenses
are higher than anticipated or the gross margins and shipments of our GenDrive products
do not increase as we expect, we may be required to implement contingency plans
within our control to conserve and/or enhance our liquidity to meet operating
needs. Such plans include: our ability to further reduce discretionary
expenses, monetize our real estate assets through a sale-leaseback arrangement
and obtain additional funding from licensing the use of our technologies. 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, and
continued development and expansion of our products. Our ability to achieve
profitability, future liquidity needs and capital requirements will depend upon
numerous factors, including the timing and quantity of product orders and
shipments, 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 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 any new research and development
programs; and changes in our strategy or our planned activities. As a result,
we can provide no assurance that we will be
able to fund our operations beyond 2012 without additional external financing.
If additional funding is required beyond 2012, alternatives the Company would
consider include equity or debt financings, strategic alliances or joint
ventures. Under such conditions, if we are unable to obtain additional capital
prior to the end of 2012, we may not be able to sustain our future operations
into 2013 and may be required to delay, reduce and/or cease our operations
and/or seek bankruptcy protection. We cannot assure you that any necessary
additional financing will be available on terms favorable to us, or at all.
Given the difficult current economic environment, we believe that it could be
difficult to raise additional funds and there can be no assurance as to the
availability of additional financing or the terms upon which additional
financing may be available. Additionally, even if we raise sufficient capital
through equity or debt financing, strategic alliances or otherwise, there can
be no assurances that the revenue or capital infusion will be sufficient to
enable us to develop our business to a level where it will be profitable or
generate positive cash flow. If we raise additional funds through the issuance
of equity or convertible debt securities, the percentage ownership of our
stockholders could be significantly diluted, and these newly issued securities
may have rights, preferences or privileges senior to those of existing
stockholders. If we incur additional debt, a substantial portion of our operating
cash flow may be dedicated to the payment of principal and interest on such
indebtedness, thus limiting funds available for our business activities. The
terms of any debt securities issued could also impose significant restrictions
on our operations. Broad market and industry factors may seriously harm the
market price of our common stock, regardless of our operating performance, and
may adversely impact our ability to raise additional funds. If we raise
additional funds through collaborations and/or licensing arrangements, we might
be required to relinquish significant rights to our technologies, or grant
licenses on terms that are not favorable to us.
7
Table of Contents
As
of June 30, 2011, we had cash and cash equivalents of $27.2 million and
working capital of $30.6 million.
2. Basis of
Presentation
Principles of Consolidation:
The accompanying unaudited condensed 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. It is the Company’s policy to reclassify
prior period consolidated financial statements to conform to current period
presentation.
Interim Financial Statements
:
The accompanying unaudited
condensed 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 U.S. generally accepted accounting
principles have been condensed or omitted. These unaudited condensed
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, 2010.
8
Table of Contents
The
information presented in the accompanying condensed consolidated balance sheet
as of December 31, 2010 has been derived from the Company’s
December 31, 2010 audited consolidated financial statements. All other
information has been derived from the Company’s unaudited condensed
consolidated financial statements as of June 30, 2011 and for the three and six
months ending June 30, 2011 and 2010.
Use of Estimates:
The unaudited condensed interim consolidated financial
statements have been prepared in conformity with GAAP, 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 financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Stock Split
: The financial
statements for all prior periods have been retroactively adjusted to reflect
the May 19, 2011 one-for-ten reverse stock split of the Company’s common
stock. See Note 6, Stockholders’ Equity, of the condensed consolidated
financial statements for more detail.
Significant Accounting
Policies:
Warrant accounting
We account for common stock warrants in accordance with
applicable accounting guidance provided in ASC 815, Derivatives and Hedging
Contracts in Entitys Own Equity, as either derivative liabilities or as equity
instruments depending on the specific terms of the warrant agreement. In
compliance with applicable securities law, 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 classify these derivative warrant liabilities on the
condensed consolidated balance sheets as a long term liability, which is
revalued at each balance sheet date subsequent to the initial issuance. We use
the Black-Scholes pricing model to value the derivative warrant liability. The Black-Scholes 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. The Company used the
following assumptions for its common stock warrants. The risk-free interest
rate for May 31, 2011 (issuance date) and June 30, 2011 were .75% and .56%,
respectively. The volatility of the market price of the Companys common stock
for May 31, 2011 (issuance date) and June 30, 2011 were 94.4% and 87.6%,
respectively. The expected average term of the warrant used for both periods
was 2.5 years. There was no expected dividend yield for the warrants granted.
As a result, if factors change and different assumptions are used, the warrant
liability and the change in estimated fair value could be materially different. Changes
in the fair value of the warrants are reflected in the condensed consolidated
statement of operations as change in fair value of warrant liability.
Recent Accounting Pronouncements:
In May
2011, the Financial Accounting Standards Board (FASB) issued Accounting
Standards Update (ASU) No. 2011-04, Fair Value Measurement (Topic 820), which
provides common fair value measurement and disclosure requirements in
accordance with GAAP and International Financial Reporting Standards (IFRS).
The amendments explain how to measure fair value and
will improve the comparability of fair value measurement presented and
disclosed in financial statements prepared in accordance with GAAP and IFRS. This
authoritative guidance is to be applied prospectively and is effective during
interim and annual periods beginning after December 15, 2011. The Company is
currently evaluating the impact, if any, of this new accounting update and
plans to adopt this new standard on January 1, 2012 and does not believe
adoption of this new standard will have a material effect on its consolidated financial
position, consolidated results of operations, and liquidity.
In June
2011, the FASB issued ASU No. 2011-05, Comprehensive Income
(Topic
220), requiring entities to present net income and other comprehensive income
in either a single continuous statement or in two separate, but consecutive,
statements of net income and other comprehensive income. Reclassification
adjustments between net income and other comprehensive income must be shown on
the face of the statement(s), with no resulting change in net earnings. This
authoritative guidance eliminates the option to present the components of other
comprehensive income as part of the statement of changes in stockholder’s
equity. This authoritative guidance is to be applied retrospectively and is
effective for fiscal years, and interim periods within those years, beginning
after December 15, 2011.
The Company
is currently evaluating the impact, if any, of this new accounting update and
plans to adopt this new standard on January 1, 2012 and does not believe
adoption of this new standard will have a material effect on its consolidated
financial position, consolidated results of operations, and liquidity.
9
Table of Contents
3. Fair Value Measurements
The
Company complies with the provisions of FASB ASC No. 820, Fair Value
Measurements and Disclosures
(ASC 820), in measuring fair value and in
disclosing fair value measurements. ASC 820 defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair value
measurements required under other accounting pronouncements. FASB ASC No.
820-10-35, Fair Value Measurements and Disclosures- Subsequent Measurement (ASC
820-10-35), clarifies that fair value is an exit price, representing the amount
that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants. ASC 820-10-35-3 also requires that a
fair value measurement reflect the assumptions market participants would use in
pricing an asset or liability based on the best information available.
Assumptions include the risks inherent in a particular valuation technique
(such as a pricing model) and/or the risks inherent in the inputs to the model.
ASC
820-10-35 discusses valuation techniques, such as the market approach
(comparable market prices), the income approach (present value of future income
or cash flow), and the cost approach (cost to replace the service capacity of
an asset or replacement cost). The statement utilizes a fair value hierarchy
that prioritizes the inputs to valuation techniques used to measure fair value
into three broad levels. The following is a brief description of those three
levels:
Level 1
Inputs – Level 1 inputs are unadjusted quoted prices in active markets
for assets or liabilities identical to those to be reported at fair value. An
active market is a market in which transactions occur for the item to be fair
valued with sufficient frequency and volume to provide pricing information on
an ongoing basis.
Level 2
Inputs – Level 2 inputs are inputs other than quoted prices included
within Level 1. Level 2 inputs are observable either directly or indirectly.
These inputs include: (a) Quoted prices for similar assets or liabilities
in active markets; (b) Quoted prices for identical or similar assets or
liabilities in markets that are not active, such as when there are few
transactions for the asset or liability, the prices are not current, price
quotations vary substantially over time or in which little information is
released publicly; (c) Inputs other than quoted prices that are observable
for the asset or liability; and (d) Inputs that are derived principally
from or corroborated by observable market data by correlation or other means.
10
Table of Contents
Level 3
Inputs – Level 3 inputs are unobservable inputs for an asset or
liability. These inputs 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.
When determining
the fair value measurements for assets or liabilities required or permitted to
be recorded at and/or marked to fair value, the Company considers the principal
or most advantageous market in which it would transact and considers
assumptions that market participants would use when pricing the asset or
liability. When possible, the Company looks to active and observable markets to
price identical assets. When identical assets are not traded in active markets,
the Company looks to market observable data for similar assets.
The
following tables summarize the basis used to measure certain financial assets
and liabilities
at fair value on a recurring basis in the condensed consolidated balance
sheets:
Basis of Fair Value
Measurements
Balance
at June 30, 2011
|
Total
|
Quoted Prices
in Active
Markets for
Identical Items
(Level 1)
|
Significant Other
Observable Inputs
(Level 2)
|
Significant
Unobservable
Inputs
(Level 3)
|
Warrant Liability
|
$
|
6,977,623
|
|
$
|
|
|
$
|
|
|
$
|
6,977,623
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2010
|
Total
|
Quoted Prices
in Active
Markets for
Identical Items
(Level 1)
|
Significant Other
Observable Inputs
(Level 2)
|
Significant
Unobservable
Inputs
(Level 3)
|
Available-for-sale securities – U.S. treasury securities
|
$
|
10,403,315
|
|
$
|
10,403,315
|
|
$
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
The following
tables show reconciliations of the beginning and ending balances for liabilities
measured at fair value on a recurring basis using significant unobservable
inputs (i.e. Level 3) for the six months ended June 30, 2011:
Warrant Liability
|
Fair Value
Measurements Using
Significant
Unobservable Inputs
|
Beginning of period
|
$
|
-
|
|
|
|
Issuance of common stock warrants
|
|
8,768,143
|
|
|
|
Change in fair value of warrant liability
|
|
(1,790,520)
|
|
|
|
Fair value of warrant liability at June 30, 2011
|
$
|
6,977,623
|
|
|
|
The
following summarizes the valuation technique for assets and liabilities measured and recorded
at fair value:
Available-for-sale
securities: For our level 1 securities, which represent U.S. treasury securities, fair value is based on quoted market prices.
Warrant liability:
For our level 3
securities, which represent common stock warrants, fair value 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.
11
Table of Contents
4. Earnings Per
Share
Basic
earnings per common share are computed by dividing net loss available to common
stockholders by the weighted average number of common shares outstanding during
the reporting period, adjusted for unvested restricted stock. Diluted earnings
per share reflects the potential dilution that could occur if securities or
other contracts to issue common stock (such as convertible preferred stock,
stock options, unvested restricted stock, and warrants) 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 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 financial statements for all prior
periods have been retroactively adjusted to reflect the May 19, 2011
one-for-ten reverse stock split of the Company’s common stock.
