Item
1 Interim Financial Statements (Unaudited)
Plug Power Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
|
|
|
September 30
|
|
December 31,
|
|
|
|
2012
|
|
2011
|
Assets
|
|
|
|
Current assets:
|
|
|
|
|
Cash and cash equivalents
|
$
|
9,461,404
|
|
$
|
13,856,893
|
|
Accounts receivable, less allowance of $0 at September 30, 2012 and December 31, 2011
|
7,661,038
|
|
13,388,909
|
|
Inventory
|
13,005,120
|
|
10,354,707
|
|
Prepaid expenses and other current assets
|
1,552,429
|
|
1,894,014
|
|
|
Total current assets
|
31,679,991
|
|
39,494,523
|
Property, plant, and equipment (net of accumulated depreciation of $26,913,460
|
|
|
|
|
at September 30, 2012 and $25,616,113 at December 31, 2011)
|
7,404,490
|
|
8,686,840
|
Note Receivable
|
585,611
|
|
-
|
Intangible assets, net
|
5,896,909
|
|
7,474,636
|
|
|
Total assets
|
$
|
45,567,001
|
|
$
|
55,655,999
|
Liabilities and Stockholders' Equity
|
|
|
|
Current liabilities:
|
|
|
|
|
Accounts payable
|
$
|
5,541,807
|
|
$
|
4,668,721
|
|
Accrued expenses
|
2,075,772
|
|
3,172,998
|
|
Product warranty reserve
|
2,968,613
|
|
1,210,909
|
|
Borrowings under line of credit
|
1,000,000
|
|
5,405,110
|
|
Deferred revenue
|
4,175,560
|
|
2,505,175
|
|
Other current liabilities
|
334,085
|
|
80,000
|
|
|
Total current liabilities
|
16,095,837
|
|
17,042,913
|
|
Common stock warrant liability
|
1,594,323
|
|
5,320,990
|
|
Deferred revenue
|
3,567,583
|
|
3,036,829
|
|
Other liabilities
|
1,264,621
|
|
1,219,602
|
|
|
Total liabilities
|
22,522,364
|
|
26,620,334
|
Stockholders' equity:
|
|
|
|
|
Common stock, $0.01 par value per share; 245,000,000 shares authorized;
|
|
|
|
|
Issued (including shares in treasury):
|
|
|
|
|
|
38,197,255 at September 30, 2012 and 22,924,411 at December 31, 2011
|
381,973
|
|
229,244
|
|
Additional paid-in capital
|
801,351,649
|
|
784,213,871
|
|
Accumulated other comprehensive income
|
1,035,329
|
|
928,744
|
|
Accumulated deficit
|
(778,171,932)
|
|
(754,783,812)
|
|
Less common stock in treasury:
|
|
|
|
|
165,906 shares at September 30, 2012 and December 31, 2011
|
(1,552,382)
|
|
(1,552,382)
|
|
|
Total stockholders' equity
|
23,044,637
|
|
29,035,665
|
|
|
Total liabilities and stockholders' equity
|
$
|
45,567,001
|
|
$
|
55,655,999
|
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 Operations
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
|
|
|
|
September 30
|
|
September 30
|
|
|
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
|
|
Product and service revenue
|
$
|
4,273,385
|
|
$
|
4,312,885
|
|
$
|
18,711,555
|
|
$
|
11,927,135
|
|
|
Research and development contract revenue
|
502,269
|
|
994,244
|
|
1,475,338
|
|
3,342,187
|
|
|
Licensed technology revenue
|
-
|
|
163,125
|
|
-
|
|
489,375
|
|
|
Total revenue
|
4,775,654
|
|
5,470,254
|
|
20,186,893
|
|
15,758,697
|
|
|
Cost of product and service revenue
|
10,848,860
|
|
7,565,994
|
|
28,552,076
|
|
19,187,617
|
|
|
Cost of research and development contract revenue
|
791,322
|
|
1,695,171
|
|
2,389,844
|
|
5,505,767
|
|
|
Research and development expense
|
1,284,975
|
|
1,478,847
|
|
4,089,509
|
|
3,647,821
|
|
|
Selling, general and administrative expenses
|
3,053,434
|
|
3,606,505
|
|
10,556,495
|
|
11,051,020
|
|
|
Gain on sale of leased assets
|
-
|
|
(673,358)
|
|
-
|
|
(673,358)
|
|
|
Amortization of intangible assets
|
578,090
|
|
584,606
|
|
1,726,854
|
|
1,754,568
|
|
|
|
Operating loss
|
(11,781,027)
|
|
(8,787,511)
|
|
(27,127,885)
|
|
(24,714,738)
|
|
|
Interest and other income and net realized losses
|
|
|
|
|
|
|
|
|
|
from available-for-sale securities
|
80,046
|
|
99,740
|
|
171,260
|
|
220,862
|
|
|
Change in fair value of common stock warrant liability
|
1,434,866
|
|
2,414,267
|
|
3,726,667
|
|
4,204,787
|
|
|
Interest and other expense and foreign currency gain (loss)
|
(59,349)
|
|
(17,042)
|
|
(158,162)
|
|
2,675
|
|
|
|
Net loss
|
$
|
(10,325,464)
|
|
$
|
(6,290,546)
|
|
$
|
(23,388,120)
|
|
$
|
(20,286,414)
|
|
|
Loss per share:
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
$
|
(0.27)
|
|
$
|
(0.28)
|
|
$
|
(0.71)
|
|
$
|
(1.16)
|
|
|
Weighted average number of common shares
|
|
|
|
|
|
|
|
|
|
outstanding
|
37,977,052
|
|
22,676,114
|
|
33,107,175
|
|
17,441,767
|
|
The accompanying notes are an integral part of
these unaudited condensed consolidated financial statements.
5
Table of
Contents
Plug Power Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive
Income (Loss)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
Net Loss
|
$
|
(10,325,464)
|
|
$
|
(6,290,546)
|
|
$
|
(23,388,120)
|
|
$
|
(20,286,414)
|
Other comprehensive (loss) income:
|
|
|
|
|
|
|
|
|
Foreign currency translation gain (loss)
|
110,625
|
|
(160,205)
|
|
106,585
|
|
(74,173)
|
|
Unrealized gain on available-for-sale securities
|
-
|
|
-
|
|
-
|
|
18,502
|
Comprehensive Loss
|
$
|
(10,214,839)
|
|
$
|
(6,450,751)
|
|
$
|
(23,281,535)
|
|
$
|
(20,342,085)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
unaudited condensed consolidated financial statements.
