10-K 1 plug-20181231x10k.htm 10-K plug_Current folio_10K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-K

 

 

 

 

(Mark One)

 

 

    

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

 

For the fiscal year ended December 31, 2018

 

 

 

 

    

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

 

For the transition period from             to            

 

Commission file number: 1-34392

 

Plug Power Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

 

Delaware

    

22-3672377

(State or Other Jurisdiction

 

(I.R.S. Identification

of Incorporation or Organization)

 

Number)

 

968 ALBANY SHAKER ROAD, LATHAM, NEW YORK 12110

(Address of Principal Executive Offices, including Zip Code)

(518) 782-7700

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

Title of Each Class

    

Name of Each Exchange on Which Registered

Common Stock, par value $.01 per share

 

The NASDAQ Capital Market

Series A Junior Participating Cumulative

Preferred Stock, par value $.01 per share

 

The NASDAQ Capital Market

 

Securities registered pursuant to Section 12(g) of the Act:    None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒

 

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

 

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

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10‑K or any amendment to this Form 10-K.   ☐

 

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

 

 

 

 

 

 

Large accelerated filer ☐

Accelerated filer ☒

Non-accelerated filer ☐

Smaller reporting company ☐

Emerging growth company ☐

 

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

 

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

 

The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $457,430,028 based on the last reported sale of the common stock on The Nasdaq Capital Market on June 30, 2018, the last business day of the registrant's most recently completed second fiscal quarter.

 

As of March 12,  2019, 233,835,808 shares of the registrant’s common stock were issued and outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

Certain information contained in Plug Power Inc.’s Proxy Statement relating to its 2019 Annual Meeting of Stockholders is incorporated by reference in Items 10, 11, 12, 13 and 14 of Part III. Plug Power Inc. intends to file such Proxy Statement with the Securities and Exchange Commission not later than 120 days after the end of its fiscal year ended December 31, 2018.

 

 

 


 

INDEX TO FORM 10‑K

 

 

 

 

 

 

Page

 

PART I

 

Item 1. 

Business

3

Item 1A. 

Risk Factors

8

Item 1B. 

Unresolved Staff Comments

17

Item 2. 

Properties

17

Item 3. 

Legal Proceedings

18

Item 4. 

Mine Safety Disclosures

18

 

PART II

 

Item 5. 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

19

Item 6. 

Selected Financial Data

20

Item 7. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

21

Item 7A. 

Quantitative and Qualitative Disclosures About Market Risk

44

Item 8. 

Financial Statements and Supplementary Data

44

Item 9. 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

44

Item 9A. 

Controls and Procedures

44

Item 9B. 

Other Information

45

 

PART III

 

Item 10. 

Directors, Executive Officers and Corporate Governance

45

Item 11. 

Executive Compensation

46

Item 12. 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

47

Item 13. 

Certain Relationships and Related Transactions, and Director Independence

47

Item 14. 

Principal Accounting Fees and Services

47

 

PART IV

 

Item 15. 

Exhibits, Financial Statement Schedules

48

Item 16.

Form 10-K Summary

48

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PART I

 

Forward‑Looking Statements

 

The following discussion should be read in conjunction with our accompanying Consolidated Financial Statements and Notes thereto included within this Annual Report on Form 10‑K. In addition to historical information, this Annual Report on Form 10‑K 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 anticipate continuing to incur losses; the risk that we will need to raise additional capital to fund our operations and such capital may not be available to us; our ability to obtain financing arrangements to support the sale or leasing of our products and services to customers; risk of our convertible debt securities that may be settled in cash, such as our Convertible Senior Notes, will have a material effect on our reported financial results;  that our convertible note hedges may affect the value of the Convertible Senior Notes and our common stock; the volatility of the market price of our common stock;  the risk that a loss of one or more of our major customers, or if one of our major customers delays payment of or is unable to pay their receivables, a material adverse effect could result on our financial condition; the cost and availability of fuel and fueling infrastructures for our products; the risk of delays in or not completing our product development goals; the risk of elimination of government subsidies and economic incentives for alternative energy products; the risk of potential losses related to any product liability claims or contract disputes; competitive factors, such as price competition and competition from other traditional and alternative energy companies; the cost and availability of components and parts for our products; possible new tariffs could have a material adverse effect on our business 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 risk that unit orders may not ship, be installed and/or converted to revenue, in whole or in part; the risk of dependency on information technology in our operations and the failure of such technology; the risks related to the use of flammable fuels in our products; our subjectivity to legal proceedings and legal compliance risks; our ability to protect our intellectual property; the risk that our lack of extensive experience in manufacturing and marketing products may impact our ability to manufacture and market products on a profitable and large‑scale commercial basis; the risk of loss related to an inability to maintain an effective system of internal controls; our ability to attract and maintain key personnel;  the risks associated with potential future acquisitions; the cost of complying with current and future federal, state and international governmental regulations; our provisions in our charter documents and Delaware law may discourage or delay an acquisition of the Company by a third party that stockholders may consider favorable and other risks and uncertainties discussed under Item 1A.  Risk Factors. 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 Annual Report on Form 10‑K.