The
following table provides the components of the calculations of basic and
diluted earnings per share:
|
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
|
|
June 30,
|
|
|
|
June 30,
|
|
|
|
June 30,
|
|
|
|
June 30,
|
|
|
|
|
2011
|
|
|
|
2010
|
|
|
|
2011
|
|
|
|
2010
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
|
(6,752,668
|
)
|
|
$
|
|
(18,515,955
|
)
|
|
$
|
|
(13,995,868
|
)
|
|
$
|
|
(29,074,705
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares
|
|
|
16,320,235
|
|
|
|
13,116,175
|
|
|
|
14,781,215
|
|
|
|
13,080,315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The potential
dilutive common shares are summarized as follows:
|
|
At
June 30,
|
|
|
2011
|
|
2010
|
Stock options outstanding
|
|
1,059,953
|
|
564,419
|
Unvested restricted stock
|
|
409,164
|
|
554,370
|
Warrants
(1)
|
|
7,128,563
|
|
57,143
|
Number
of potential dilutive common shares
|
|
8,597,680
|
|
1,175,932
|
(1)
|
On May 31, 2011, the Company granted 7,128,563 warrants as
part of an underwritten public offering. On May 4, 2007, the Company
granted 57,143 warrants (as adjusted for the reverse stock split) to the
shareholders of General Hydrogen as part of the acquisition of that company.
Those warrants expired on May 4, 2011.
|
12
Table of Contents
5.
Intangible Assets
The gross carrying
amount and accumulated amortization of the Company’s acquired
identifiable intangible assets related to Plug Power Canada Inc. as of June 30,
2011 are as follows:
|
|
Weighted
Average
Amortization
Period
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Effect of
Foreign
Currency
Translation
|
|
Total
|
Acquired Technology
|
|
8 years
|
|
$
|
15,900,000
|
|
$
|
(8,884,179)
|
|
$
|
1,353,369
|
|
$
|
8,369,190
|
Customer Relationships
|
|
8 years
|
|
|
1,000,000
|
|
|
(520,800)
|
|
|
—
|
|
|
479,200
|
|
|
|
|
$
|
16,900,000
|
|
$
|
(9,404,979)
|
|
$
|
1,353,369
|
|
$
|
8,848,390
|
6.
Stockholders’ Equity
On May 19, 2011,
the Company implemented a one-for-ten reverse stock
split of its common stock. As a result of the reverse
stock split, each ten (10) outstanding shares of pre-split common stock were
automatically combined into one (1) share of post-split common stock. Fractional shares received cash and
proportional adjustments were made to the Company’s outstanding stock
options and other equity awards and to the Company’s equity compensation
plans to reflect the reverse stock split. The financial statements for all
prior periods have been retroactively adjusted to reflect this stock split for
both common stock issued and options outstanding.
On May 31, 2011, the Company completed
an underwritten public offering of
8,265,000 shares of its common stock and warrants to purchase an aggregate of
7,128,563 shares of common stock (
including
warrants to purchase an aggregate of 929,813 shares of common stock purchased
by the underwriter pursuant to the exercise of its over-allotment option). The
shares and the warrants were sold together as a fixed combination, with each
combination consisting of one share of common stock and 0.75 of a warrant to
purchase one share of common stock, at a price to the public of $2.42 per fixed
combination
. Net proceeds, after underwriting discounts
and commissions and other
fees and expenses payable by
Plug Power,
were $18,289,883 (of this amount $8,768,143
in fair value was recorded as warranty liability at issuance date). The
warrants are exercisable upon issuance and will expire on May 31, 2016. The
exercise price of the warrants is $3.00 per share of common stock. The warrants
include weighted-average anti-dilution protection and, in the event of a sale
of the Company, and under certain conditions, each warrantholder has the right to require the Company to
purchase such holder’s warrants at a price determined using a
Black-Scholes option pricing model.
On
June 8, 2011, the Company sold 836,750 additional shares of
common stock, pursuant to the underwriter’s partial exercise of its over-allotment
option
, resulting in additional net proceeds to Plug
Power of $1,874,990
.
On July 1,
2011, the Company
sold 231,000
additional shares of common stock, pursuant to the underwriter’s partial
exercise of its over-allotment option, resulting in additional
net proceeds to Plug Power of $
517,624.
13
Table of Contents
Changes
in stockholders’ equity for the six months ended June 30, 2011 are as
follows:
|
Common Stock
|
|
|
|
|
|
Treasury Stock
|
|
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Additional Paid-
in-Capital
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
Shares
|
|
Amount
|
|
Accumulated
Deficit
|
|
Total
Stockholders'
Equity
|
|
Total
Comprehensive
Loss
|
December 31, 2010
|
13,369,924
|
|
$
|
1,336,992
|
|
$
|
769,659,871
|
|
$
|
965,868
|
|
180,449
|
|
$
|
(1,719,510)
|
|
$
|
(727,329,858)
|
|
$
|
42,913,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
(13,995,868)
|
|
(13,995,868)
|
|
(13,995,868)
|
Foreign currency translation gain
|
-
|
|
-
|
|
-
|
|
86,032
|
|
-
|
|
-
|
|
-
|
|
86,032
|
|
86,032
|
Unrealized gain on available-for-sale securities
|
-
|
|
-
|
|
-
|
|
18,502
|
|
-
|
|
-
|
|
-
|
|
18,502
|
|
18,502
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(13,891,334)
|
Stock based compensation
|
102,881
|
|
1,029
|
|
994,561
|
|
-
|
|
-
|
|
-
|
|
-
|
|
995,590
|
|
|
Reclassification adjustment - stock split
|
-
|
|
(1,203,293)
|
|
1,203,293
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
|
Public offering common stock, net
|
9,101,750
|
|
91,017
|
|
11,305,712
|
|
-
|
|
-
|
|
-
|
|
-
|
|
11,396,729
|
|
|
Issuance of treasury shares
|
-
|
|
-
|
|
(328,650)
|
|
-
|
|
(35,000)
|
|
328,650
|
|
-
|
|
-
|
|
|
Purchase of treasury shares
|
-
|
|
-
|
|
-
|
|
-
|
|
20,292
|
|
(161,279)
|
|
-
|
|
(161,279)
|
|
|
June 30, 2011
|
22,574,555
|
|
$
|
225,745
|
|
$
|
782,834,787
|
|
$
|
1,070,402
|
|
165,741
|
|
$
|
(1,552,139)
|
|
$
|
(741,325,726)
|
|
$
|
41,253,069
|
|
|
7.
Supplemental Disclosures of Cash Flows Information
The
following represents required supplemental disclosures of cash flows
information and non-cash financing and investing activities which occurred
during the six months ended June 30, 2011 and 2010:
|
|
June 30,
2011
|
|
June 30,
2010
|
Stock-based compensation accrual impact
|
|
$
|
(10,021)
|
|
$
|
586,652
|
Change in unrealized gain (loss) on available-for-sale securities
|
|
|
18,502
|
|
|
(58,237)
|
Cash paid for interest
|
|
|
-
|
|
|
360,289
|
Transfer of leased assets to inventory
|
|
|
263,239
|
|
|
-
|
Transfer of assets held for sale to inventory
|
|
|
1,000,000
|
|
|
-
|
14
Table of Contents
8. Restructuring Charges
On May 25, 2010, the Company adopted a restructuring
plan to focus and align the Company on its GenDrive business. As part of this
plan, the Company consolidated all operations into its Latham, New York headquarters. At June 30, 2011, $704,199 remains in accrued expenses on the
condensed consolidated balance sheets.
The
accrued restructuring charges relating to the May 2010 restructuring are
comprised of the following at June 30, 2011:
|
Accrued
restructuring
charges at
January 1, 2011
|
|
Adjustments to,
additional accrued
restructuring charges
or non-cash
charges
|
|
Cash payments
|
|
Accrued
restructuring
charges at
June 30, 2011
|
Personnel Related
|
$
|
-
|
|
$
|
24,095
|
|
$
|
(24,095)
|
|
$
|
-
|
Net Lease Obligations
|
|
687,696
|
|
|
16,503
|
|
|
-
|
|
|
704,199
|
Total
|
$
|
687,696
|
|
$
|
40,598
|
|
$
|
(24,095)
|
|
$
|
704,199
|
During 2008, the Company adopted two restructuring
plans to focus the Company on becoming a market and sales driven organization,
to drive revenue growth, improve organizational efficiency and to position the
Company for long-term profitability. As part of the plans, the Company
implemented reductions in workforce, terminated purchase commitments, charged
off inventory related to lapsed product lines, cut back discretionary spending,
and deferred non strategic projects. At June 30, 2011, $497,642 remains in
accrued expenses on the condensed consolidated balance sheets.
The accrued restructuring charges relating to the two
2008 restructurings are comprised of the following at June 30, 2011:
|
Accrued
restructuring
charges at
January 1, 2011
|
|
Adjustments to,
additional accrued
restructuring charges
or non-cash
charges
|
|
Cash payments
|
|
Accrued
restructuring
charges at
June 30, 2011
|
Contract Cancellation
|
$
|
547,356
|
|
$
|
-
|
|
$
|
(49,714)
|
|
$
|
497,642
|
Net Lease Obligations
|
|
157,516
|
|
|
-
|
|
|
(157,516)
|
|
|
-
|
Total
|
$
|
704,872
|
|
$
|
-
|
|
$
|
(207,230)
|
|
$
|
497,642
|
15
Table of Contents
9. Credit Line Agreement and Auction Rate Debt
Securities Repurchase Agreement
In
December 2008, the Company entered into a Credit Line Agreement with a third-party
lender with a maximum availability of $62.9 million. The Company’s
auction rate debt securities included in trading securities were pledged as
collateral for the Credit Line Agreement. As of December 31, 2008, the Company
had drawn down $62.9 million on this line of credit. During the six months
ended June 30, 2010, approximately $33.9 million of auction rate debt
securities were sold by the third-party lender holding the collateral which
resulted in a corresponding reduction in amounts outstanding under the Credit
Line Agreement. The Credit Line Agreement had interest at a variable rate equal
to the average rate of interest earned by the Company on the auction rate debt
securities pledged as collateral for the Credit Line Agreement. Interest expense
on the advances on the Credit Line Agreement was approximately $296,000 for the
six months ended June 30, 2010.
The
advances on the Credit Line Agreement were repayable on demand by the
third-party lender. If the third-party lender had exercised its right to demand
repayment of the advances under the Credit Line Agreement prior to June 30,
2010 (the date upon which the Company could first exercise its rights under the
Repurchase Agreement discussed below), the third-party lender was required to
arrange alternative financing on terms substantially the same as the Credit
Line Agreement or the third party lender must repurchase the auction rate debt
securities pledged as collateral for the Credit Line Agreement at their par
value.
In December 2008,
the Company also entered into a Repurchase Agreement with the third-party
lender such that the Company may require the third-party lender to repurchase
the auction rate debt securities pledged as collateral for the Credit Line
Agreement, at their par value, from June 30, 2010 through July 2, 2012 as full
settlement for the advances on the Credit Line Agreement. The Company
elected to record this item at its fair value in accordance with ASC No.