6
Table of
Contents
P
lug Power Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
|
|
|
|
Nine months ended
|
|
|
|
|
September 30,
|
|
|
|
|
2012
|
|
2011
|
|
Cash Flows From Operating Activities:
|
|
|
|
|
Net loss
|
|
$
|
(23,388,120)
|
|
$
|
(20,286,414)
|
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
Depreciation of property, plant and equipment
|
1,459,159
|
|
1,600,143
|
|
|
Amortization of intangible assets
|
1,726,854
|
|
1,754,568
|
|
|
Stock-based compensation
|
1,500,352
|
|
1,602,097
|
|
|
Loss on disposal of property, plant and equipment
|
57,680
|
|
308,902
|
|
|
Gain on sale of leased assets
|
-
|
|
(673,358)
|
|
|
Realized loss on available for sale securities
|
-
|
|
22,421
|
|
|
Change in fair value of common stock warrant liability
|
(3,726,667)
|
|
(4,204,787)
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
Accounts receivable
|
5,728,228
|
|
(1,028,099)
|
|
|
Inventory
|
(2,650,413)
|
|
5,303,221
|
|
|
Prepaid expenses and other current assets
|
341,585
|
|
(180,390)
|
|
|
Issuance of note receivable
|
(585,611)
|
|
-
|
|
|
Accounts payable, accrued expenses, product warranty reserve and other liabilities
|
1,787,625
|
|
(2,914,462)
|
|
|
Deferred revenue
|
2,201,139
|
|
(456,295)
|
|
|
|
Net cash used in operating activities
|
(15,548,189)
|
|
(19,152,453)
|
|
Cash Flows From Investing Activities:
|
|
|
|
|
|
Purchase of property, plant, and equipment
|
(292,389)
|
|
(1,156,163)
|
|
|
Restricted cash
|
-
|
|
525,000
|
|
|
Proceeds from sale of leased assets
|
-
|
|
673,358
|
|
|
Proceeds from disposal of property, plant and equipment
|
57,900
|
|
45,000
|
|
|
Proceeds from maturities and sales of available-for-sale securities
|
-
|
|
10,399,396
|
|
|
|
Net cash (used in) provided by investing activities
|
(234,489)
|
|
10,486,591
|
|
Cash Flows From Financing Activities:
|
|
|
|
|
|
Purchase of treasury stock
|
-
|
|
(158,492)
|
|
|
Proceeds from issuance of common stock
|
17,192,500
|
|
22,583,877
|
|
|
Stock issuance costs
|
(1,402,230)
|
|
(1,891,378)
|
|
|
Repayments under line of credit, net
|
(4,405,110)
|
|
-
|
|
|
Principal payments on long-term debt
|
-
|
|
(9,956)
|
|
|
|
Net cash provided by financing activities
|
11,385,160
|
|
20,524,051
|
|
|
Effect of exchange rate changes on cash
|
2,029
|
|
(11,407)
|
|
|
(Decrease) increase in cash and cash equivalents
|
(4,395,489)
|
|
11,846,782
|
|
|
Cash and cash equivalents, beginning of period
|
13,856,893
|
|
10,955,403
|
|
|
Cash and cash equivalents, end of period
|
$
|
9,461,404
|
|
$
|
22,802,185
|
The accompanying notes are an integral part of these
unaudited condensed consolidated financial statements.
7
Table of
Contents
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.
We are 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.
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 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.
We sell our 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.
We were organized in the State of Delaware on June 27,
1997 and became a public company listed on the NASDAQ exchange on October 29,
1999. We were originally a joint venture between Edison Development
Corporation and Mechanical Technology Incorporated. In 2007, we acquired
all the issued and outstanding 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.
Unless the context indicates otherwise, the terms
Company, Plug Power, we, our or us as used herein refers to Plug
Power Inc. and its subsidiaries.
Liquidity
As of September 30, 2012, we had approximately $15.6
million of working capital, which includes $9.5 million of cash and cash equivalents
to fund our future operations. Additionally, as of March 30, 2012, we executed
a Second Loan Modification Agreement with Silicon Valley Bank which increased
our credit facility, providing us access of up to $15 million in financing,
subject to borrowing base limitations, to support working capital needs. Based
on the borrowing base calculation and our current outstanding loan balance, the
availability under this facility at September 30, 2012 was approximately $1.9
million (see Note
4, Loan and Security Agreement, of the condensed consolidated financial
statements). 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 into 2013. This
projection is based on our current expectations regarding product sales, cost
structure, cash burn rate and operating assumptions.
8
Table of
Contents
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
and meet 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 without
additional external financing.
Alternatives we would consider for additional
funding include equity or debt financing, a sale-leaseback of our real estate,
or licensing of our technology. In addition to raising capital, we may
also consider strategic alternatives including business combinations, strategic
alliances or joint ventures. Under such
conditions, if we are unable to obtain additional capital in 2013, we may not
be able to sustain our future operations 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 alternatives
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. Similarly, if our common stock is delisted from the NASDAQ Capital
Market, it may limit our ability to raise additional funds (see Note 14,
Subsequent Events). 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.
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
Companys 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 Companys audited consolidated financial
statements and notes thereto included in the Companys Annual Report on Form
10-K filed for the fiscal year ended December 31, 2011.
9
Table of
Contents
The information presented in the accompanying
condensed consolidated balance sheet as of December 31, 2011 has been
derived from the Companys December 31, 2011 audited consolidated
financial statements. All other information has been derived from the Companys
unaudited condensed consolidated financial statements as of September 30, 2012
and for the three and nine months ended September 30, 2012 and 2011.
Use of Management 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.
Significant Accounting Policies:
Warrant accounting
We account for common stock warrants in accordance
with applicable accounting guidance provided in Accounting Standards
Codification (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), December 31, 2011, and September 30, 2012 were .75%, .33% and .30%, respectively.
The volatility of the market price of the Companys common stock for May 31, 2011,
December 31, 2011 and September 30, 2012 were 94.4%, 78.6%, and 76.2%,
respectively. The expected average term of the warrant used for all 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. Generally, as the market price of our common stock increases,
the fair value of the warrant increases, and conversely, as the market price of
our common stock decreases, the fair value of the warrant decreases. Also, a significant increase in the volatility of the market price of
the Company's common stock, in isolation, would result in a significantly
higher fair value measurement; and a significant decrease in volatility would
result in a significantly lower fair value measurement. Changes in the
fair value of the warrants are reflected in the condensed consolidated
statement of operations as change in fair value of common stock warrant
liability.
Joint Venture
We account for investments in joint ventures in which
we have significant influence in accordance with applicable accounting guidance
in Subtopic 323-10,
Investments Equity Method and Joint Ventures Overall
.