 

Item 1.  Business

 

Background

 

Plug Power Inc., or the Company, is a leading provider of alternative energy technology focused on the design, development, commercialization and manufacture of hydrogen and fuel cell systems used primarily for the material handling and stationary power markets.  As part of the global drive to electrification, the Company has recently entered new electric vehicle markets, specifically ground support equipment and electric delivery vans. These applications promote the advancement of hydrogen fueling and accelerate commercialization of hydrogen-fueled products.

 

 We are focused on proton exchange membrane, or PEM, fuel cell and fuel processing technologies, fuel cell/battery hybrid technologies, and associated hydrogen storage and dispensing infrastructure from which multiple products are available. A fuel cell is an electrochemical device that combines hydrogen and oxygen to produce electricity

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and heat without combustion. Hydrogen is derived from hydrocarbon fuels such as liquid petroleum gas, or LPG, natural gas, propane, methanol, ethanol, gasoline or biofuels. Plug Power develops complete hydrogen generation, delivery, storage and refueling solutions for customer locations. Currently the Company obtains the majority of its hydrogen by purchasing it from fuel suppliers for resale to customers.

 

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

 

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

 

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.

 

Business Strategy

 

We are committed to developing effective, economical and reliable fuel cell related products, systems and services for businesses and government agencies. Building on our substantial fuel cell application and product integration experience, we are focused on generating strong relationships with customers who value increased reliability, productivity and energy security.

 

Our business strategy leverages 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.

 

Our primary marketing strategy is to focus our resources on the material handling market. Through established customer relationships, Plug Power has proven itself as a trusted partner with a reliable fuel cell solution.  We have made significant progress in penetrating the material handling market, supported through the deployment of over 25,000 GenDrive units into commercial applications. 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 addition, we have deployed our GenKey hydrogen and fuel cell solution to multiple customer sites.

 

Our operating strategy also includes the following objectives: decrease product and service costs, expand system reliability, improve service and post‑sales support experience.

 

Our longer‑term objectives are to deliver economic, social, and environmental benefits in terms of reliable, clean, cost‑effective fuel cell solutions and, ultimately, productivity.

 

We believe continued investment in research and development is critical to the development and enhancement of innovative products, technologies and services. In addition to evolving our direct hydrogen fueled systems, we continue to capitalize on our investment and expertise in power electronics, controls, and software design.

 

We continue to develop and monitor future fuel cell solutions that align with our evolving product roadmap. By leveraging our current GenDrive architecture, Plug Power is evaluating adjacent markets such as ProGen electric vehicles, ground support equipment (GSE) and fuel cell vehicles.

 

Business Organization

 

We manage our business as a single operating segment, emphasizing shared learning across end‑user applications and common supplier/vendor relationships.

 

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Products and Services

 

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

 

Our current products and services include:

 

GenDrive: GenDrive is our hydrogen fueled PEM fuel cell system providing power to material handling electric vehicles, including class 1, 2, 3 and 6 electric forklifts and ground support equipment;

GenFuel:  GenFuel is our hydrogen fueling delivery, generation, storage and dispensing system;

GenCare: GenCare is our ongoing ‘internet of things’-based maintenance and on-site service program for GenDrive fuel cells, GenSure products, GenFuel products and ProGen engines;

 

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

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

ProGen:  ProGen is our fuel cell stack and engine technology currently used globally in mobility and stationary fuel cell systems, and as engines in electric delivery vans; and

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

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

 

To promote fuel cell adoption and maintain post‑sale customer satisfaction, we offer a range of service and support options through extended maintenance contracts. Additionally, customers may waive our service option, and choose to service their systems independently. A high percentage of fuel cells sold in recent years were bundled with maintenance contracts. As a result, only approximately 1.0% of fuel cells deployed are still under standard warranty that is not a part of an extended maintenance contract.

 

Markets/Geography & Order Status

 

The Company’s products and services predominantly serve the North American and European material handling markets, and primarily support large to mid-sized fleet, multi‑shift operations in high‑volume manufacturing and high‑throughput distribution centers. Based on recent market experience, it appears there may be some seasonality to sales stemming from varied customer appropriation cycles; however, these market factors will continue to evolve and the Company’s insight to these trends will improve with continued commercial success and time.