825-10-25 to allow consistent treatment of this repurchase agreement and the
underlying collateral. At June 30, 2010, the fair value of this item was
approximately $2.8 million and was recorded as an asset on the condensed
consolidated balance sheets. The change in the fair value of the Repurchase
Agreement for the six months ended June 30, 2010 was approximately $3.1 million
and was recorded as a realized loss on the condensed consolidated statements of
operations.
Effective July 1,
2010, all auction rate debt securities were repurchased at par by the
third-party lender holding the collateral under the Repurchase Agreement which
resulted in a corresponding reduction in amounts outstanding and the
extinguishment of the Credit Line Agreement.
16
Table of Contents
10. Debt and Lease Arrangement
In March 2009, the
Company signed a $1.7 million promissory note issued by Key Equipment
Finance Inc. (Key Equipment) for the purpose of financing GenDrive products
leased to Central Grocers, beginning on April 1, 2009. Monthly
installments of $32,900 were due through March 2014 and the note was subject to
interest at a fixed rate of 7.23% per annum on a 360-day year. The Company was
initially required to pledge $1.8 million in cash to collateralize the debt,
which was to decrease over time in accordance with decreases in the outstanding
balance of the debt. This note was also secured by the equipment that was
leased to Central Grocers as described in the Master Security Agreement and
Collateral Schedule No. 01 dated as of March 20, 2009, together known as the
Master Security Agreement. The promissiory note was paid in full during the
year ended December 31, 2010.
On April 1, 2009,
the Company began leasing the GenDrive products to Central Grocers. The terms
of the arrangement were 60 monthly installments of $32,900. Upon expiration of
the 60 months (initial term of the lease), Central Grocers had the option to
renew the lease for an additional five years at mutually agreed upon pricing,
to purchase all equipment for a purchase price equal to the then fair market
value thereof, or to return the equipment to the Company. The Company shall
provide maintenance in accordance with the lease agreement.
In December 2010,
the Company assigned all of its rights, title and interest in the lease to
Somerset Capital Group, Ltd. (Somerset), but the Company will continue to
provide maintenance in accordance with the lease agreement. In conjunction with
the assignment of the lease, the Key Equipment promissory note was completely
paid off by the Company and the collateralized cash was released to the
Company. The Company sold all of the equipment under the lease to Somerset.
During 2010, the
Company entered into the second phase of leased assets with Central Grocers.
The terms of the arrangement were 60 monthly installments of $24,640. Upon
expiration of the 60 months (initial term of the lease), Central Grocers had
the option to renew the lease for an additional five years at mutually agreed
upon pricing, to purchase all equipment for a purchase price equal to the then
fair market value thereof, or to return the equipment to the Company. The
Company shall provide maintenance in accordance with the lease agreement.
In December 2010,
the Company assigned all of its rights, title and interest in the second phase
lease to Somerset, but the Company will continue to provide maintenance in
accordance with the lease agreement. The Company sold all of the equipment
under the second phase lease to Somerset.
In July 2009, the
Company signed a letter of credit with Key Bank in the amount of $525,000. The
standby letter of credit is required by the agreement negotiated between Air
Products and Chemicals, Inc. (Air Products) and the Company to supply hydrogen
infrastructure and hydrogen to Central Grocers at their distribution center.
The standby letter of credit is collateralized by cash held in a restricted
account and is recorded as restricted cash in the condensed consolidated
balances sheets as of June 30, 2011 and December 31, 2010.
In October 2009,
the Company entered into a 15 month financing arrangement for an electrolyzer. The
outstanding balance of the debt as of December 31, 2010 was approximately
$10,000 and was recorded as current portion of long term debt in the condensed
consolidated balance sheets. This debt was paid in full during the first
quarter of 2011.
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11.
Available-For-Sale Securities
The
amortized cost and fair value of the Company’s available-for-sale
securities as of December 31, 2010 were as follows:
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury Securities
|
$
|
10,421,817
|
|
$
|
-
|
|
$
|
18,502
|
|
$
|
10,403,315
|
|
|
|
|
|
|
|
|
|
|
|
|
Included
in the above table are two securities where the current fair value is less than
the related amortized cost at December 31, 2010. These unrealized losses
do not reflect any deterioration of the credit worthiness of the issuers of the
securities. All securities are of investment grade. The unrealized losses on
these temporarily impaired securities are a result of changes in interest rates
for fixed-rate securities where the interest rate received is less than the
current rate available for new offerings of similar securities and changes in
market spreads as a result of shifts in supply and demand. The contractual
maturities of available-for-sale securities were in the quarter ended March 31,
2011 for balances as of December 31, 2010.
The
Company recognized gross gains, gross losses and proceeds on available-for-sale
securities for each of the six months ended June 30 as follows:
|
2011
|
2010
|
Proceeds on
Sales
|
$
|
-
|
$
|
9,978,083
|
Proceeds on
Maturities
|
$
|
10,399,396
|
$
|
35,926,223
|
Gross Realized Gains
|
$
|
-
|
$
|
-
|
Gross Realized Losses
|
$
|
22,421
|
$
|
-
|
12. Fair Value of Financial Instruments
The
following disclosure of the estimated fair value of financial instruments is
made in accordance with the provision of ASC 825-10-65, Financial Instruments,
which requires disclosures about fair value of financial instruments in interim
financial statements as well as in annual financial statements. Although the
estimated fair value amounts have been determined by the Company using
available market information and appropriate valuation methodologies, the
estimates presented are not necessarily indicative of the amounts that the
Company could realize in current market exchanges.
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The following methods and assumptions were used by the
Company in estimating its fair value disclosures for financial instruments:
Cash and cash equivalents, accounts
receivable, accrued interest receivable and payable:
The carrying amounts
reported in the condensed consolidated balance sheets approximate fair value
because of the short maturities of these instruments.
13.
Multiple-Deliverable Revenue Arrangements
The
Company enters into multiple-deliverable revenue arrangements that may contain
a combination of fuel cell systems or equipment, installation, service,
maintenance, fueling and other support services. The delivered item, equipment,
does have value to the customer on a standalone basis and could be separately
sold by another vendor. In addition, the Company does not include a right
of return on its products. Total revenue recognized under multiple-deliverable
revenue arrangements in the three and six months ended June 30, 2011 was
approximately 59.6% and 70.6% of total product and service revenue,
respectively. Total revenue recognized under multiple-deliverable revenue
arrangements in the three and six months ended June 30, 2010 was approximately
34.6% and 47.5% of total product and service revenue, respectively. The
majority of the Company’s multiple-deliverable revenue arrangements ship
complete within the same quarter.
Under
the guidance of the FASB ASU No. 2009-13, in an arrangement with
multiple-deliverables, the delivered items will be considered a separate unit
of accounting if the following criteria are met:
-
The delivered item or items have
value to the customer on a standalone basis.
-
If the arrangement includes a
general right of return relative to the delivered item(s), delivery or
performance of the undelivered item or items is considered probable and
substantially in the control of the vendor.
Deliverables
not meeting the criteria for being a separate unit of accounting are combined
with a deliverable that does meet that criterion. The appropriate allocation of
arrangement consideration and recognition of revenue is then determined for the
combined unit of accounting.
The
Company allocates arrangement consideration to each deliverable in an
arrangement based on its relative selling price. The Company determines selling
price using vendor-specific objective evidence (VSOE), if it exists, otherwise
third-party evidence (TPE). If neither VSOE nor TPE of selling price exists for
a unit of accounting, the Company uses estimated selling price (ESP).
VSOE
is generally limited to the price that a vendor charges when it sells the same or
similar products or services on a standalone basis. TPE is determined based on
the prices charged by competitors of the Company for a similar deliverable when
sold separately. The Company generally expects that it will not be able
to establish VSOE or TPE for certain deliverables due to the lack of standalone
sales and the nature of the markets in which the Company competes, and, as
such, the Company typically will determine selling price using ESP.
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The
objective of ESP is to determine the price at which the Company would transact
if the product or service were sold by the Company on a standalone basis. The
Company’s determination of ESP may involve a weighting of several factors
based on the specific facts and circumstances of the arrangement. Specifically,
the Company may consider the cost to produce the deliverable, the anticipated
margin on that deliverable, the selling price and profit margin for similar
parts, 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 will determine ESP for deliverables in future
agreements based on the specific facts and circumstances of the arrangement.
As
noted above, in determining selling price, TPE is generally not readily
available due to a lack of a competitive environment in selling fuel cell
technology. However, when determining selling price for certain
deliverables such as service and maintenance, if available, the Company
utilizes prices charged by its competitors as TPE when estimating its costs for
labor hours.
Each
deliverable within the Company’s multiple-deliverable revenue
arrangements is accounted for as a separate unit of accounting under the
guidance of ASU No. 2009-13. Once a standalone selling price for all the
deliverables that meet the separation criteria has been met, whether by VSOE,
TPE or ESP, the relative selling price method is used to proportionately
allocate each element of the arrangement to the sale consideration. The Company
plans to analyze the selling prices used in its allocation of arrangement
consideration at a minimum on an annual basis. Selling prices will be analyzed
on a more frequent basis if a significant change in the Company’s
business necessitates a more timely analysis or if the Company experiences
significant variances in its selling prices.
For all
product and service revenue transactions entered into prior to the
implementation of ASU No. 2009-13, the Company will continue to defer the
recognition of product and service revenue and recognize revenue on a
straight-line basis as the continued service, maintenance and other support
obligations expire, which are generally for periods of twelve to thirty months,
or which extend over multiple years. While contract terms for those
transactions generally required payment shortly after shipment or delivery and
installation of the fuel cell system and were not contingent on the achievement
of specific milestones or other substantive performance, the multiple-element
revenue obligations within our contractual arrangements were generally not
accounted for separately based on our limited experience and lack of evidence
of fair value of the undelivered components.
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14.
Licensing Agreement
On
October 26, 2010, the Company licensed the intellectual property relating to
its stationary power products, GenCore and GenSys, to IdaTech plc on a
non-exclusive basis. Plug Power maintains ownership of, and the right to use,
the patents and other intellectual property licensed to IdaTech. As part of the
transaction, Plug Power also sold inventory, equipment and certain other assets
related to its stationary power business. Total consideration for the licensing
and assets was $5 million and was received during October 2010. The
consideration was subject to reduction by a maximum of $1 million in the
event that the Company did not deliver certain of the assets sold. As of
December 31, 2010, $1.0 million was included in assets held for sale and $1.0
million was included in other current liabilities in the condensed consolidated
balance sheets, respectively until all assets have been sold. Upon the sale of
assets in the quarter ended June 30, 2011, the $1.0 million of consideration
was released.
15. Income Taxes
Under
Internal Revenue Code (IRC) Section 382, the use of net operating loss
carryforwards, capital loss carryforwards and other tax credit carryforwards
may be limited if a change in ownership of a company occurs. If it is
determined that due to transactions involving the Companys shares owned by its
five percent stockholders a change of ownership has occurred under the
provisions of IRC Section 382, the Company's net operating loss, capital loss
and tax credit carryforwards could be subject to significant IRC Section 382
limitations.
At
December 31, 2010, the Company had approximately $573.4 million in Federal and
state net operating loss carryforwards and $15.5 million in Federal research
and experimentation tax credit carryforwards (of which $5.7 million represents
an uncertain tax position), which resulted in $217.9 million and $9.8 million,
respectively, in gross deferred tax assets that are recorded on the Companys
balance sheet at December 31, 2010. These gross deferred tax assets are offset
by a full valuation allowance, resulting in net deferred tax assets of zero.