On February 29, 2012 we completed the formation of our joint venture with
Axane, S.A., a subsidiary of Air Liquide, under the name HyPulsion (the
JV). The principal purpose of the JV is to develop and sell hydrogen fuel
cell systems for the European material handling market. Axane contributed cash
at the closing and will make additional fixed cash contributions in 2013 and
2014 in exchange for 55% ownership of the JV, subject to certain conditions. We
contributed to the JV the right to use our technology, including design and
technology know-how on GenDrive systems, in exchange for 45% ownership of the
JV. Accordingly, we will share in 45% of the profits from the JV.
We have not contributed any cash to the JV and we are not obligated to
contribute any cash. We have an option in the future to contribute cash
and become a majority owner of the JV.
10
Table of
Contents
In accordance with the equity method of accounting,
the Company will increase its investment in the JV by its share of any
earnings, and decrease its investment in the JV by its share of any
losses. Losses in excess of the investment must be restored from future
profits before we can recognize our proportionate share of profits. As of
September 30, 2012, the Company had a zero basis for its investment in the JV.
Recent Accounting Pronouncements:
There are no recently issued accounting
standards with pending adoptions that the Companys management currently
anticipates will have any material impact upon its financial statements.
3. 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.
Under the guidance of the Financial Accounting
Standards Board (FASB) Accounting Standards Update (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.
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 Companys 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 Companys 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.
11
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Each deliverable within the Companys
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 Companys 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. We recognized
revenue related to these transactions of approximately $51,000 and $152,000
during the three and nine months ended September 30, 2012, respectively.
At September 30, 2012, and December 31, 2011, there was approximately $758,000
and $910,000, respectively, included in deferred revenue in the condensed
consolidated balance sheets related to these transactions.
4. Loan and Security Agreement
The Company is party to a loan and security agreement,
as amended, (the Loan Agreement) with Silicon Valley Bank (SVB) providing the
Company with access to up to $15,000,000 of financing in the form of (i)
revolving loans, (ii) letters of credit, (iii) foreign exchange contracts and
(iv) 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 receivable and
(B) an advanced rate of 25% on the Company's eligible inventory (subject to a
limit of the lesser of (a) $3 million and (b) 30% of all outstanding advances),
subject to certain reserves established by SVB and other adjustments.
Interest
on advances of credit under the Loan Agreement for: (i) financed accounts
receivables are equal to (a) SVBs prime rate, which is currently 3.25% per
annum, plus 3.0% per annum or (b) if the Company maintains at all times during
any month 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 at all times during any
month 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 $6,000 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. At September 30, 2012 the Company was in compliance with all
covenants except the adjusted quick ratio covenant. Silicon Valley Bank has
waived our noncompliance with this covenant as of September 30, 2012.
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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
(viii) any misrepresentations, or (ix) any revocation, invalidation, breach or
invalidation of any subordinated debt.
The
Loan Agreement will expire on March 29, 2013. The Loan Agreement may be
terminated prior to March 29, 2013; however, the Company would be required to
pay a $150,000 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. As of September 30,
2012, $1,000,000 was outstanding under the loan agreement and was recorded as
borrowings under line of credit on the condensed consolidated balance sheets.
Based on the borrowing base calculation and our current outstanding loan
balance, the availability under this facility at September 30, 2012 was
approximately $1.9 million.
5. Stockholders Equity
On May 12, 2011, the Companys 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). 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. On May 16, 2012, the stockholders approved an amendment to the 2011
Plan, to increase the number of shares of the Companys common stock authorized
for issuance under the 2011 Plan from 1,000,000 to 6,500,000.
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). 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 common stock warranty liability at issuance date).
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. The warrants are exercisable upon issuance and will expire
on May 31, 2016. The exercise price of the warrants upon issuance was $3.00 per
share of common stock and is subject to weighted average anti-dilution
provisions in the event of issuance of additional shares of common stock and
certain other conditions, as further described in the warrant agreement.
Additionally, in the event of a sale of the Company, and under certain
conditions, each warrant holder has the right to require the Company to
purchase such holders warrants at a price determined using a Black-Scholes
option pricing model. As a result of the March 28 and 29, 2012 public offerings
and pursuant to the effect of the anti-dilution provisions, the exercise price
of the warrants was reduced to $2.27 per share of common stock. Simultaneously
with the adjustment to the exercise price, the number of common stock shares
that may be purchased upon exercise of the warrants was increased to 9,421,008
shares.
On June 8, 2011, the Company sold 836,750 additional
shares of common stock, pursuant to the underwriters 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 underwriters partial exercise of its
over-allotment option, resulting in additional net proceeds to Plug Power of $
527,626.
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On March 28, 2012, the Company completed an underwritten
public offering of 13,000,000 shares of its common stock. The shares were sold
at $1.15 per share. Net proceeds, after underwriting discounts and
commissions and other fees and expenses payable by Plug Power were
$13,704,745.
On March 29, 2012, the Company sold 1,950,000
additional shares of common stock at $1.15 per share, pursuant to the
underwriters exercise of its over-allotment option in connection with the
March 28, 2012 underwritten public offering, resulting in additional net
proceeds to Plug Power of $2,085,525.
Changes in stockholders equity for the nine months
ended September 30, 2012 are as follows:
|
|
|
|
|
|
|
|
|
|
Accumulated
Other
Comprehensive
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Additional Paid-in-
Capital
|
|
|
Treasury Stock
|
|
Accumulated
Deficit
|
|
Total
Stockholders'
Equity
|
|
|
Shares
|
|
Amount
|
|
|
|
Shares
|
|
Amount
|
|
|
|
December 31, 2011
|
|
22,924,411
|
|
$
|
229,244
|
|
$
|
784,213,871
|
|
$
|
928,744
|
|
165,906
|
|
$
|
(1,552,382)
|
|
$
|
(754,783,812)
|
|
$
|
29,035,665
|
|
Net loss
|
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
(23,388,120)
|
|
(23,388,120)
|
|
Foreign currency translation gain
|
|
|
-
|
|
-
|
|
-
|
|
106,585
|
|
-
|
|
-
|
|
-
|
|
106,585
|
|
Stock based compensation
|
|
322,844
|
|
3,229
|
|
1,497,008
|
|
-
|
|
-
|
|
-
|
|
-
|
|
1,500,237
|
|
Public offering common stock, net
|
|
14,950,000
|
|
149,500
|
|
15,640,770
|
|
-
|
|
-
|
|
-
|
|
-
|
|
15,790,270
|
|
September 30, 2012
|
|
38,197,255
|
|
$
|
381,973
|
|
$
|
801,351,649
|
|
$
|
1,035,329
|
|
165,906
|
|
$
|
(1,552,382)
|
|
$
|
(778,171,932)
|
|
$
|
23,044,637
|
6. 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. Diluted
earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock (such as stock options,
unvested restricted stock, 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
and the Companys 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 following table provides the components of the
calculations of basic and diluted earnings per share:
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
Numerator:
|
|
|
|
|
|
|
|
|
Net loss
|
$
|
(10,325,464)
|
|
$
|
(6,290,546)
|
|
$
|
(23,388,120)
|
|
$
|
(20,286,414)
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
37,977,052
|
|
22,676,114
|
|
33,107,175
|
|
17,441,767
|
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Table of
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The potential dilutive common shares are summarized as
follows:
|
At September 30,
|
|
2012
|
|
2011
|
Stock options outstanding
|
1,999,521
|
|
1,344,665
|
Unvested restricted stock
|
|
275,262
|
|
408,388
|
Common stock warrants
(1)
|
9,421,008
|
|
7,128,563
|
Number of dilutive potential common shares
|
11,695,791
|
|
8,881,616
|
(1)
|
On May 31, 2011, the Company granted
7,128,563 warrants as part of an underwritten public offering. As a
result of the March 28 and 29, 2012 public offerings described in Note 5, the
number of warrants increased to 9,421,008.