 

Orders for the Company’s products and services approximated $225.0 million and $285.0 million for the years ended December 31, 2018 and 2017, respectively.  The Company’s backlog for products and services approximated  $540.0 million and $500.0 million as of December 31, 2018 and 2017, respectively. The Company’s backlog at any given time is comprised of fuel cells, hydrogen installations, maintenance services, and hydrogen fuel deliveries. The specific elements of the backlog will vary in terms of timing of delivery and can vary between 90 days to 10 years, with fuel cells and hydrogen installations being delivered near term and maintenance services and hydrogen fuel deliveries being delivered

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over a longer period of time. Historically, shipments made against product orders generally occur between ninety days and twentyfour months from the date of acceptance of the order.

 

For the year ended December 31, 2018,  66.7% of total consolidated revenues were associated primarily with Amazon.com, Inc (Amazon) and Wal-Mart Stores, Inc (Walmart), representing 22.1% and 44.6%, respectively. A loss or decline in business with any of the aforementioned parties, could have an adverse impact on our business, financial condition and results of operations.

 

We assemble our products at our manufacturing facilities in Latham, New York, Clifton Park, New York and Spokane, Washington, and provide our services and installations at customer locations and service centers in Illinois and Ohio. Currently, the supply and manufacture of varied critical components used in our products and services are performed by sole‑sourced third‑party vendors in the U.S., Canada and China.

 

Distribution, Marketing and Strategic Relationships

 

We have developed strategic relationships with well‑established companies in key areas including distribution, service, marketing, supply, technology development and product development. We sell our products worldwide, with a primary focus on North America, through our direct product sales force, original equipment manufacturers, or OEMs, and their dealer networks. Additionally, we operate in Europe under the name HyPulsion, to develop and sell hydrogen fuel cell systems for the European material handling market.

 

Competition

 

We are confronted by competition in all areas of our business. The markets we address for motive power are characterized by the presence of well‑established battery and combustion generator products. The principal competitive factors in the markets in which we operate include product features, including size and weight, relative price and performance, product quality and reliability, design innovation, marketing and distribution capability, service and support and corporate reputation.

 

In the material handling market, we believe our GenDrive products have an advantage over lead‑acid batteries for customers who run high‑throughput distribution centers and manufacturing locations with multi‑shift operations by offering increased productivity with lower operational costs. However, we expect competition in this space to intensify as competitors attempt to imitate our approach with their own offerings.

 

Intellectual Property

 

We believe that neither we nor our competitors can achieve a significant proprietary position on the basic technologies currently used in PEM fuel cell systems. However, we believe the design and integration of our system and system components, as well as some of the low‑cost manufacturing processes that we have developed, are intellectual property that can be protected. Our intellectual property portfolio covers among other things: fuel cell components that reduce manufacturing part count; fuel cell system designs that lend themselves to mass manufacturing; improvements to fuel cell system efficiency, reliability and system life; and control strategies, such as added safety protections and operation under extreme conditions. In general, our employees are party to agreements providing that all inventions, whether patented or not, made or conceived while being our employee, which are related to or result from work or research that we perform, will remain our sole and exclusive property.

 

We have a total of 125 issued patents currently active with the USPTO. At the close of 2018, we had four U.S. patent applications pending. Additionally, we have 19 trademarks registered with the USPTO and three trademark applications pending.

 

Government Regulation

 

Our products and their installations are subject to oversight and regulation at the state and local level in accordance with state and local statutes and ordinances relating to, among others, building codes, fire codes, public safety, electrical and gas pipeline connections and hydrogen siting. The level of regulation may depend, in part, upon where a system is located.

 

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In addition, product safety standards have been established by the American National Standards Institute, or ANSI, covering the overall fuel cell system. The class 1, 2 and 3 GenDrive products are designed with the intent of meeting the requirements of UL 2267 “Fuel Cell Power Systems for Installation in Industrial Electric Trucks” and NFPA 505 “Fire Safety Standard for Powered Industrial Trucks”. The hydrogen tanks used in these systems have been either certified to ANSI/CSA NGV2‑2007 “Compressed Natural Gas Vehicle Fuel Containers” or ISO/TS 15869 “Gaseous hydrogen and hydrogen blends—Land vehicle fuel tanks”. We will continue to design our GenDrive products to meet ANSI and/or other standards in 2018. We certified several models of Class 1, 2 and 3 GenDrive products to the requirements of the CE mark with guidance from a European certified body. The hydrogen tanks used in these systems are certified to the Pressure Equipment Directive by a European certified body.

 

The GenFuel hydrogen storage and dispensing products are designed with the intent of meeting the requirements of NFPA 2 “Hydrogen Technologies Code”.

 

Other than these requirements, at this time we do not know what additional requirements, if any, each jurisdiction will impose on our products or their installation. We also do not know the extent to which any new regulations may impact our ability to distribute, install and service our products. As we continue distributing our systems to our target markets, the federal, state, local or foreign government entities may seek to impose regulations or competitors may seek to influence regulations through lobbying efforts.