During 2011, as a result of certain equity transactions by five percent
stockholders, an ownership change occurred for IRC Section 382 purposes. As a
result of the ownership change, approximately $22 to $60 million of the
Company's Federal and state net operating loss and recognized built in loss carryforwards are available. The remaining net operating loss and recognized
built in loss carryforwards will expire prior to utilization. As a result, the
Companys gross deferred tax asset and related valuation allowance will
decrease by approximately $195 to $209 million. Additionally, the $15 million
of Federal research and experimentation tax credit carryforwards will now expire
prior to utilization, resulting in the Company's gross deferred tax asset and
related valuation allowance decreasing by $9.8 million. These
decreases have no impact on the Companys current financial position, results of
operations, or cash flows because of the full valuation allowance.
The
adoption of the IRC Section 1374 approach prescribed in Notice 2003-65 with
respect to the ownership change for the Company resulted in Net Unrealized
Built in Losses which should result in Recognized Built in Losses during the
five year recognition period of approximately $6.5 to $34 million. This will
translate into unfavorable book to tax add backs in the Company's 2011 to 2016
U.S. Corporate Income Tax returns that will generate a gross deferred tax
liability at the ownership change date of approximately $2.5 to $13 million
and a corresponding reduction to the valuation allowance. This gross deferred
tax liability will offset certain existing gross deferred tax assets (i.e.
capitalized research expense). This has no impact on the Companys
current financial position, results of operations, or cash flows because of the full
valuation allowance.
The Company is in the process of
completing a formal IRC Section 382 study to determine the actual amount of the
Federal and state net operating losses available and the actual amount of Built
in Losses required to be recognized during the five year recognition period.
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16. Stock Option Plan
On May
12, 2011, the Company’s
stockholders approved the 2011 Stock Option and Incentive Plan (the 2011 Plan).
The 2011 Plan provides for the
issuance of up to a
maximum number
of shares of common stock equal to
the sum of (i) 1,000,000, plus
(ii) the number of shares of common
stock underlying any grants pursuant to the
2011 Plan or the Plug Power Inc. 1999 Stock Option and Incentive Plan that are
forfeited, canceled, repurchased or are terminated (other t
han
by exercise). The shares may be issued pursuant to stock options, stock
appreciation rights, restricted stock awards and certain other equity-based
awards granted to employees, directors and consultants of the Company.
No
grants may be made under the 2011 Plan after May 12, 2021.
17. Commitments
and Contingencies
The
Equipment Sale Agreement Addendum No. 1 between Ballard and the Company was
executed on June 30, 2011. This addendum relates to a committed purchase by the
Company of a total of 3,250 Ballard fuel cell stacks between the dates of July
1, 2011 and December 31, 2012. The amount of this commitment is approximately $9.4
million. In conjunction with this agreement, the Company paid a one-time
non-recurring engineering fee of $450,000 to Ballard to be used at
Ballard’s sole discretion for the purposes of product development, cost
reduction and production implementation.
18. Subsequent
Events
The
Company has evaluated subsequent events and transactions through the date of
this filing for potential recognition or disclosure in the financial
statements and has noted no other subsequent events requiring recognition or
disclosure other than as stated below.
On August 9, 2011, the Company entered into a loan and
security agreement (the Loan Agreement) with SVB providing that in return for paying an up front fee of $52,250
the Company has access to up to $7 million of financing in the form of (i) revolving
loans, (ii) letters of credit, (iii) foreign exchange contracts and (iii) cash
management services such as merchant services, direct deposit of payroll,
business credit card and check cashing services. Advances under the Loan
Agreement cannot exceed a borrowing base limit calculated using (A) an advanced
rate of 80% on the Company's eligible accounts and (B) an advanced rate of 25% on
the Company's
eligible inventory (subject to a limit of the lesser of (a) $2 million and (b)
30% of all outstanding advances), subject to certain reserves established by SVB and other adjustments. The aggregate amount of outstanding letters of
credit, foreign exchange contract financing and amounts utilized for cash
management services cannot exceed a sublimit of $750,000 in the aggregate at
any time.
Interest on
advances of credit under the Loan Agreement for: (i) financed accounts
receivables is equal to (a) SVBs prime rate, which is currently 3.25% per
annum, plus 3.0% per annum or (b) if the Company maintains during any month at all times
an adjusted quick ratio of 2.0 to 1.0, then SVBs prime rate plus 1.50% per
annum; and (ii) financed inventory is equal to (a) SVBs prime rate plus 5.25%
per annum or (b) if the Company maintains during any month at all times an adjusted quick
ratio of 2.0 to 1.0, then SVBs prime rate plus 3.25% per annum. The minimum
monthly interest charge is $4,000 per month. The Loan Agreement will be used by
the Company to support its current working capital needs.
The Loan Agreement
is secured by substantially all of the Company's properties, rights and assets,
including substantially all of its equipment, inventory, receivables,
intellectual property and general intangibles.
The Loan Agreement
includes customary representations and warranties for credit facilities of this
type. In addition, the Loan Agreement contains a number of covenants that will
impose significant operating and financial restrictions on the Company's operations,
including restrictions pertaining to, among other things: (i) the condition of
inventory; (ii) maintenance of an adjusted quick ratio of at least 1.50 to 1.0;
(iii) intellectual property right protection and registration; (iv)
dispositions of assets; (v) changes in business, management, ownership or
business locations; (vi) mergers, consolidations or acquisitions; (vii) incurrence
or assumption of indebtedness; (viii) incurrence of liens on any of the
Company's
property; (ix) paying dividends or making distributions on, or redemptions,
retirements or repurchases of, capital stock; (x) transactions with affiliates;
and (xi) payments on or amendments to subordinated debt.
The Loan Agreement
also contains events of default customary for credit facilities of this type
with, in some cases, corresponding grace periods, including, (i) failure to pay
any principal or interest when due, (ii) failure to comply with covenants,
(iii) any material adverse change occurring, (iv) an attachment, levy or
restraint on our business, (v) certain bankruptcy or insolvency events , (vi)
payment defaults relating to, or acceleration of, other indebtedness or that could
result in a material adverse change to the Company's business, (vii) the Company or
its
subsidiaries becoming subject to judgments, claims or liabilities in an amount
individually or in aggregate in excess of $150,000.00, (vii) any
misrepresentations, or (viii) any revocation, invalidation, breach or
invalidation of any subordinated debt.
The Loan Agreement
will expire on August 8, 2012. The Loan Agreement may be terminated prior to
August 8, 2012; however, the Company would be required to pay a $70,000 early
termination fee in connection with a termination (i) by the Company for any reason or
(ii) by SVB upon notice and after the occurrence and during the continuance of
an event of default.
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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
condensed 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, 2010. 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 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: expectations regarding expected shipments of GenDrive units for
2011 and 2012, the risk that we continue to incur losses and might never
achieve or maintain profitability, the risk that the additional capital we may
need to raise to fund our operations may not be available; the risk that the
previously disclosed expected uses of the Company’s recently raised
capital may change;
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 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; the ability to achieve the forecasted
gross margin on the sale of our products; the actual net cash used for
operating expenses may exceed the projected net cash for operating expenses;
the cost and availability of fuel and fueling infrastructures for our products;
market acceptance of our GenDrive systems; 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 expand our product lines;
our ability to improve system reliability for our GenDrive systems; 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; and other risks and uncertainties discussed, but are
not limited to, those set forth in Item 1A-Risk Factors in our Annual Report on
Form 10-K for the fiscal year ended December 31, 2010, as filed on March 31,
2011 as updated by Part II, Item 1A of our Form 10-Q for the quarter ended
March 31, 2011 and this Form 10-Q. 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.
23
Table of Contents
Overview
Plug
Power Inc., or the Company, is a leading provider of alternative energy
technology focused on the design, development, commercialization and
manufacture of fuel cell systems for the industrial off-road (forklift or
material handling) market. Plug Power has also developed products for the
back-up and stationary power markets worldwide. Effective April 1, 2010, the
Company was no longer considered a development stage enterprise since principal
operations began to provide more than insignificant revenues as the Company
received orders from repeat customers, increased its customer base and had a significant
backlog. Prior to April 1, 2010, the Company was considered a development stage
enterprise because substantially all of our resources and efforts were aimed at
the discovery of new knowledge that could lead to significant improvement in
fuel cell reliability and durability and the establishment, expansion and
stability of markets for our products.
We
concentrate our efforts on developing, manufacturing and selling our
hydrogen-fueled PEM GenDrive products on commercial terms for industrial
off-road (forklift or material handling) applications, with a focus on
multi-shift high volume manufacturing and high throughput distribution sites.
We
have successfully introduced new GenDrive product offerings to augment our
product suite and allow full site conversions. We have sold, on commercial
terms, product offerings to target customers including Walmart, FedEx Freight,
Coca-Cola Bottling Co., Sysco Foods and Central Grocers. Our sales to Central
Grocers and Sysco Foods involve “greenfield” conversion sites.
Greenfield sites offer the potential for the greatest financial benefits
to our customers by eliminating the need for customers to make capital
investments in batteries and the associated chargers, storage and changing
systems.
In the three and six
months ended June 30, 2011, we received orders for 431 and 986 GenDrive units,
respectively. Our backlog of 1,296 orders as of June 30, 2011 represents
approximately $24.2 million in potential future revenue and we expect approximately
60 percent of these orders to ship throughout the remainder of 2011. With this
increase in orders, and expected engineering improvements that utilize common
components across product lines, we expect to drive down material costs by 30
to 40 percent. Implementation is currently underway and we expect these
improvements to begin to impact our financial results by the end of
2011. We have experienced and continue to experience negative cash flows
from operations and we expect to continue to incur net losses in the foreseeable
future. Accordingly, in 2010, we restructured and consolidated our operations
to focus on the GenDrive business. This restructuring is expected to decrease
our operating expenses by $12 to $15 million annually starting in 2011.
Including the receipt of $20.2 million in net proceeds
from the capital raise completed in the quarter ended June 30, 2011, we had
approximately $27.2 million of cash and cash equivalents at June 30, 2011 to
fund our future operations. Additionally,
subsequent to June 30, 2011, we entered into a revolving credit facility
arrangement with Silicon Valley Bank (SVB) providing availability to an
additional $7 million to support working capital needs (See "Liquidity and
Capital Resources" for
further disclosure on the credit facility with SVB). We believe that our
current cash, cash equivalents and cash generated from future sales, in
conjunction with the availability of the credit facility, will provide
sufficient liquidity to fund operations through the end of 2012. This
projection is based on our current expectations regarding product sales, cost
structure, cash burn rate and operating assumptions
24
Table of Contents
(including
those specified in the May 2010 restructuring plan described below). Our
ability to achieve profitability, future liquidity needs and capital
requirements will depend upon numerous factors, including the timing and
quantity of product orders and shipments, the extent to which we can effectuate
the May 2010 restructuring plan; 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 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 any new research
and development programs; and changes in our strategy or our planned
activities.