|
7. Inventory
Inventory as of September 30, 2012
and December 31, 2011 consisted of the following:
|
September 30, 2012
|
|
December 31, 2011
|
Raw materials and supplies
|
|
$
|
9,479,058
|
|
$
|
9,159,004
|
Work-in-process
|
|
18,584
|
|
462,832
|
Finished goods
|
|
3,507,478
|
|
732,871
|
|
|
$
|
13,005,120
|
|
$
|
10,354,707
|
Finished goods inventory at September 30, 2012
includes approximately $3 million related to 245 units shipped to a customer
site during the quarter in connection with a customer lease agreement that was
not yet complete.
8. Intangible Assets
The gross carrying amount and accumulated amortization
of the Companys acquired identifiable intangible assets related to Plug Power
Canada Inc. as of September 30, 2012 are as follows:
|
|
|
|
|
|
|
|
|
|
|
Effect of
|
|
|
|
|
Weighted Average
|
|
Gross Carrying
|
|
Accumulated
|
|
Foreign Currency
|
|
|
|
|
Amortization Period
|
|
Amount
|
|
Amortization
|
|
Translation
|
|
Total
|
|
Acquired Technology
|
8 years
|
|
|
$
|
15,900,000
|
|
$
|
(11,607,664)
|
|
$
|
1,281,656
|
|
$
|
5,573,992
|
|
Customer Relationships
|
8 years
|
|
|
1,000,000
|
|
(677,083)
|
|
-
|
|
322,917
|
|
|
|
|
|
|
|
$
|
16,900,000
|
|
$
|
(12,284,747)
|
|
$
|
1,281,656
|
|
$
|
5,896,909
|
15
Table of
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The gross carrying amount and accumulated amortization
of the Companys acquired identifiable intangible assets related to Plug Power
Canada Inc. as of December 31, 2011 are as follows:
|
|
|
|
|
|
|
|
|
|
|
Effect of
|
|
|
|
|
Weighted Average
|
|
Gross Carrying
|
|
Accumulated
|
|
Foreign Currency
|
|
|
|
|
Amortization Period
|
|
Amount
|
|
Amortization
|
|
Translation
|
|
Total
|
|
Acquired Technology
|
8 years
|
|
|
$
|
15,900,000
|
|
$
|
(9,974,597)
|
|
$
|
1,132,529
|
|
$
|
7,057,932
|
|
Customer Relationships
|
8 years
|
|
|
1,000,000
|
|
(583,296)
|
|
-
|
|
416,704
|
|
|
|
|
|
|
|
$
|
16,900,000
|
|
$
|
(10,557,893)
|
|
$
|
1,132,529
|
|
$
|
7,474,636
|
9. Income Taxes
Under Internal Revenue Code (IRC) Section 382, the use
of net operating loss carry-forwards, capital loss carry-forwards and other tax
credit carry-forwards 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 carry-forwards could be subject to significant
IRC Section 382 limitations.
Prior to March 2011, the Company had approximately
$703 million in Federal and state net operating loss carry-forwards and $15.6
million in Federal research and experimentation tax credit
carry-forwards. A Section 382 ownership change occurred during March 2011
that resulted in approximately $675 million of Federal and state net operating
loss carry-forwards being subject to IRC Section 382 limitations and as a
result of IRC Section 382 limitations, approximately $618 million of the net
operating loss carry-forwards and $15.6 million of the Federal research and
experimentation tax credit carry-forwards will expire prior to
utilization. As a result of the IRC Section 382 limitations, these net
operating loss and tax credit carry-forwards that will expire unutilized were
not reflected in the Companys gross deferred tax asset as of December 31,
2011. The ownership change also resulted in Net Unrealized Built in Losses per
IRS Notice 2003-65 which should result in Recognized Built in Losses during the
five year recognition period of approximately $9.4 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 resulted in a gross deferred tax liability of
$3.6 million at the time of the ownership change and $2.6 million at December
31, 2011 with 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 had no impact on the Company's
current financial position, results of operations, or cash flows because of the
full valuation allowance.
As a result of certain equity transactions by five
percent stockholders, a Section 382 ownership change occurred during March 2012
that resulted in all but approximately $14.9 million of the Companys Federal
and state net operating loss carry-forwards expiring prior to utilization,
which resulted in the Companys gross deferred tax asset and related valuation
allowance decreasing by approximately $24.6 million. The ownership also
resulted in Net Unrealized Built in Losses per IRS Notice 2003-65 which should
result in Recognized Built in Losses during the five year recognition period of
approximately $36.5 million. This will translate into unfavorable book to tax
add backs in the Company's 2012 to 2017 U.S. corporate income tax returns that
would result in a gross deferred tax liability of $13.9 million at the time of
the ownership change with 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). These decreases would have no
impact on the Companys financial position, results of operations, or cash
flows. However, these potential future tax benefits would no longer be
available to the Company.
10. Note Receivable
On May 25, 2012, we executed a $663,359 Promissory
Note with Forem Energy Group, maturing on May 25, 2022. This note is
unsecured and bears interest at an annual rate of 2.9%. Accordingly,
receivables relating to this agreement in the amount of $585,611 and $63,398
have been recorded as note receivable and current portion note receivable
(prepaid expenses and other current assets), respectively, in the condensed
consolidated balance sheets as of September 30, 2012.
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Table of
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11. Fair Value
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.