 

Raw Materials and Suppliers

 

Most components essential to our business are generally available from multiple sources.  We believe there are component suppliers and manufacturing vendors whose loss to us could have a material adverse effect upon our business and financial condition. We are mitigating these potential risks by introducing alternate system architectures which we expect will allow us to diversify our supply chain with multiple fuel cell stack and air supply component vendors. We are also working closely with these vendors and other key suppliers on coordinated product introduction plans, strategic inventories, and internal and external manufacturing schedules and levels.

 

Research and Development

 

Because the fuel cell industry is characterized by its early state of adoption, our ability to compete successfully is heavily dependent upon our ability to ensure a continual and timely flow of competitive products, services, and technologies to the marketplace. We continue to develop new products and technologies and to enhance existing products in the areas of cost, size, weight, and in supporting service solutions in order to drive further commercialization.

 

We may expand the range of our product offerings and intellectual property through licensing and/or acquisition of third‑party business and technology. Our research and development expense totaled $33.9 million, $28.7 million, and $21.2 million during the years ended December 31, 2018, 2017 and 2016, respectively. We also had cost of research and development contract revenue of zero,  $0.3 million, $0.9 million during the years ended December 31, 2018, 2017 and 2016, respectively. These expenses represent the cost of research and development programs that are partially funded under cost reimbursement research and development arrangements with third parties and are reported within other cost of revenue on the consolidated statements of operations.

 

Employees

 

As of December 31, 2018, we had 685 employees, including 110 temporary employees. We consider our relationship with our employees to be positive.

 

Financial Information About Geographic Areas

 

Please refer to our Geographic Information included in our Consolidated Financial Statements and notes thereto included in Part II, Item 8: Financial Statements and Supplementary Data of this Form 10‑K.

 

Available Information

 

Our Annual Report on Form 10‑K, Quarterly Reports on Form 10‑Q, Current Reports on Form 8‑K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available free

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of charge, other than an investor’s own internet access charges, on the Company’s website with an internet address of www.plugpower.com as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to the Securities and Exchange Commission (SEC). The information contained on our website is not included as a part of, or incorporated by reference into, this Annual Report on Form 10‑K. The SEC also maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The SEC’s website address is http://www.sec.gov.

 

Item 1A.  Risk Factors

 

The following risk factors should be considered carefully in addition to the other information in this Annual Report on Form 10‑K. The occurrence of any of the following material risks could harm our business and future results of operations and could result in the trading price of our common stock declining and a partial or complete loss of your investment. These risks are not the only ones that we face. Additional risks not presently known to us or that we currently consider immaterial may also impair our business operations and trading price of our common stock. Except as mentioned under “Quantitative and Qualitative Disclosure About Market Risk” and except for the historical information contained herein, the discussion contained in this Annual Report on Form 10‑K contains “forward‑looking statements,” within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act, that involve risks and uncertainties. Please refer to the section entitled “Forward‑Looking Statements.”

 

We have incurred losses and anticipate continuing to incur losses.

 

We have not achieved operating profitability in any quarter since our formation and we will continue to incur net losses until we can produce sufficient revenue to cover our costs. Our net losses were approximately $78.1 million in 2018, $127.1  million in 2017 and  $57.5 million in 2016. As of December 31, 2018, we had an accumulated deficit of $1.3 billion. We anticipate that we will continue to incur losses until we can produce and sell our products on a large‑scale and cost‑effective basis. We cannot guarantee when we will operate profitably, if ever. In order to achieve profitability, we must successfully execute our planned path to profitability in the early adoption markets on which we are focused. The hydrogen infrastructure that is needed to support our growth readiness and cost efficiency must be available and cost efficient. We must continue to shorten the cycles in our product roadmap with respect to improvement in product reliability and performance that our customers expect. We must execute on successful introduction of our products into the market. We must accurately evaluate our markets for, and react to, competitive threats in both other technologies (such as advanced batteries) and our technology field. Finally, we must continue to lower our products’ build costs and lifetime service costs. If we are unable to successfully take these steps, we may never operate profitably, and, even if we do achieve profitability, we may be unable to sustain or increase our profitability in the future.

 

In addition, the primary current value proposition for our customers stems from productivity gains in using our solutions. Longer term, given evolving market dynamics and changes in alternative energy tax credits, if we are unable to successfully develop future products that are competitive with competing technologies in terms of price, reliability and longevity, customers may not buy our products. The profitability of our products depends largely on material and manufacturing costs and the market price of hydrogen. We cannot guarantee that we will be able to lower these costs to the levels to assure market acceptance in conjunction with other critical customer criteria in performance and reliability.

 

We may require additional capital funding and such capital may not be available to us.