As a
result, we can provide no assurance that we will be able to fund our operations
beyond 2012 without external financing. If we are unable to obtain additional
capital prior to the end of 2012, we may not be able to sustain our future
operations into 2013 and may be required to delay, reduce and/or cease our
operations and/or seek bankruptcy protection. We cannot assure you that any
necessary additional financing will be available on terms favorable to us, or
at all. Given the difficult current economic environment, we believe that it
could be difficult to raise additional funds and there can be no assurance as to
the availability of additional financing or the terms upon which additional
financing may be available. Additionally, even if we raise sufficient capital
through equity or debt financing, strategic alliances or otherwise, there can
be no assurances that the revenue or capital infusion will be sufficient to
enable us to develop our business to a level where it will be profitable or
generate positive cash flow.
Recent
Developments
Stock
Split.
On
May 19, 2011, the Company implemented a one-for-ten
reverse stock split of its common stock. As a result of
the reverse stock split, each ten (10) outstanding shares of pre-split common
stock were automatically combined into one (1) share of post-split common
stock. Fractional shares received
cash and proportional adjustments were made to the Company’s outstanding
stock options and other equity awards and to the Company’s equity
compensation plans to reflect the reverse stock split. The financial statements
for all prior periods have been retroactively adjusted to reflect this stock
split for both common stock issued and options outstanding.
Stock Option Plan.
On May 12, 2011, the stockholders approved the 2011 Stock Option and
Incentive Plan (the 2011 Plan). The 2011 Plan provides for the
issuance
of up to a
maximum number of shares of common stock
equal to the sum of (i)
1,000,000, plus (ii) the number of
shares of common stock underlying
any grants pursuant to the 2011
Plan or the Plug Power Inc. 1999 Stock Option and Incentive Plan that are
forfeited, canceled, repurchased or are terminated (other than by exercise).
Shares tendered or held back upon exercise of an Option or settlement of an
Award to cover the exercise price or tax withholding shall not be available for
future issuance under the Plan. In addition, upon exercise of Stock
Appreciation Rights, the gross number of shares exercised shall be deducted
from the total number of shares remaining available for issuance under the
Plan. Subject to such overall limitations, shares of Stock may be issued up to
such maximum number pursuant to any type or types of Award; provided, however,
that Stock Options or Stock Appreciation Rights with respect to no more than
200,000 shares of Stock may be granted to any one individual grantee during
any one calendar year period and no more than 1,000,000 shares of Stock shall
be issued in the form of Incentive Stock Options. The shares available for
issuance under the Plan may be authorized but unissued shares of Stock or
shares of Stock reacquired by the Company.
25
Table of Contents
Stock
options granted under the 2011 Plan may be either incentive stock options or
non-qualified stock options. The exercise price per share for the common stock covered
by a stock option granted shall be determined by the administrator at the time
of grant but shall not be less than 100 percent of the fair market value on the
date of grant. In the case of an incentive stock option that is granted to a
ten percent owner, the option price of such incentive stock option shall be not
less than 110 percent of the fair market value on the grant date. The term of
each stock option shall be fixed by the administrator, but no stock option
shall be exercisable more than ten years after the date the stock option is granted.
In the case of an incentive stock option that is granted to a ten percent
owner, the term of such stock option shall be no more than five years from the
date of grant.
The
exercise price of a stock appreciation right granted under the 2011 Plan shall
not be less than 100 percent of the fair market value of the common stock on the date
of grant. Stock appreciation rights may be granted by the administrator
independently of any stock option granted pursuant to the 2011 Plan. Stock
appreciation rights shall be subject to such terms and conditions as shall be
determined from time to time by the administrator. The term of a stock
appreciation right may not exceed ten years.
The
2011 Plan also provides for restricted stock awards, deferred stock awards,
unrestricted stock awards, cash-based awards, performance share awards and
performance-based awards to covered employees as defined in the 2011 Plan.
No
grants of stock options and other awards may be made under the 2011 Plan after
the tenth anniversary of the effective date of the 2011 Plan and no grants of incentive
stock
options may be made under the 2011 Plan after the tenth anniversary of the date
the 2011 Plan is approved by the Board.
Public
Offering.
On
May 31, 2011, the Company completed an underwritten public offering of 8,265,000 shares of its
common stock and warrants to purchase an aggregate of 7,128,563 shares of
common stock (
including warrants
to purchase an aggregate of 929,813 shares of common stock purchased by the
underwriter pursuant to the exercise of its over-allotment option). The shares
and the warrants were sold together as a fixed combination, with each
combination consisting of one share of common stock and 0.75 of a warrant to
purchase one share of common stock, at a price to the public of $2.42 per fixed
combination. Net proceeds, after underwriting discounts
and commissions and other
fees and expenses payable by
Plug Power,
were $18,289,883. The
warrants are exercisable upon issuance and will expire on May 31, 2016. The
exercise price of the warrants is $3.00 per share of common stock. The warrants
include weighted-average anti-dilution protection and, in the event of a sale
of the Company, each warrantholder has the right to require the Company to
purchase such holder’s warrants at a price determined using a Black-Scholes
option pricing model.
On
June 8, 2011, the Company
sold 836,750 additional shares of
common stock, pursuant to the underwriter’s partial exercise of its
over-allotment option
, resulting in additional net
proceeds to Plug Power of $1,874,990.
On July 1,
2011, the Company
sold 231,000
additional shares of common stock, pursuant to the underwriter’s partial
exercise of its over-allotment option
, resulting in
additional net proceeds to Plug Power of $
517,624
.
Nasdaq
Listing
. On June 6, 2011, the
Company received a letter from The Nasdaq Stock Market advising that the
Company had regained compliance with the Nasdaq Capital Market's minimum bid
price requirement for continued listing as set forth in Nasdaq Listing Rule
5550(a)(2).
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Table of Contents
Equipment Sale Agreement.
The Equipment Sale Agreement Addendum No. 1 between
Ballard and the Company was executed on June 30, 2011. This addendum relates to
a committed purchase by the Company of a total of 3,250 Ballard fuel cell
stacks between the dates of July 1, 2011 and December 31, 2012. The amount of
this commitment is approximately $9.4 million. In conjunction with this
agreement, the Company paid a one-time non-recurring engineering fee of
$450,000 to Ballard to be used at Ballard’s sole discretion for the
purposes of product development, cost reduction and production implementation.
Loan and Security Agreement.
The Company entered into a revolving credit facility arrangement with Silicon
Valley Bank (SVB) providing availability to an additional $7 million to support
working capital needs (See "Liquidity and Capital Resources" for further
disclosure on the credit facility with SVB).
Customer Growth.
On
April 5, 2011, the Company announced that WinCo Foods LLC will use
184 GenDrive fuel cell units to power its electric lift truck fleet at its
800,000 sq. ft. grocery distribution center in Modesto, California. This transaction
with WinCo Foods marks Plug Power’s first large grocery installation in California. At the same time, the GenDrive units being developed for WinCo’s
European-style moving mast lift trucks will offer Plug Power a segue into the
European material handling industry with a reliable product. The material
handling industry in Europe is approximately a $5.7B USD market and provides an
opportunity for expansion for Plug Power.
On
June 29, 2011, the Company announced that
Kroger Co. will use 161 GenDrive fuel cell units in its food distribution
center in Compton, California.
Results
of Operations
Product
and service revenue.
Effective April
1, 2010, the Company adopted ASU No. 2009-13 on Topic 605, Revenue
Recognition– Multiple Deliverable Revenue Arrangements retroactive to
January 1, 2010
.
ASU No. 2009-13 amends the FASB ASC to eliminate the residual
method of allocation for multiple-deliverable revenue arrangements, and
requires that arrangement consideration be allocated at the inception of an
arrangement to all deliverables using the relative selling price method. As a
result of implementing ASU No. 2009-13, we recognized approximately $1.6
million and $5.4 million of revenue during the three and six months ended June
30, 2011, respectively, that would have been deferred under the Company’s
previous guidance for multiple-deliverable revenue arrangements. We recognized
approximately $805,000 and $2.6 million of revenue during the three and six
months ended June 30, 2010, respectively, that would have been deferred under
the Company’s previous guidance for multiple-deliverable revenue arrangements.
The Company anticipates that the effect of the adoption of this guidance on
subsequent periods will be primarily based on the arrangements entered into and
the timing of shipment of deliverables. See Note 13, Multiple-Deliverable
Revenue Arrangements, of the condensed consolidated financial statements, Part
I, Item 1 of this Form 10-Q for further discussion of our multiple-deliverable
revenue arrangements.
For all product
and service revenue transactions entered into prior to the implementation of
ASU No. 2009-13, the Company will continue to defer the recognition of product
and service revenue and recognize revenue on a straight-line basis as the
continued service, maintenance and other support obligations expire, which are
generally for periods of twelve to thirty months, or which can extend over
multiple years. While contract terms for those transactions generally required
payment shortly after shipment or delivery and installation of the fuel cell
system and were not contingent on the achievement of specific milestones or
other substantive performance, the multiple-element revenue obligations within
our contractual arrangements were generally not accounted for separately based
on our limited experience and lack of evidence of fair value of the undelivered
components.
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Table of Contents
Product
and service revenue for the three months ended June 30, 2011 increased
$295,000, or 12.7%, to $2.6 million from $2.3 million for the three months
ended June 30, 2010. Despite a decrease in shipments quarter over quarter, the
increase is primarily related to more revenue being recognized on the current
year shipments as a result of contractual terms of the sale agreements. The
prior year revenue did not include $1.4 million of revenue on 67 units since
certain contractual terms were not met. The change in revenue recorded on
current quarter shipments was also partially offset by a decrease in revenue
from prior period system shipments that have now been fully accreted into income.
A portion of product and service revenue represents revenue associated with
replacement parts or services not covered by service agreements or other
similar types of sales where the Company has no continuing obligation after the
parts are shipped or delivered or after services are rendered. This
portion of product and service revenue is approximately $733,000 and $789,000,
respectively for the three months ended June 30, 2011 and 2010.
In
the product and service revenue category, during the three months ended June
30, 2011, we shipped 73 fuel cell systems as compared to 97 fuel cell systems
shipped during the three months ended June 30, 2010. In the three months ended
June 30, 2011, we recognized approximately $2.3 million of revenue for products
shipped or delivered or services rendered in the three months ended June 30,
2011, as compared to approximately $1.6 million of revenue recognized in the
three months ended June 30, 2010 for products shipped or delivered or services
rendered in that quarter. Additionally, in the three months ended June 30,
2011, we recognized approximately $290,000 of product and services revenue from
fuel cell shipments made prior to 2011, whereas in the three months ended June
30, 2010, we recognized approximately $731,000 of product and service revenue
from fuel cell shipments made prior to 2010.
Product
and service revenue for the six months ended June 30, 2011 increased $2.1
million, or 38.7%, to $7.6 million from $5.5 million for the six months ended
June 30, 2010. The increase is primarily related to an increase in current
period system shipments partially offset by a decrease in revenue from prior
period system shipments that have now been fully accreted into income. A
portion of product and service revenue represents revenue associated with
replacement parts or services not covered by service agreements or other
similar types of sales where the Company has no continuing obligation after the
parts are shipped or delivered or after services are rendered. This
portion of product and service revenue is approximately $1.4 million and $1.3
million, respectively for the six months ended June 30, 2011 and 2010.