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:
|
|
|
|
|
Quoted Prices in Active
|
|
Significant
|
|
Significant
|
|
|
|
|
|
Markets for Identical
|
|
Other Observable
|
|
Unobservable
|
|
|
|
|
|
Items
|
|
Inputs
|
|
Inputs
|
Balance at September 30, 2012
|
|
Total
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
Common stock warrant liability
|
|
$
|
1,594,323
|
|
$
|
-
|
|
$
|
-
|
|
$
|
1,594,323
|
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 nine
months ended September 30, 2012:
|
|
|
|
|
|
Fair Value
|
|
|
Measurement Using
|
|
|
Significant
|
Common stock warrant liability
|
|
Unobservable Inputs
|
|
|
|
Beginning of period - January 1, 2012
|
$
|
5,320,990
|
Change in fair value of common stock warrants
|
(3,726,667)
|
Fair value of common stock warrant liability at September 30, 2012
|
$
|
1,594,323
|
17
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The following summarizes the valuation technique for
assets and liabilities measured and recorded at fair value:
Common stock 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.
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.
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, accounts payable and borrowings under
line of credit:
The carrying amounts
reported in the condensed consolidated balance sheets approximate fair value
because of the short maturities of these instruments.
12. Commitments and Contingencies
In September 2011, the Company signed a letter of
credit with Silicon Valley Bank in the amount of $525,000. The standby letter
of credit is required by an 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. There are no collateral requirements associated with this letter
of credit.
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 was approximately $9.4 million.
As of September 30, 2012, the Company had purchased 2,347 stacks, and has a
remaining commitment of approximately $2.2 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 Ballards sole discretion for the purposes of
product development, cost reduction and production implementation. This
fee is being amortized to research and development expense over a period of
eighteen months.
Concentrations of credit risk with respect to
receivables exist due to the limited number of select customers that the
Company has initial commercial sales arrangements with and with government
agencies. To mitigate credit risk, the Company performs appropriate evaluation
of a prospective customers financial condition.
At September 30, 2012, four
customers comprise approximately 79.4% of the
total accounts receivable balance, with each customer individually representing
61.0%, 8.8%, 5.0%, and 4.6% of total accounts receivable, respectively.
At December 31, 2011, five customers comprise approximately 83.0% of the
total accounts receivable balance, with each customer individually representing
27.0%, 17.3%, 16.4%, 12.1%, and 10.2% of total accounts receivable,
respectively.
For the nine months ended September 30, 2012,
contracts with three customers comprise approximately 55.5% of total
consolidated revenues, with each customer representing 25.8%, 19.4%, and 10.3%, respectively. For the nine months
ended September 30, 2011, contracts with two customers and two federal
government agencies comprised approximately 63.7% of total consolidated
revenues, with each customer representing 22.5%, 20.7%, 10.5%, and 10.0%,
respectively.
18
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The
product and service revenue contracts we entered into generally provide a one
to two-year product warranty to customers from date of installation. We
currently estimate the costs of satisfying warranty claims based on an analysis
of past experience and provide for future claims in the period the revenue is
recognized. Factors that affect our warranty liability include the number
of installed units, estimated material costs, estimated travel, and labor
costs. During the quarters ended September 30, 2012, and September 30, 2011, we
adjusted our reserve for additional warranty claims arising from GenDrive
component quality issues that were identified during the quarter. These are
isolated quality issues that were identified in GenDrive units that are
currently being used at customer sites. These units will be retro-fitted with
replacement components that will improve the reliability of our GenDrive products
for our customers.
The following table summarizes product warranty
activity recorded during the nine months ended September 30, 2012 and 2011:
|
September 30, 2012
|
|
September 30, 2011
|
Beginning balance - January 1
|
|
$
|
1,210,919
|
|
$
|
862,480
|
Additions for current year deliveries
|
|
399,623
|
|
569,452
|
Reductions for payments made
|
|
(1,915,253)
|
|
(398,966)
|
Reserve Adjustment
|
|
3,273,324
|
|
561,750
|
Ending balance - September 30
|
|
$
|
2,968,613
|
|
$
|
1,594,716
|
|
|
|
|
|
13. 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 nine months ended September 30, 2012 and
2011:
|
September 30, 2012
|
|
September 30, 2011
|
Stock-based compensation accrual impact, net
|
|
$
|
(115)
|
|
$
|
(211,614)
|
Change in unrealized gain on available-for-sale securities
|
|
-
|
|
18,502
|
Transfer of investment in leased property to inventory
|
|
-
|
|
263,239
|
Transfer of assets held for sale to inventory
|
|
-
|
|
1,000,000
|
14. 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 October 12, 2012, the Company received a deficiency
notice from The Nasdaq Stock Market ("Nasdaq") stating that it no
longer complies with Nasdaq Marketplace Rule 5550(a)(2) because the bid price
of the Company's common stock closed below the required minimum $1.00 per share
for the previous 30 consecutive business days. The notice also indicated that,
in accordance with Marketplace Rule 5810(c)(3)(A), Plug Power has a period of
180 calendar days, until April 10, 2013, to regain compliance with Rule 5550(a)(2).
If at any time before April 10, 2013 the bid price of the Company's common
stock closes at $1.00 per share or more for a minimum of 10 consecutive
business days, Nasdaq will notify the Company that it has regained compliance
with Rule 5550(a)(2). In the event the Company does not regain compliance with
Rule 5550(a)(2) prior to the expiration of the 180-day period, Nasdaq will
notify the Company that its common stock is subject to delisting. The Company
may appeal the delisting determination to a Nasdaq hearing panel and the
delisting will be stayed pending until the panel's determination. At such
hearing, the Company would present a plan to regain compliance and Nasdaq would
then subsequently render a decision. The Company is currently evaluating its
alternatives to resolve the listing deficiency.
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Item 2 Managements 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, 2011. In
addition to historical information, this Form 10-Q and the following discussion
contain statements that are not historical facts and are considered
forward-looking within the meaning of Section 27A of the Securities Act and
Section 21E of the Exchange Act. These forward-looking statements contain
projections of our future results of operations or of our financial position or
state other forward-looking information. In some cases you can identify these
statements by forward-looking words such as anticipate, believe, could, continue,
estimate, expect, intend, may, should, will, would, plan,
projected or the negative of such words or other similar words or phrases. We
believe that it is important to communicate our future expectations to our
investors. However, there may be events in the future that we are not able to
accurately predict or control and that may cause our actual results to differ
materially from the expectations we describe in our forward-looking statements.