 

On December 31, 2018, we had cash and cash equivalents of $38.6 million, restricted cash of $71.6 million and net working capital of $9.2 million. This compares to $24.8 million, $43.2 million and $3.9 million, respectively, on December 31, 2017. Restricted cash becomes available to us as we perform in accordance with the related leasing agreements.

 

Our cash requirements relate primarily to working capital needed to operate and grow our business, including funding operating expenses, growth in inventory to support both shipments of new units and servicing the installed base, growth in equipment leased to customers under long-term arrangements, funding the growth in our GenKey “turn-key” solution, which includes the installation of our customers’ hydrogen infrastructure as well as delivery of the hydrogen fuel,  continued expansion of our markets, such as Europe and China, continued development and expansion of our products, such as Pro Gen, payment of lease obligations under sale/leaseback financings, and the repayment or refinancing of our long-term debt. Our ability to achieve profitability and meet future liquidity needs and capital requirements will depend upon numerous factors, including the timing and quantity of product orders and shipments; attaining and expanding

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positive gross margins across all product lines; the timing and amount of our operating expenses; the timing and costs of working capital needs; the timing and costs of building a sales base; the ability of our customers to obtain financing to support commercial transactions; our ability to obtain financing arrangements to support the sale or leasing of our products and services to customers, including financing arrangements to repay or refinance our long-term debt, and the terms of such agreements that may require us to pledge or restrict substantial amounts of our cash to support these financing arrangements; the timing and costs of developing marketing and distribution channels; the timing and costs of product service requirements; the timing and costs of hiring and training product staff; the extent to which our products gain market acceptance; the timing and costs of product development and introductions; the extent of our ongoing and new research and development programs; and changes in our strategy or our planned activities. If we are unable to fund our operations with positive cash flows and cannot obtain external financing, we may not be able to sustain future operations.  As a result, we may be required to delay, reduce and/or cease our operations and/or seek bankruptcy protection.

 

We cannot assure you that any necessary additional financing will be available on terms favorable to us, or at all. 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 additional equity or debt financings, strategic alternatives or otherwise, there can be no assurance 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 existing stockholders could be significantly diluted, and these newly issued securities may have rights, preferences or privileges senior to those of existing stockholders. If we incur additional debt, a substantial portion of our operating cash flow may be dedicated to the payment of principal and interest on such indebtedness, thus limiting funds available for our business activities. The terms of any debt securities issued could also impose significant restrictions on our operations. Broad market and industry factors may seriously harm the market price of our common stock, regardless of our operating performance, and may adversely impact our ability to raise additional funds. If we raise additional funds through collaborations and/or licensing arrangements, we might be required to relinquish significant rights to our technologies or grant licenses on terms that are not favorable to us.

 

If we cannot obtain financing to support the sale or leasing of our products and services to customers, such failure may adversely affect our sales, profitability and liquidity.

 

Customers representing most of our revenue lease, rather than purchase, our products. These lease arrangements require us and our customers to finance the purchase of such products, either ourselves or through third‑party financing sources. For example, approximately $71.6 million of our cash is currently restricted to support such leasing arrangements, which prevents us from using such cash for other purposes. To date, we have been successful in obtaining or providing the necessary financing arrangements. There is no certainty, however, that we will be able to continue to obtain or provide adequate financing for these arrangements on acceptable terms, or at all, in the future. Failure to obtain or provide such financing may result in the loss of material customers and product sales, which could have a material adverse effect on our business, financial condition and results of operations. Further, if we are required to continue to pledge or restrict substantial amounts of our cash to support these financing arrangements, such cash will not be available to us for other purposes, which may have a material adverse effect on our liquidity and financial position.

 

Convertible debt securities that may be settled in cash, such as the Convertible Senior Notes, will have a material effect on our reported financial results.

Under Accounting Standards Codification 470-20, Debt with Conversion and Other Options, or ASC 470-20, an entity must separately account for the liability and equity components of the convertible debt instruments (such as our Convertible Senior Notes) that may be settled entirely or partially in cash upon conversion in a manner that reflects the issuer’s economic interest cost. The effect of ASC 470-20 on the accounting for the Convertible Senior Notes is that the equity component is required to be included in the additional paid-in capital section of stockholders’ equity on our consolidated balance sheet at the issuance date and the value of the equity component would be treated as debt discount for purposes of accounting for the debt component of the Convertible Senior Notes. As a result, we are required to record a non-cash interest expense as a result of the amortization of the discounted carrying value of the Convertible Senior Notes to their face amount over the term of the Convertible Senior Notes. We will report larger net losses (or lower net income) in our financial results because ASC 470-20 will require interest to include the amortization of the debt discount, which could adversely affect our reported or future financial results or the trading price of our common stock.