In
the product and service revenue category, during the six months ended June 30,
2011, we shipped 217 fuel cell systems as compared to 201 fuel cell systems
(191 were related to sales to end customers and 10 were delivered to Central
Grocers under a lease arrangement whereby Plug Power retained title and
ownership of the equipment until it subsequently sold the leases) shipped
during the six months ended June 30, 2010. In the six months ended June 30,
2011, we recognized approximately $6.8 million of revenue for products shipped
or delivered or services rendered in the six months ended June 30, 2011, as
compared to approximately $3.9 million of revenue recognized in the six months
ended June 30, 2010 for products shipped or delivered or services rendered in
that quarter. Additionally, in the six months ended June 30, 2011, we
recognized approximately $764,000 of product and services revenue from fuel
cell shipments made prior to 2011, whereas in the six months ended June 30,
2010, we recognized approximately $1.6 million of product and service revenue
from fuel cell shipments made prior to 2010.
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Table of Contents
Research and
development contract revenue.
Research
and development contract revenue primarily relates to 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 generally 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. Revenue from fixed fee contracts is recognized on the basis of
percentage of completion. We expect to continue certain research and
development contract work that is directly related to our current product
development efforts.
Research and
development contract revenue for the three months ended June 30, 2011 increased
approximately $785,000, or 100.9%, to $1.6 million from $778,000 for the three
months ended June 30, 2010. The increase is primarily related to billings under
programs that began in the second quarter of 2011.
Research and
development contract revenue for the six months ended June 30, 2011 increased
approximately $362,000, or 18.2%, to $2.3 million from $2.0 million for the six
months ended June 30, 2010. The increase is primarily related to billings under
programs that began in the second quarter of 2011.
Licensed
technology revenue.
Licensed
technology revenue relates to the sale of licensing rights and engineering
assistance. This revenue is being amortized over a twelve month period.
Licensed
technology revenue for the three and six months ended June 30, 2011 was
approximately $163,000 and $326,000, respectively.
Cost of product
and service revenue.
Cost of product
and service revenue includes the direct material and labor cost as well as an
allocation of overhead costs that relate to the manufacturing of products we
sell. In addition, cost of product and service revenue also includes the labor
and material costs incurred for product maintenance, replacement parts and
service under our contractual obligations.
Cost of product
and service revenue for the three months ended June 30, 2011 increased
approximately $389,000, or 8.6%, to $4.9 million from $4.5 million for the three
months ended June 30, 2010. There were 73 fuel cell system shipments for the
three months ended June 30, 2011 as compared to 97 for the three months ended
June 30, 2010. Despite the decrease in system shipments, the increase is
primarily related to additional costs charged to cost of product and service
revenue as a result of the restructuring of the Company to focus on commercial
production of our product. Accordingly, some of these costs were included in
research and development expense prior to this quarter, due to the Company’s
focus on research and development at that time.
Cost of product
and service revenue for the six months ended June 30, 2011 increased
approximately $3.8 million, or 48.4%, to $11.6 million from $7.8 million for the
six months ended June 30, 2010. The increase is primarily related to increased
product and service fuel cell system shipments to end customers. There were 217
fuel cell system shipments for the six months ended June 30, 2011 as compared
to 201 for the six months ended June 30, 2010. There were zero and 10 fuel cell
system shipments being accounted for under a lease arrangement during the six
months ended June 30, 2011 and 2010, respectively. The cost of leased units is
recorded on the unaudited condensed consolidated balance sheets as investment
in leased property. The increase also includes additional costs charged to cost
of product and service revenue as a result of the restructuring of the Company
to focus on commercial production of our product. Accordingly, some of these
costs were included in research and development expense prior to this quarter,
due to the Company’s focus on research and development at that time.
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Table of Contents
Cost of
research and development contract revenue
. Cost of research and development contract revenue includes 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 research
and development contract revenue for the three months ended June 30, 2011
increased approximately $794,000, or 47.3%, to $2.5 million from $1.7 million
for the three months ended June 30, 2010. This increase is primarily related to
billings under programs that began in the second quarter of 2011.
Cost of research
and development contract revenue for the six months ended June 30, 2011
increased approximately $250,000, or 7.0%, to $3.8 million from $3.6 million
for the six months ended June 30, 2010. This increase is primarily related to
billings under programs that began in the second quarter of 2011.
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 outside suppliers
for subcontracted components and services, 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 June 30, 2011 decreased
approximately $3.3 million, or 74.8%, to $1.1 million from $4.4 million for the
three months ended June 30, 2010. This decrease was primarily a result of the
corporate restructuring plan announced in May 2010 to focus and align the
Company on its GenDrive business as well as the wind-down of our operations in
Plug Power Energy India Private Limited and Plug Power Canada Inc. The decrease
was also coupled with our allocation of overhead costs charged to cost of
product and service revenue as a result of increased sales and a focus on
commercial production of our product. Accordingly, some of these costs were
included in research and development expense in the prior year comparable
quarter, due to the Company’s focus on research and development at that
time.
Research and
development expense for the six months ended June 30, 2011 decreased
approximately $7.7 million, or 78.0%, to $2.2 million from $9.9 million for the
three months ended June 30, 2010. This decrease was primarily a result of the
corporate restructuring plan announced in May 2010 to focus and align the
Company on its GenDrive business as well as the wind-down of our operations in
Plug Power Energy India Private Limited and Plug Power Canada Inc. The decrease
was also coupled with our allocation of overhead costs charged to cost of
product and service revenue as a result of increased sales and a focus on
commercial production of our product. Accordingly, some of these costs were
included in research and development expense in the prior year comparable
quarter, due to the Company’s focus on research and development at that
time.
Selling,
general and administrative expenses.
Selling, general and administrative expenses includes cash and non-cash
compensation, benefits 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.
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Selling,
general and administrative expenses for the three months ended June 30, 2011
decreased approximately $6.7 million, or 63.2%, to $3.9 million from $10.5
million for the three months ended June 30, 2010. The decrease was primarily
the result of the corporate restructuring plan announced in May 2010 to focus
and align the Company on its GenDrive business as well as the wind-down of our
operations in Plug Power Energy India Private Limited and Plug Power Canada
Inc. The Company incurred $6.4 million in selling, general and administrative
expenses during the three months ended June 30, 2010 related to the restructuring.
Selling,
general and administrative expenses for the six months ended June 30, 2011
decreased approximately $7.0 million, or 48.3%, to $7.4 million from $14.4
million for the six months ended June 30, 2010. The decrease was primarily the
result of the corporate restructuring plan announced in May 2010 to focus and
align the Company on its GenDrive business as well as the wind-down of our
operations in Plug Power Energy India Private Limited and Plug Power Canada
Inc. The Company incurred $6.4 million in selling, general and administrative
expenses during the three months ended June 30, 2010 related to the
restructuring.
Amortization
of intangible assets.
Amortization of
intangible assets represents the amortization associated with the Company’s
acquired identifiable intangible assets from Plug Power Canada Inc., including
acquired technology and customer relationships, which are being amortized over
eight years.
Amortization
of intangible assets increased to approximately $588,000 for the three months
ended June 30, 2011, compared to approximately $567,000 for the three months
ended June 30, 2010. The increase is related to foreign currency fluctuations.
Amortization
of intangible assets increased to approximately $1.2 million for the six months
ended June 30, 2011, compared to approximately $1.1 million for the six months
ended June 30, 2010. The increase is related to foreign currency fluctuations.
Interest and
other income and net realized losses from available-for-sale securities.
Interest and other income and net realized losses from
available-for-sale securities consists primarily of interest earned on our
cash, cash equivalents, available-for-sale securities, trading securities and
other income.
Interest
and other income and net realized losses from available-for-sale securities for
the three months ended June 30, 2011 decreased approximately $181,000, or
67.5%, to $87,000 from $269,000 for the three months ended June 30, 2010. The
decrease is primarily related to the sale of trading securities and
available-for-sale securities during 2011 and 2010. Also contributing were
lower cash balances coupled with lower yields on our investments due to a
declining interest rate environment. Interest income on trading securities and
available-for-sale securities for the three months ended June 30, 2010 was
approximately $76,000 and $32,000, respectively. Rental income for the three
months ended June 30, 2011 and 2010 was approximately $87,000 and $92,000,
respectively.
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Interest
and other income and net realized losses from available-for-sale securities for
the six months ended June 30, 2011 decreased approximately $490,000, or 80.2%,
to $121,000 from $611,000 for the six months ended June 30, 2010. The decrease
is primarily related to the sale of trading securities and available-for-sale
securities during 2011 and 2010. Also contributing were lower cash balances
coupled with lower yields on our investments due to a declining interest rate
environment and decreased rental income received from our Latham facility. Interest
income on trading securities and available-for-sale securities for the six
months ended June 30, 2011 was approximately $0 and $5,000, respectively.
Interest income on trading securities and available-for-sale securities for the
six months ended June 30, 2010 was approximately $253,000 and $108,000,
respectively. Rental income for the six months ended June 30, 2011 and 2010 was
approximately $138,000 and $180,000, respectively.
Change in fair value of warrant liability.
We account for common stock warrants in accordance with
applicable accounting guidance provided in ASC 815, Derivatives and Hedging
Contracts in Entitys Own Equity, as either derivative liabilities or as equity
instruments depending on the specific terms of the warrant agreement. Derivative
warrant liabilities are valued using the Black-Scholes pricing model at the
date of initial issuance and each subsequent balance sheet date. Changes in the
fair value of the warrants are reflected in the condensed consolidated
statement of operations as change in the fair value of warrant liability.
The change in fair value of warrant liability for the three
and six months ended June 30, 2011 resulted in income of $1.8 million and $1.8
million, respectively due to a decrease in the Companys common stock share
price and changes in volatility of our common stock during the period of
warrant issuance through June 30, 2011.
Gain
on auction rate debt securities repurchase agreement.
In December 2008, the Company entered into a Repurchase
Agreement with the third-party lender such that the Company may require the
third-party lender to repurchase the auction rate debt securities pledged as
collateral for a Credit Line Agreement, at their par value, from June 30, 2010
through July 2, 2012. As a result of the Repurchase Agreement entered into with
a third party lender in December 2008, the Company reclassified the auction
rate debt securities from available-for-sale securities to trading securities.
The Company elected to record this item at its fair value in accordance with
FASB ASC No. 825-10-25, Fair Value Option. The third-party lender repurchased
the securities on July 1, 2010 in accordance with the Repurchase Agreement. The
corresponding Credit Line Agreement was paid in full on July 1, 2010 in
conjunction with the repurchase of the auction rate debt securities.
The change in fair value of approximately $2.5 million
and $3.1 million during the three and six months ended June 30, 2010 was
recorded as a loss in the condensed consolidated statements of operations which
is offset by the change in fair value of the auction rate debt securities held
as collateral of approximately $2.5 million and $3.1 million that is recorded
as a gain in the condensed consolidated statements of operations for the three
and six months ended June 30, 2010.