Investors are cautioned not to
unduly
rely on
forward-looking statements because they involve risks and uncertainties, and
actual results may differ materially from those discussed as a result of
various factors, including, but not limited to: the risk that we continue to
incur losses and might never achieve or maintain profitability, the risk that
we expect we will need to raise additional capital to fund our operations and
such capital may not be available to us; 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; the risk
that pending orders may not convert to purchase orders; the risk that our
continued failure to comply with NASDAQs listing standards may severely limit
our ability to raise additional capital; 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, 2011, as filed on March 30,
2012 as updated by Part II, Item 1A of our Form 10-Q for the quarters ended
March 31 and June 30, 2012, 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.
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. We continue to leverage
our unique fuel cell application and integration knowledge to identify early
adopter markets for which we can design and develop innovative systems and
customer solutions that provide superior value, ease-of-use and environmental
design. We have made significant progress in our analysis of the material
handling market. We believe we have developed reliable products which allow
the end customers to eliminate incumbent power sources from their operations,
and realize their sustainability objectives through clean energy alternatives.
In October, 2011 we introduced our next generation
GenDrive products. These next generation fuel cell units include a simplified
architecture featuring 30% fewer components, giving customers greater
flexibility in managing their deployments.
20
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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 significantly reduced our operating expenses in 2011. As of
September 30, 2012, we had approximately $15.6 million of working capital,
which includes $9.5 million of cash and cash equivalents to fund our future
operations. Our future liquidity and capital requirements will depend upon
numerous factors, including those identified in Part II, Item 1A (Risk Factors)
of this Form 10-Q.
Additionally, as of March 30, 2012,
we executed a Second Loan Modification Agreement with Silicon Valley Bank which
increased our credit facility, providing us access of up to $15 million in
financing, subject to borrowing base limitations, to support working capital
needs. Based on the borrowing base calculation and our current outstanding loan
balance, the availability under this facility at September 30, 2012 was
approximately $1.9 million (see Note 4, Loan and Security Agreement, of the condensed consolidated
financial statements). 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 into
2013. This projection is based on our current expectations regarding product
sales, cost structure, cash burn rate and operating assumptions.
As
a result, we can anticipate that we can fund our operations into 2013, but we can
provide no assurance that we will be able to fund our operations thereafter
without external financing. If we are unable to obtain additional capital in 2013,
we may not be able to sustain our future operations 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
On October 12, 2012, the Company
received a deficiency notice from The Nasdaq Stock Market ("Nasdaq")
stating that it no longer complies with Nasdaq Marketplace Rule 5550(a)(2)
because the bid price of the Company's common stock closed below the required
minimum $1.00 per share for the previous 30 consecutive business days. The
notice also indicated that, in accordance with Marketplace Rule 5810(c)(3)(A),
Plug Power has a period of 180 calendar days, until April 10, 2013, to regain
compliance with Rule 5550(a)(2). If at any time before April 10, 2013 the bid
price of the Company's common stock closes at $1.00 per share or more for a
minimum of 10 consecutive business days, Nasdaq will notify the Company that it
has regained compliance with Rule 5550(a)(2). In the event the Company does not
regain compliance with Rule 5550(a)(2) prior to the expiration of the 180-day
period, Nasdaq will notify the Company that its common stock is subject to
delisting. The Company may appeal the delisting determination to a Nasdaq hearing
panel and the delisting will be stayed pending until the panel's determination.
At such hearing, the Company would present a plan to regain compliance and
Nasdaq would then subsequently render a decision. The Company is currently
evaluating its alternatives to resolve the listing deficiency.
21
Table of
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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. 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 3, 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.
Product and service revenue for the three months ended
September 30, 2012 decreased $40,000, or 0.9%, to $4.27 million from $4.31 for
the three months ended September 30, 2011. During the three months ended
September 30, 2012 we shipped 186 fuel cell systems to end customers as
compared to 195 fuel cell systems shipped during the three months ended
September 30, 2011. During the three months ended September 30, 2012, and
September 30, 2011, we deferred $673,000 and $587,000 in revenue, respectively,
due to contingent provisions in our agreements, as well as certain deliverables
where the criteria for recognition have not yet been met. Additionally,
in the three months ended September 30, 2012, we recognized approximately $166,000
of deferred revenue in connection with deliverables that have since met the
criteria for recognition, whereas in the three months ended September 30, 2011,
we recognized approximately $279,000 of deferred revenue associated with
deliverables that have since met the criteria for recognition.
Product and service revenue for the nine months ended September
30, 2012 increased $6.8 million, or 57.1%, to $18.7 million from $11.9 million
for the nine months ended September 30, 2011. During the nine months ended September
30, 2012 we shipped 873 fuel cell systems to end customers as compared to 412
fuel cell systems shipped during the nine months ended September 30,
2011. During the nine months ended September 30, 2012, and September 30,
2011, we deferred $3.3 million and $1.1 million in revenue, respectively, due
to contingent provisions in our agreements, as well as certain deliverables
where the criteria for recognition have not yet been met. Additionally,
in the nine months ended September 30, 2012, we recognized approximately $1.7
million of deferred revenue in connection with deliverables that have since met
the criteria for recognition, whereas in the nine months ended September 30,
2011, we recognized approximately $1.1 million of deferred revenue associated
with deliverables that have since met the criteria for recognition.
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. 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 September 30, 2012
decreased approximately $492,000, or 49.5%, to $502,000 from $994,000 for the
three months ended September 30, 2011. The decrease is primarily related to
fewer active projects in 2012. Additionally, in the three months ended
September 30, 2011, we shipped 40 fuel cell systems under two separate
Department of Defense contracts.
22
Table of
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Research
and development contract revenue for the nine months ended September 30, 2012
decreased approximately $1.8 million, or 54.5%, to $1.5 million from $3.3 million for
the nine months ended September 30, 2011. The decrease is primarily related to
fewer active projects in 2012. Additionally, in the nine months ended
September 30, 2011, we shipped 40 fuel cell systems under two separate
Department of Defense contracts.
Licensed
technology revenue.
Licensed
technology revenue relates to the sale of licensing rights and engineering
assistance. This revenue was being amortized over a twelve month period
that ended in October 2011.
Licensed
technology revenue for the three months and nine months ended September 30,
2011 was approximately $163,000 and $489,000, 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 September 30, 2012
increased approximately $3.2 million, or 42.1%, to $10.8 million from $7.6
million for the three months ended September 30, 2011. The increase in
the cost of product and service revenue primarily resulted from $3.3 million in
additional expenses for unanticipated warranty claims arising from GenDrive
component quality issues that were identified during the quarter ended September
30, 2012.