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While the Company plans to settle the principal amount of the Convertible Senior Notes in cash subject to available funding at time of settlement, we currently use the if-converted method for calculating any potential dilutive effect of the conversion option on diluted net income per share, subject to meeting the criteria for using the treasury stock method in future periods. We cannot be sure that the accounting standards in the future will permit the use of the treasury stock method. If we are unable or otherwise elect not to use the treasury stock method in accounting for the shares issuable upon conversion of the Convertible Senior Notes, then our diluted earnings per share could be adversely affected.

The convertible note hedges may affect the value of our common stock.

In connection with the pricing of the Convertible Senior Notes, we entered into convertible note hedge transactions with one or more of the initial purchasers of the Convertible Senior Notes and/or their respective affiliates or other financial institutions, or the option counterparties. The convertible note hedge transactions are generally expected to reduce the potential dilution upon any conversion of Convertible Senior Notes and/or provide a source of cash to settle a portion of its cash payments related to any excess over the principal amount upon conversion of any Convertible Senior Notes.

The option counterparties and/or their respective affiliates may modify their hedge positions by entering into or unwinding various derivatives with respect to our common stock and/or purchasing or selling our common stock in secondary market transactions prior to the maturity of the Convertible Senior Notes (and are likely to do so during any observation period related to a conversion of Convertible Senior Notes or following any repurchase of Convertible Senior Notes by us on any fundamental change repurchase date or otherwise). This activity could also cause or avoid an increase or a decrease in the market price of our common stock. In addition, if any such convertible note hedge transaction fails to become effective, the option counterparties may unwind their hedge positions with respect to our common stock, which could adversely affect the value of our common stock.

The potential effect, if any, of these transactions and activities on the market price of our common stock will depend in part on market conditions and cannot be ascertained at this time. Any of these activities could adversely affect the value of our common stock.

 

We are subject to counterparty risk with respect to the convertible note hedge transactions.

The option counterparties are financial institutions or affiliates of financial institutions, and are subject to the risk that one or more of such option counterparties may default under the convertible note hedge transactions. Our exposure to the credit risk of the option counterparties is not secured by any collateral. If any option counterparty becomes subject to bankruptcy or other insolvency proceedings, we will become an unsecured creditor in those proceedings with a claim equal to our exposure at that time under our transactions with that option counterparty. Our exposure will depend on many factors but, generally, an increase in our exposure will be correlated to an increase in our common stock market price and in the volatility of the market price of our common stock. In addition, upon a default by an option counterparty, we may suffer adverse tax consequences and dilution with respect to our common stock. We can provide no assurance as to the financial stability or viability of any option counterparty.

 

Our stock price and stock trading volume have been and could remain volatile.

 

The market price of our common stock has historically experienced and may continue to experience significant volatility. In 2018, the sales price of our common stock fluctuated from a high of $2.16 per share to a low of $1.02  per share. Our progress in developing and commercializing our products, our quarterly operating results, announcements of new products by us or our competitors, our perceived prospects, changes in securities analysts’ recommendations or earnings estimates, changes in general conditions in the economy or the financial markets, adverse events related to our strategic relationships, significant sales of our common stock by existing stockholders, including one or more of our strategic partners, and other developments affecting us or our competitors could cause the market price of our common stock to fluctuate substantially. In addition, in recent years, the stock market has experienced significant price and volume fluctuations. This volatility has affected the market prices of securities issued by many companies for reasons unrelated to their operating performance and may adversely affect the price of our common stock. Such market price volatility could adversely affect our ability to raise additional capital. In addition, we may be subject to securities class action litigation as a result of volatility in the price of our common stock, which could result in substantial costs and diversion of management’s attention and resources and could harm our stock price, business, prospects, results of operations and financial condition.

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Sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the market perception that the holders of a large number of shares intend to sell shares, could reduce the market price of our common stock.

 

Additionally, market conditions may result in volatility in the level of, and fluctuations in, the market prices of stocks generally and, in turn, our common stock and sales of substantial amounts of our common stock in the market, in each case being unrelated or disproportionate to changes in our operating performance.

 

We depend on a concentration of anchor customers for the majority of our revenues and the loss of any of these customers would adversely affect our business, financial condition, results of operations and cash flows.

 

We sell most of our products to a range of customers that include a few anchor customers, and while we are continually seeking to expand our customer base, we expect this will continue for the next several years.  For example, for the year ended December 31, 2018,  66.7% of total consolidated revenues were associated primarily with  Amazon and Walmart, representing 22.1% and 44.6%, respectively.  For the year ended December 31, 2017, 71.8% of total consolidated revenues were associated primarily with Amazon and Walmart, representing 42.4% and 29.4%, respectively. For the year ended 2016, 34.1% of total consolidated revenues were associated primarily with Walmart.  Any decline in business with significant customers could have an adverse impact on our business, financial condition and results of operations. Our future success is dependent upon the continued purchases of our products by a small number of customers.  If we are unable to broaden our customer base and expand relationships with potential customers, our business will continue to be impacted by demand fluctuations due to our dependence on a small number of customers. Demand fluctuations can have a negative impact on our revenues, business, financial condition, results of operations and cash flows. Our dependence on a small number of major customers exposes us to additional risks.  A slowdown, delay or reduction in a customer’s orders could result in excess inventories or unexpected quarterly fluctuations in our operating results and liquidity.  Each of our major customers has significant purchasing leverage over us to require changes in sales terms including pricing, payment terms and product delivery schedules, which could adversely affect our business, financial condition, results of operations and cash flows.  If one of our major customers delays payment of or is unable to pay their receivables, that could have a material adverse effect on our business, financial condition, results of operations and cash flows.