Interest
and other expense and foreign currency gain (loss).
Interest and other expense and foreign currency gain
(loss) consists of interest on repayable government assistance amounts related
to the activities of Cellex and General Hydrogen, interest related to the
Credit Line Agreement and long term debt, and foreign currency exchange gain
(loss).
Interest
and other expense and foreign currency gain (loss) for the three months ended
June 30
, 2011 and
2010 was approximately $5,000 and ($177,000), respectively. Interest expense
related to the Credit Line Agreement was approximately $0 and $139,000,
respectively, for the three months ended
June
30
, 2011 and 2010.
Interest
and other expense and foreign currency gain (loss) for the six months ended
June 30
, 2011 and
2010 was approximately $20,000 and ($373,000), respectively. Interest expense
related to the Credit Line Agreement was approximately $0 and $296,000,
respectively, for the six months ended
June
30
, 2011 and 2010.
Income taxes.
We did not report a benefit for federal and state
income taxes in the condensed consolidated financial statements for the three
and six months ended June 30, 2011 and 2010 as 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.
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Table of Contents
Liquidity and Capital Resources
We
have experienced recurring operating losses and as of June 30, 2011, we had an
accumulated deficit of approximately $741.3 million. Substantially all of our
losses resulted from costs incurred in connection with our operating expenses,
research and development expenses and from general and administrative costs
associated with our operations. To date, we have funded our operations
primarily through private and public offerings of our common and preferred
stock, our line of credit and maturities and sales of our available-for-sale
securities. We anticipate incurring substantial additional losses and may never
achieve profitability. Our May 2010 restructuring plan, which involves focusing
on our GenDrive business and consolidating our operations into our Latham, New York facility, is expected to reduce these losses going forward. We anticipate that the
restructuring will reduce our annual operating expenses by approximately $12 to
$15 million annually starting in 2011.
Including
the receipt of $20.2 million in net proceeds from the capital raise completed
in the quarter ended June 30, 2011, we had approximately $27.2 million of cash
and cash equivalents at June 30, 2011 to fund our future operations. Additionally, subsequent to June 30, 2011,
we entered into a revolving credit facility arrangement with Silicon Valley
Bank (SVB) providing availability to an additional $7 million to support
working capital needs. See the below discussion for additional
information regarding the revolving credit facility. We believe that our current cash, cash
equivalents and cash generated from future sales, in conjunction with the
availability of the credit facility, will provide sufficient liquidity to fund
operations through the end of 2012. This projection is based on our
current expectations regarding product sales, cost structure, cash burn rate
and operating assumptions (including those specified in the May 2010
restructuring plan). In the event that our operating expenses are higher than
anticipated or the gross margins and shipments of our GenDrive products do not
increase as we expect, we may be required to implement contingency plans within
our control to conserve and/or enhance our liquidity to meet operating needs.
Such plans include: our ability to further reduce discretionary expenses,
monetize our real estate assets through a sale-leaseback arrangement and obtain
additional funding from licensing the use of our technologies. 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, and continued
development and expansion of our products. Our ability to achieve
profitability, future liquidity needs and capital requirements will depend upon
numerous factors, including the timing and quantity of product orders and
shipments, 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 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 any new research and development programs; and
changes in our strategy or our planned activities. As a result, we can provide
no assurance that we will be able to fund our operations beyond 2012 without
additional external financing. If additional funding is required beyond 2012,
alternatives the Company would consider include equity or debt financings,
strategic alliances or joint ventures. Under such conditions, if we are unable
to obtain additional capital prior to the end of 2012, we may not be able to
sustain our future operations into 2013 and may be required to delay, reduce
and/or cease our operations and/or seek bankruptcy protection. We cannot assure
you that any necessary additional financing will be available on terms
favorable to us, or at all. Given the difficult current economic environment,
we believe that it could be difficult to raise additional funds and there can
be no assurance as to the availability of additional financing or the terms
upon which additional financing may be available. Additionally, even if we
raise sufficient capital through equity or debt financing, strategic alliances
or otherwise, there can be no assurances that the revenue or capital infusion will
be sufficient to enable to us to develop our business to a
level where it will be profitable or generate positive cash flow. If we raise
additional funds through the issuance of equity or convertible debt securities,
the percentage ownership of our stockholders could be significantly diluted,
and these newly issued securities may have rights, preferences or privileges
senior to those of existing stockholders. If we incur additional debt, a
substantial portion of our operating cash flow may be dedicated to the payment
of principal and interest on such indebtedness, thus limiting funds available
for our business activities. The terms of any debt securities issued could also
impose significant restrictions on our operations. Broad market and industry
factors may seriously harm the market price of our common stock, regardless of
our operating performance, and may adversely impact our ability to raise
additional funds. If we raise additional funds through collaborations and/or
licensing arrangements, we might be required to relinquish significant rights
to our technologies, or grant licenses on terms that are not favorable to us.
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Table of Contents
Several
key indicators of liquidity are summarized in the following table:
(in thousands)
|
|
Six months
ended or at
June 30,
2011
|
|
Six months
ended or at
June 30,
2010
|
|
Year
ended or at
December 31,
2010
|
Cash and cash equivalents at end of period
|
|
$
|
27,151
|
|
$
|
3,789
|
|
$
|
10,955
|
Available-for-sale securities at end of period
|
|
|
-
|
|
|
32,009
|
|
|
10,403
|
Trading securities – auction rate debt securities at
end of period
|
|
|
-
|
|
|
22,607
|
|
|
-
|
Borrowings under line of credit at end of period
|
|
|
-
|
|
|
25,450
|
|
|
-
|
Working capital at end of period
|
|
|
30,625
|
|
|
33,005
|
|
|
23,659
|
Net loss
|
|
|
13,996
|
|
|
29,075
|
|
|
46,959
|
Net cash used in operating activities
|
|
|
13,172
|
|
|
24,504
|
|
|
40,770
|
Purchase of property, plant and equipment
|
|
|
1,065
|
|
|
1,215
|
|
|
1,100
|
Effective
July 1, 2010, all auction rate debt securities were repurchased at par by the
third-party lender holding the collateral under the Repurchase Agreement which
resulted in a corresponding reduction in amounts outstanding and the
extinguishment of the Credit Line Agreement (See Note 9, Credit Line Agreement
and Auction Rate Debt Securities Repurchase Agreement, of the condensed
consolidated financial statements).
Our
cash requirements depend on numerous factors, including completion of our
product development activities, ability to commercialize our fuel cell systems,
market acceptance of our systems and other factors. As of June 30, 2011, we had
cash and cash equivalents of $27.2 million and working capital of $30.6
million.
On August 9, 2011, the Company entered into a loan and
security agreement (the Loan Agreement) with SVB providing that in return for paying an up front fee of $52,250
the Company has access to up to $7 million of financing in the form of (i) revolving
loans, (ii) letters of credit, (iii) foreign exchange contracts and (iii) cash
management services such as merchant services, direct deposit of payroll,
business credit card and check cashing services. Advances under the Loan
Agreement cannot exceed a borrowing base limit calculated using (A) an advanced
rate of 80% on the Company's eligible accounts and (B) an advanced rate of 25% on
the Company's
eligible inventory (subject to a limit of the lesser of (a) $2 million and (b)
30% of all outstanding advances), subject to certain reserves established by SVB and other adjustments. The aggregate amount of outstanding letters of
credit, foreign exchange contract financing and amounts utilized for cash
management services cannot exceed a sublimit of $750,000 in the aggregate at
any time.
Interest on
advances of credit under the Loan Agreement for: (i) financed accounts
receivables is equal to (a) SVBs prime rate, which is currently 3.25% per
annum, plus 3.0% per annum or (b) if the Company maintains during any month at all times
an adjusted quick ratio of 2.0 to 1.0, then SVBs prime rate plus 1.50% per
annum; and (ii) financed inventory is equal to (a) SVBs prime rate plus 5.25%
per annum or (b) if the Company maintains during any month at all times an adjusted quick
ratio of 2.0 to 1.0, then SVBs prime rate plus 3.25% per annum. The minimum
monthly interest charge is $4,000 per month. The Loan Agreement will be used by
the Company to support its current working capital needs.
The Loan Agreement
is secured by substantially all of the Company's properties, rights and assets,
including substantially all of its equipment, inventory, receivables,
intellectual property and general intangibles.
The Loan Agreement
includes customary representations and warranties for credit facilities of this
type. In addition, the Loan Agreement contains a number of covenants that will
impose significant operating and financial restrictions on the Company's operations,
including restrictions pertaining to, among other things: (i) the condition of
inventory; (ii) maintenance of an adjusted quick ratio of at least 1.50 to 1.0;
(iii) intellectual property right protection and registration; (iv)
dispositions of assets; (v) changes in business, management, ownership or
business locations; (vi) mergers, consolidations or acquisitions; (vii) incurrence
or assumption of indebtedness; (viii) incurrence of liens on any of the
Company's
property; (ix) paying dividends or making distributions on, or redemptions,
retirements or repurchases of, capital stock; (x) transactions with affiliates;
and (xi) payments on or amendments to subordinated debt.
The Loan Agreement
also contains events of default customary for credit facilities of this type
with, in some cases, corresponding grace periods, including, (i) failure to pay
any principal or interest when due, (ii) failure to comply with covenants,
(iii) any material adverse change occurring, (iv) an attachment, levy or
restraint on our business, (v) certain bankruptcy or insolvency events , (vi)
payment defaults relating to, or acceleration of, other indebtedness or that could
result in a material adverse change to the Company's business, (vii) the Company or
its
subsidiaries becoming subject to judgments, claims or liabilities in an amount
individually or in aggregate in excess of $150,000.00, (vii) any
misrepresentations, or (viii) any revocation, invalidation, breach or
invalidation of any subordinated debt.
The Loan Agreement
will expire on August 8, 2012. The Loan Agreement may be terminated prior to
August 8, 2012; however, the Company would be required to pay a $70,000 early
termination fee in connection with a termination (i) by the Company for any reason or
(ii) by SVB upon notice and after the occurrence and during the continuance of
an event of default.
During
the six months ended June 30, 2011, cash used for operating activities was
$13.2 million, consisting primarily of a net loss of $14.0 million offset, in
part, by non-cash expenses in the amount of $1.8 million, including $2.2
million for amortization and depreciation, $1.0 million for stock based
compensation, $309,000 for loss on disposal of property, plant and
equipment and a $1.8 million reduction for the change in fair value of warranty
liability. Cash provided by investing activities for the six months ended June
30, 2011 was $9.4 million, consisting primarily of $10.4 million of maturities
(net of purchases) of available-for-sale securities offset by $1.1 million used
to purchase property, plant and equipment. Cash provided by financing
activities for the six months ended June 30, 2011 was approximately $20.0
million consisting primarily of $22.0 million in proceeds from the public offering
offset by $1.9 million in public offering costs, $158,000 for the purchase of
treasury stock and $10,000 in principal payments on long-term debt.