Cost
of product and service revenue for the nine months ended September 30, 2012
increased approximately $9.4 million, or 49.0%, to $28.6 million from $19.2
million for the nine months ended September 30, 2011. The increase in the
cost of product and service revenue primarily resulted from $3.3 million
in additional expenses for unanticipated warranty claims arising from GenDrive component
quality issues that were identified during the quarter ended September 30,
2012. Additionally, during the nine months ended September 30, 2012 we shipped
873 fuel cell systems to end customers as compared to 412 fuel cell systems
shipped during the nine months ended September 30, 2011.
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 September
30, 2012 decreased approximately $909,000, or 53.5%, to $791,000 from $1.7
million for the three months ended September 30, 2011. The decrease is
primarily a result of fewer active contracts in 2012, coupled with a lower
percentage of cost sharing on active contracts in 2012. Additionally, in the
three months ended September 30, 2011, we shipped 40 fuel cell systems under
two separate Department of Defense contracts.
Cost
of research and development contract revenue for the nine months ended September
30, 2012 decreased approximately $3.1 million, or 56.4%, to $2.4 million from $5.5
million for the nine months ended September 30, 2011. The decrease is
primarily a result of fewer active contracts in 2012, coupled with a lower
percentage of cost sharing on active contracts in 2012. Additionally, in the
nine months ended September 30, 2011, we shipped 40 fuel cell systems under two
separate Department of Defense contracts.
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.
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Research
and development expense for the three months ended September 30, 2012 decreased
approximately $200,000, or 13.3%, to $1.3 million from $1.5 million for the
three months ended September 30, 2011. This decrease was a result of lower
spending on materials, coupled with a decrease in consulting fees during
2012.
Research
and development expense for the nine months ended September 30, 2012 increased
approximately $500,000, or 13.9%, to $4.1 million from $3.6 million for the nine
months ended September 30, 2011. This increase in expense was a result of a
decrease in engineering personnel charging time to government programs due to
fewer government contracts during 2012.
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.
Selling, general and administrative expenses for the
three months ended September 30, 2012 decreased approximately $500,000, or 13.9%,
to $3.1 million from $3.6 million for the three months ended September 30, 2011.
The decrease was primarily the result of restructuring charges of approximately
$434,000 recorded during the quarter ended September 30, 2011, coupled with a
decrease in professional fees incurred during the quarter ended September 30, 2012.
Selling, general and administrative expenses for the nine
months ended September 30, 2012 decreased approximately $500,000, or 4.5%, to
$10.6 million from $11.1 million for the nine months ended September 30, 2011.
The decrease was primarily the result of restructuring charges of approximately
$474,000 recorded during 2011, coupled with a decrease in professional fees
incurred during 2012. These expenses were partly offset by an increase in
travel expenses, and a decline in selling, general and administrative expenses
charged to government programs due to fewer government contracts during 2012.
Gain on sale of leased assets.
Gain on sale of leased assets represents the gain on
sale of leased assets.
In
December 2010, the Company assigned all of its rights, title and interest in
its leased property to Somerset Capital Group, Ltd. (Somerset). Due to
contingent provisions in the agreement, the full amount of the sale could not
be recognized at the time. During the quarter ended September 30, 2011 the
contingent provisions of the agreement were met, and an additional $673,000 was
recorded as gain on sale of leased assets.
Amortization of intangible assets.
Amortization of intangible assets represents the amortization
associated with the Companys 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 decreased to
approximately $578,000 for the three months ended September 30, 2012, compared
to approximately $585,000 for the three months ended September 30, 2011. The
decrease is related to foreign currency fluctuations.
Amortization of intangible assets decreased to
approximately $1.7 million for the nine months ended September 30, 2012,
compared to approximately $1.8 million for the nine months ended September 30,
2011. The decrease 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, and rental income.
Interest and other income and net realized losses from
available-for-sale securities for the three months ended September 30, 2012
decreased approximately $20,000, or 20.0%, to $80,000 from $100,000 for the
three months ended September 30, 2011. The decrease is primarily related to a
decrease in rental income.
24
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Interest and other income and net realized losses from
available-for-sale securities for the nine months ended September 30, 2012
decreased approximately $50,000, or 22.6%, to $171,000 from $221,000 for the nine
months ended September 30, 2011. The decrease is primarily related to a
decrease in rental income, partially offset by a realized loss from
available-for-sale securities recorded in the first quarter of 2011.
Change in fair value of common stock 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 common stock warrant liability.
The change in fair value of common stock warrant
liability for the three months ended September 30, 2012 decreased $1.0 million
or 41.7%, to $1.4 million from $2.4 million for the three months ended September
30, 2011. The change in fair value of common stock warrant liability for
the nine months ended September 30, 2012 decreased $500,000 or 11.9%, to $3.7
million from $4.2 million for the nine months ended September 30, 2011.
These variances are primarily due to changes in the Companys common stock
share price, and changes in volatility of our common stock, which are
significant inputs to the Black-Scholes valuation model.
Interest and other expense and foreign currency gain
(loss).
Interest and other expense
and foreign currency gain (loss) consists of interest related to the Loan and
Security Agreement, loan modification fees related to the Credit Line
Agreement, and foreign currency exchange gain (loss).
Interest and other expense and foreign currency gain
(loss) for the three months ended September 30, 2012 and 2011 was approximately
$(59,000) and $(17,000), respectively. Interest and other expense related to
the Credit Line Agreement was approximately $43,000 and $0, respectively, for
the three months ended September 30, 2012 and 2011.
Interest and other expense and foreign currency gain
(loss) for the nine months ended September 30, 2012 and 2011 was approximately
$(158,000) and $3,000, respectively. Interest and other expense related to the
Credit Line Agreement was approximately $153,000 and $0, respectively, for the nine
months ended September 30, 2012 and 2011.
Income
taxes.
We did not report a benefit
for federal and state income taxes in the condensed consolidated financial
statements for the three and nine months ended September 30, 2012 and 2011 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.
Liquidity and
Capital Resources
We have experienced recurring operating losses and as
of September 30, 2012, we had an accumulated deficit of approximately $778.2 million.
Substantially all of our accumulated deficit has 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 public and private 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.
As of September 30, 2012, we had approximately $15.6
million of working capital, which includes $9.5 million of cash and cash
equivalents to fund our future operations. Additionally, as of March 30, 2012,
we executed a Second Loan Modification Agreement with Silicon Valley Bank which
increased our credit facility, providing us access of up to $15 million in
financing, subject to borrowing base limitations, to support working capital
needs. Based on the borrowing base calculation and our current outstanding loan
balance, the availability under this facility at September 30, 2012 was
approximately $1.9 million. (See Note 4, Loan and Security Agreement, of the condensed consolidated
financial statements). 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 into
2013. This projection is based on our current expectations regarding product
sales, cost structure, cash burn rate and operating assumptions.