 

Our product sales and performance depends on the availability of hydrogen.

 

Our products and services depend largely on the availability of hydrogen gas. We are dependent upon hydrogen suppliers for success with the profitable commercialization of our products and services. Although we will continue to work with hydrogen suppliers to mutually agree on terms for our customers, including, but not limited to, the competitiveness of the price of the hydrogen fuel, liquid hydrogen, hydrogen infrastructure and service costs, to the benefit of our product value proposition, ultimately we have no control over such third parties. If these fuels are not readily available or if their prices are such that energy produced by our products costs more than energy provided by other sources, then our products could be less attractive to potential users and our products’ value proposition could be negatively affected. If hydrogen suppliers elect not to participate in the material handling market, there may be an insufficient supply of hydrogen for this market that could negatively affect our sales and deployment of our products and services.

 

Delays in or not completing our product development goals may adversely affect our revenue and profitability. 

 

If we experience delays in meeting our development goals, our products exhibit technical defects, or if we are unable to meet cost or performance goals, including power output, useful life and reliability, the profitable commercialization of our products will be delayed. In this event, potential purchasers of our products may choose alternative technologies and any delays could allow potential competitors to gain market advantages. We cannot assure that we will successfully meet our commercialization schedule in the future.

 

Periodically, we may enter into contracts with our customers for certain products that have not been developed or produced. There can be no assurance that we will complete the development of these products and meet the specifications required to fulfill customer agreements and deliver products on schedule. Pursuant to such agreements, the customers would have the right to provide notice to us if, in their good faith judgment, we have materially deviated from such agreements. Should a customer provide such notice, and we cannot mutually agree to a modification to the agreement, then the customer may have the right to terminate the agreement, which could adversely affect our future business.

 

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Other than our current products, which we believe to be commercially viable at this time, we do not know when or whether we will successfully complete research and development of other commercially viable products that could be critical to our future. If we are unable to develop additional commercially viable products, we may not be able to generate sufficient revenue to become profitable. The profitable commercialization of our products depends on our ability to reduce the costs of our components and subsystems, and we cannot assure you that we will be able to sufficiently reduce these costs. In addition, the profitable commercialization of our products requires achievement and verification of their overall reliability, efficiency and safety targets, and we cannot assure you that we will be able to develop, acquire or license the technology necessary to achieve these targets. We must complete additional research and development to fill our product portfolios and deliver enhanced functionality and reliability in order to manufacture additional commercially viable products in commercial quantities. In addition, while we are conducting tests to predict the overall life of our products, we may not have run our products over their projected useful life prior to large‑scale commercialization. As a result, we cannot be sure that our products will last as long as predicted, resulting in possible warranty claims and commercial failures.

 

The reduction or elimination of government subsidies and economic incentives for alternative energy technologies, or the failure to renew such subsidies and incentives could reduce demand for our products.

 

We believe that the near‑term growth of alternative energy technologies is affected by the availability and size of government and economic incentives. Many of these government incentives expire, phase out over time, may exhaust the allocated funding, or require renewal by the applicable authority. In addition, these incentive programs could be reduced or discontinued for other reasons. The investment tax credit under the U.S. tax code was renewed in February 2018 and is scheduled to expire December 31, 2022.  The renewal allows for a 30% investment tax credit which begins to phase out from 2020 to 2022. The reduction, elimination, or expiration of the investment tax credit or other government subsidies and economic incentives, or the failure to renew such tax credit, governmental subsidies, or economic incentives, may result in the diminished economic competitiveness of our products to our customers and could materially and adversely affect the growth of alternative energy technologies, including our products, as well as our future operating results and liquidity.

 

Certain component quality issues have resulted in adjustments to our warranty reserves and the accrual for loss contracts.

 

In the past, quality issues have arisen with respect to certain components in certain products that are currently being used at customer sites. Under the terms of our extended maintenance contracts, we have had to retrofit units subject to component quality issues with replacement components that will improve the reliability of our products for our customers. We recorded a provision for loss contracts related to service in prior years. Though, we continue to work with our vendors on these component issues to improve quality and reliability,  unanticipated additional quality issues or warranty claims may arise and, additional material charges may be incurred in the future.  Quality issues also could cause profitable maintenance contracts to become unprofitable.