34
Table of Contents
Income
Taxes
Under
Internal Revenue Code (IRC) Section 382, the use of net operating loss
carryforwards, capital loss carryforwards and other tax credit carryforwards
may be limited if a change in ownership of a company occurs. If it is
determined that due to transactions involving the Companys shares owned by its
five percent stockholders a change of ownership has occurred under the
provisions of IRC Section 382, the Company's net operating loss, capital loss
and tax credit carryforwards could be subject to significant IRC Section 382
limitations.
At
December 31, 2010, the Company had approximately $573.4 million in Federal and
state net operating loss carryforwards and $15.5 million in Federal research
and experimentation tax credit carryforwards (of which $5.7 million represents
an uncertain tax position), which resulted in $217.9 million and $9.8 million,
respectively, in gross deferred tax assets that are recorded on the Companys
balance sheet at December 31, 2010. These gross deferred tax assets are offset
by a full valuation allowance, resulting in net deferred tax assets of zero.
During 2011, as a result of certain equity transactions by five percent
stockholders, an ownership change occurred for IRC Section 382 purposes. As a
result of the ownership change, approximately $22 to $60 million of the
Company's Federal and state net operating loss and recognized built in loss carryforwards are available. The remaining net operating loss and recognized
built in loss carryforwards will expire prior to utilization. As a result, the
Companys gross deferred tax asset and related valuation allowance will
decrease by approximately $195 to $209 million. Additionally, the $15 million
of Federal research and experimentation tax credit carryforwards will now expire
prior to utilization, resulting in the Company's gross deferred tax asset and
related valuation allowance decreasing by $9.8 million. These
decreases have no impact on the Companys current financial position, results of
operations, or cash flows because of the full valuation allowance.
The
adoption of the IRC Section 1374 approach prescribed in Notice 2003-65 with
respect to the ownership change for the Company resulted in Net Unrealized
Built in Losses which should result in Recognized Built in Losses during the
five year recognition period of approximately $6.5 to $34 million. This will
translate into unfavorable book to tax add backs in the Company's 2011 to 2016
U.S. Corporate Income Tax returns that will generate a gross deferred tax
liability at the ownership change date of approximately $2.5 to $13 million
and a corresponding reduction to the valuation allowance. This gross deferred
tax liability will offset certain existing gross deferred tax assets (i.e.
capitalized research expense). This has no impact on the Companys
current financial position, results of operations, or cash flows because of the full
valuation allowance.
The Company is in the process of completing a formal IRC Section 382 study to
determine the actual amount of the Federal and state net operating losses
available and the actual amount of Built in Losses required to be recognized
during the five year recognition period.
Critical Accounting Policies and Estimates
Management’s
discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with U.S. generally accepted accounting principles. The
preparation of these 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 bad
debts, inventories, intangible assets, equity investments, unbilled revenue,
income taxes and contingencies. 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 the carrying values of assets and
liabilities 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” of our Annual Report on
Form 10-K for the fiscal year ended December 31, 2010. The following material change or modification has
been made to the policies since December 31, 2010:
On May 31, 2011, the Company granted 7,128,563 warrants
as part of an underwritten public offering. We account for common stock
warrants in accordance with applicable accounting guidance provided in ASC 815,
Derivatives and Hedging Contracts in Entitys Own Equity, as either
derivative liabilities or as equity instruments depending on the specific terms
of the warrant agreement. In compliance with applicable securities law,
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 classify these
derivative warrant liabilities on the condensed consolidated balance sheets as
a long term liability, which is revalued at each balance sheet date subsequent
to the initial issuance. We use the Black-Scholes pricing model to value the
derivative warrant liability. The Black-Scholes 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. The Company used the
following assumptions for its common stock warrants. The risk-free interest
rate for May 31, 2011 (issuance date) and June 30, 2011 were .75% and .56%,
respectively. The volatility of the market price of the Companys common stock
for May 31, 2011 (issuance date) and June 30, 2011 were 94.4% and 87.6%,
respectively. The expected average term of the warrant used for both periods
was 2.5 years. There was no expected dividend yield for the warrants granted.
As a result, if factors change and different assumptions are used, the warrant
liability and the change in estimated fair value could be materially different. Changes in the fair value of the warrants are
reflected in the condensed consolidated statement of operations as change in
fair value of warrant liability.
35
Table of Contents
Recent Accounting Pronouncements
A discussion of
recent accounting pronouncements is included in Note 2, Basis of Presentation,
of the unaudited condensed consolidated financial statements in Part I, Item 1
of this Form 10-Q.
Item
3 – Quantitative and Qualitative Disclosures about Market Risk
We
generally invest our excess 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. Accordingly, we believe
that, while the investment-grade securities we may hold are subject to changes in
the financial standing of the issuer of such securities, 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.
As of December 31, 2010, all of the Company’s
operations have been relocated to the United States. A portion of the
Company’s total financial performance was attributable to residual
operations from both Canada and India. Our exposure to changes in foreign
currency rates primarily related from short-term inter-company transactions
with our previous Canadian and Indian subsidiaries and from client receivables
in different currencies. As exchange rates vary, the Company’s
results can be materially affected.
In
addition, the Company may source inventory among its worldwide suppliers. This
practice can give rise to foreign exchange risk resulting from the varying cost
of inventory to the receiving location as well as from the revaluation of
intercompany balances. The Company mitigates this risk through local sourcing
efforts.
Item 4 – Controls
and Procedures
(a) Evaluation of
disclosure controls and procedures
As required by Rule
13a-15(b) under the Securities and Exchange Act of 1934, our management,
including the Chief Executive Officer and Chief Financial Officer, conducted an
evaluation as of the end of the period covered by this report, of the
effectiveness of the Company’s disclosure controls and procedures as
defined in Exchange Act Rule 13a-15(e). Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the
Company’s disclosure controls and procedures were effective at a
reasonable assurance level as of the end of the period covered by this report.
(b) Changes in
internal controls over financial reporting
As required by Rule
13a-15(d) under the Securities Exchange Act of 1934, our management, including
the Chief Executive Officer and Chief Financial Officer, also conducted an
evaluation of the Company’s internal control over financial reporting to
determine whether any changes occurred during the period covered by this report
that have materially affected, or are reasonably likely to materially affect,
the Company’s internal control over financial reporting. Based on that
evaluation, there has been no such change during the period covered by this
report.
36
Table of Contents
PART II.
OTHER INFORMATION
Item 1 – Legal Proceedings
On
May 26, 2011, Plug Power Inc. was served with a complaint that was filed by
Alpha Equities Ltd. on May 6, 2011 in the Supreme Court of British Columbia
against Plug Power Inc. and Plug Power Canada Inc. alleging breach of contract
related to Plug Power Canada Inc.’s lease of premises in Richmond, British Columbia. The plaintiff is seeking damages relating to the restoration of
the premises and unpaid rent. On July 28, 2011, Plug Power Inc. submitted a
Response to plaintiff’s Civil Claim and we intend to vigorously defend
this action. Accordingly, while there continue to be on-going discussions
between the parties, the Company believes it is too early to determine that 1)
there is likely exposure to an adverse outcome; and 2) whether or not the
probability of an adverse outcome is more than remote.
Item 1A - Risk Factors
Part
II, Item 1A, “Risk Factors” of our most recently filed Annual
Report on Form 10-K with the Securities and Exchange Commission, filed on March
31, 2011, 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)
During the three months ended June 30, 2011, we issued 121,068 shares of our
common stock in connection with matching contributions under our 401(k)
Savings & Retirement Plan. The issuance of these shares is exempt from
registration under Section 3(a)(2) of the Securities Act of 1933, as
amended.
(b)
Not applicable.
(c)
None.
37
Table of Contents
Item 3 – Defaults
Upon Senior Securities
None.
Item 4 – Removed
and Reserved
None.
Item 5 – Other Information
(a)
None.
(b)
None.
Item 6 – Exhibits
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3.1
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Amended
and Restated Certificate of Incorporation of Plug Power Inc. (1)
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3.2
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Third
Amended and Restated By-laws of Plug Power Inc. (3)
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3.3
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Certificate
of Amendment to Amended and Restated Certificate of Incorporation of Plug
Power Inc. (1)
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3.4
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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. (2)
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3.5
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Second
Certificate of Amendment of Amended and Restated Certificate of Incorporation
of Plug Power Inc. (5)
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4.1
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Form
of Warrant (6)
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10.1
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2011
Stock Option and Incentive Plan (4)
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10.2
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Form
of Incentive Stock Option Agreement (7)
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10.3
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Form
of Non-Qualified Stock Option Agreement for Employees (7)
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10.4
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Form
of Non-Qualified Stock Option Agreement for Independent Directors (7)
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10.5
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Form
of Restricted Stock Award Agreement (7)
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10.6
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Loan
and Security Agreement, dated as of August
9, 2011, by and between Plug Power Inc. and Silicon Valley
Bank (7)
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38
Table of Contents
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31.1 and 31.2
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Certifications
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (7)
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32.1 and 32.2
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Certifications
pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002. (7)
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101.INS*
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XBRL
Instance Document (7)
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101.SCH*
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XBRL
Taxonomy Extension Schema Document (7)
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101.CAL*
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XBRL
Taxonomy Extension Calculation Linkbase Document (7)
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101.DEF*
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XBRL
Taxonomy Extension Definition Linkbase Document (7)
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101.LAB*
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XBRL
Taxonomy Extension Labels Linkbase Document (7)
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101.PRE*
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XBRL
Taxonomy Extension Presentation Linkbase Document (7)
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(1)
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Incorporated
by reference from the Company’s Annual Report on Form 10-K for the
period ended December 31, 2008.
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(2)
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Incorporated
by reference from the Company’s Registration Statement on Form 8-A
dated June 24, 2009.
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(3)
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Incorporated
by reference from the Company’s Current Report on Form 8-K dated
October 28, 2009.
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(4)
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Incorporated
by reference from the Company’s Current Report on Form 8-K dated May
12, 2011.
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(5)
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Incorporated
by reference from the Company’s Current Report on Form 8-K dated May
19, 2011.
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(6)
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Incorporated
by reference from the Company’s Current Report on Form 8-K dated May
24, 2011.
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(7)
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Furnished
herewith
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*
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
June 30, 2011, formatted in eXtensible Business Reporting Language (XBRL) and
tagged as blocks of text: (i) Condensed Consolidated Balance Sheets at June 30,
2011 and December 31, 2010; (ii) Condensed Consolidated Statements of
Operations for the Three and Six Months Ended June 30, 2011 and 2010; (iii) Condensed
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2011
and 2010; and (iv) related notes, tagged as blocks of text. Pursuant to Rule
406T of Regulation S-T this data is deemed not filed or part of a registration
statement or prospectus for purposes of sections 11 or 12 of the Securities Act
of 1933, as amended, is deemed not filed for purposes of section 18 of the
Securities and Exchange Act of 1934, as amended, and otherwise is not subject
to liability under these sections.
39
Table of Contents
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.
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PLUG
POWER INC.
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Date:
August 11, 2011
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By:
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/s/
Andrew Marsh
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Andrew
Marsh
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President,
Chief Executive Officer and Director (Principal Executive Officer)
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Date:
August 11, 2011
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By:
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/s/
Gerald A. Anderson
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Gerald
A. Anderson
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Chief
Financial Officer (Principal Financial Officer)
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40