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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 and meet 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 without additional external financing.
Alternatives we would consider for additional
funding include equity or debt financing, a sale-leaseback of our real estate,
or licensing of our technology. In addition to raising capital, we may
also consider strategic alternatives including business combinations, strategic
alliances or joint ventures. Under such
conditions, if we are unable to obtain additional capital in 2013, we may not
be able to sustain our future operations 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 alternatives
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. Similarly, if our common stock is delisted from the NASDAQ Capital
Market, it may limit our ability to raise additional funds (see Note 14,
Subsequent Events). 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.
Several
key indicators of liquidity are summarized in the following table:
|
Nine months
|
|
Nine months
|
|
Year
|
|
ended or at
|
|
ended or at
|
|
ended or at
|
|
September 30,
|
|
September 30,
|
|
December 31,
|
(in thousands)
|
2012
|
|
2011
|
|
2011
|
Cash and cash equivalents at end of period
|
9,461
|
|
22,802
|
13,857
|
Borrowings under line of credit at end of period
|
1,000
|
|
-
|
|
5,405
|
Working capital at end of period
|
15,584
|
|
24,543
|
22,452
|
Net loss
|
23,388
|
|
20,286
|
27,454
|
Net cash used in operating activities
|
15,548
|
|
19,152
|
33,310
|
Purchase of property, plant, and equipment
|
292
|
|
1,156
|
1,326
|
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The Company is party to a loan and security agreement,
as amended, (the Loan Agreement) with Silicon Valley Bank (SVB) providing the
Company with access to up to $15,000,000 of financing in the form of (i)
revolving loans, (ii) letters of credit, (iii) foreign exchange contracts and
(iv) 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 receivable and
(B) an advanced rate of 25% on the Company's eligible inventory (subject to a
limit of the lesser of (a) $3 million and (b) 30% of all outstanding advances),
subject to certain reserves established by SVB and other adjustments.
Interest
on advances of credit under the Loan Agreement for: (i) financed accounts
receivables are equal to (a) SVBs prime rate, which is currently 3.25% per
annum, plus 3.0% per annum or (b) if the Company maintains at all times during
any month 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 at all times during any
month 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 $6,000 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. At September 30, 2012 the Company was in compliance
with all covenants except the adjusted quick ratio covenant. Silicon Valley
Bank has waived our noncompliance with this covenant as of September 30, 2012.
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
(viii) any misrepresentations, or (ix) any revocation, invalidation, breach or
invalidation of any subordinated debt.
The
Loan Agreement will expire on March 29, 2013. The Loan Agreement may be
terminated prior to March 29, 2013; however, the Company would be required to
pay a $150,000 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. As of September 30,
2012, $1,000,000 was outstanding under the loan agreement and was recorded as
borrowings under line of credit on the condensed consolidated balance sheets.
During the nine months ended September 30, 2012, cash
used for operating activities was $15.5 million, consisting primarily of a net
loss of $23.4 million, offset by changes in operating assets and liabilities of
$6.8 million, and net non-cash expenses in the amount of $1.1 million,
including $3.2 million for amortization and depreciation, $1.5 million for
stock based compensation, $58,000 for loss on disposal of property, plant, and
equipment, offset by a $3.7 million reduction for the change in fair value of
common stock warrant liability. Cash used in investing activities for the nine
months ended September 30, 2012 was $234,000, consisting of purchases of
property, plant, and equipment of $292,000, offset by proceeds from the
disposal of property, plant and equipment of $58,000. Cash provided by
financing activities for the nine months ended September 30, 2012 was
approximately $11.4 million consisting primarily of $17.2 million in proceeds
from the public offering offset by $1.4 million in public offering costs and $4.4
million in net repayment of borrowings under line of credit.
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Income Taxes
Under Internal Revenue Code (IRC) Section 382, the use
of net operating loss carry-forwards, capital loss carry-forwards and other tax
credit carry-forwards 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 carry-forwards could be subject to
significant IRC Section 382 limitations.
Prior to March 2011, the Company had approximately
$703 million in Federal and state net operating loss carry-forwards and $15.6
million in Federal research and experimentation tax credit
carry-forwards. A Section 382 ownership change occurred during March 2011
that resulted in approximately $675 million of Federal and state net operating
loss carry-forwards being subject to IRC Section 382 limitations and as a
result of IRC Section 382 limitations, approximately $618 million of the net
operating loss carry-forwards and $15.6 million of the Federal research and
experimentation tax credit carry-forwards will expire prior to
utilization. As a result of the IRC Section 382 limitations, these net
operating loss and tax credit carry-forwards that will expire unutilized were
not reflected in the Companys gross deferred tax asset as of December 31,
2011. The ownership change also resulted in Net Unrealized Built in Losses per
IRS Notice 2003-65 which should result in Recognized Built in Losses during the
five year recognition period of approximately $9.4 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 resulted in a gross deferred tax liability of
$3.6 million at the time of the ownership change and $2.6 million at December
31, 2011 with 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 had no impact on the Company's
current financial position, results of operations, or cash flows because of the
full valuation allowance.
As a result of certain equity transactions by five
percent stockholders, a Section 382 ownership change occurred during March 2012
that resulted in all but approximately $14.9 million of the Companys Federal
and state net operating loss carry-forwards expiring prior to utilization,
which resulted in the Companys gross deferred tax asset and related valuation
allowance decreasing by approximately $24.6 million. The ownership also
resulted in Net Unrealized Built in Losses per IRS Notice 2003-65 which should
result in Recognized Built in Losses during the five year recognition period of
approximately $36.5 million. This will translate into unfavorable book to tax
add backs in the Company's 2012 to 2017 U.S. corporate income tax returns that
would result in a gross deferred tax liability of $13.9 million at the time of
the ownership change with 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). These decreases would have no
impact on the Companys financial position, results of operations, or cash
flows. However, these potential future tax benefits would no longer be
available to the Company.
Critical Accounting Policies and Estimates
Managements 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, product warranty reserves, unbilled revenue, common stock
warrants, 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 Managements
Discussion and Analysis of Financial Condition and Results of
OperationsCritical Accounting Estimates of our Annual Report on
Form 10-K for the fiscal year ended December 31, 2011, as well as a
discussion of Significant Accounting Policies included in Note 2, Basis of
Presentation, of the unaudited condensed consolidated financial statements in
Part I, Item 1 of this Form 10-Q.
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Recent Accounting Pronouncements
There are no recently issued accounting standards with
pending adoptions that the Companys management currently anticipates will have
any material impact upon its financial statements.