 

In addition, from time to time we experience other unexpected design or product performance issues. We make significant investment in the continued improvement of our products and maintain appropriate warranty reserves for known and unexpected issues; however, unknown malfunctions or design defects could result in unexpected material liabilities and could adversely affect our business, financial condition, results of operation, cash flows and prospects. In addition, a well‑publicized actual or perceived problem could adversely affect the market’s perception of our products resulting in a decline in demand for our products and could divert the attention of our management, which may materially and adversely affect our business, financial condition, results of operations, cash flows and prospects.

 

Certain component quality issues have resulted in adjustments to our warranty reserves and the accrual for loss contracts.

 

In the past, quality issues have arisen with respect to certain components in certain products that are currently being used at customer sites. Under the terms of our extended maintenance contracts, we have had to retrofit units subject to component quality issues with replacement components to improve the reliability of our products for our customers. We recorded a provision for loss contracts related to service in prior years. Though we continue to work with our vendors on these component issues to improve quality and reliability, unanticipated additional quality issues or warranty claims may arise and additional material charges may be incurred in the future.  Quality issues also could cause profitable maintenance contracts to become unprofitable. 

 

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In addition, from time to time we experience other unexpected design, manufacturing or product performance issues. We make significant investment in the continued improvement of our products and maintain appropriate warranty reserves for known and unexpected issues; however, unknown malfunctions or defects could result in unexpected material liabilities and could adversely affect our business, financial condition, results of operation, cash flows and prospects. For example, in 2019, the Company commenced a field replacement program for certain composite fuel tanks that did not meet the supply contract standard, as determined by the Company and the manufacturer.  The manufacturer of the tanks is funding the entire incremental cost of the replacement program and the Company is working with its customers to ensure an efficient, minimally disruptive process for the exchange.  In addition, an actual or perceived problem could adversely affect the market’s perception of our products resulting in a decline in demand for our products and could divert the attention of our management, which may materially and adversely affect our business, financial condition, results of operations, cash flows and prospects.

Our products and services face intense competition.

 

The markets for energy products are intensely competitive. Some of our competitors in the motive power sector (predominantly incumbent technologies) are much larger than we are and may have the manufacturing, marketing and sales capabilities to complete research, development and commercialization of profitable, commercially viable products more quickly and effectively than we can. There are many companies engaged in all areas of traditional and alternative energy generation in the United States and abroad, including, among others, major electric, oil, chemical, natural gas, battery, generator and specialized electronics firms, as well as universities, research institutions and foreign government‑sponsored companies. These firms are engaged in forms of power generation such as advanced battery technologies, generator sets, fast charged technologies and other types of fuel cell technologies. Technological advances in alternative energy products, battery systems or other fuel cell technologies may make our products less attractive or render them obsolete.

 

A material change in cost,  performance, availability, or development of key suppliers’ products could have a material adverse effect on our business.

 

We have certain key suppliers who we rely on for critical components in our products, and there are numerous other components for our products that are sole sourced. A supplier’s failure to develop and supply components in a timely manner or at all, or to develop or supply components that meet our quality, quantity or cost requirements, or our inability to obtain substitute sources of these components on a timely basis or on terms acceptable to us, could harm our ability to manufacture our products. In addition, to the extent that our supply partners use technology or manufacturing processes that are proprietary, we may be unable to obtain comparable components from alternative sources.

 

In addition, commodity prices and supply levels affect our costs. For example, platinum is a key material in our PEM fuel cells. Platinum is a scarce natural resource and we are dependent upon a sufficient supply of this commodity. Any shortages could adversely affect our ability to produce commercially viable fuel cell systems and significantly raise our cost of producing our fuel cell systems. While we do not anticipate significant near‑ or long‑term shortages in the supply of platinum, a shortage could adversely affect our ability to produce commercially viable PEM fuel cells or raise our cost of producing such products.

 

Possible new tariffs could have a material adverse effect on our business. 

 

Our business is dependent on the availability of raw materials and components for our products, particularly electrical components common in the semiconductor industry. The United States has recently imposed tariffs on steel and aluminum imports which may increase the cost of raw materials for our products and decrease the available supply. The United States is also considering tariffs on additional items which could include items imported by us from China or other countries.

 

Although we currently maintain alternative sources for raw materials, our business is subject to the risk of price fluctuations and periodic delays in the delivery of certain raw materials, which tariffs may exacerbate. Disruptions in the supply of raw materials and components could temporarily impair our ability to manufacture our products for our customers or require us to pay higher prices to obtain these raw materials or components from other sources, which could affect our business and our results of operations. While it is too early to predict how the recently enacted tariffs on imported steel and aluminum will impact our business; the imposition of tariffs on items imported by us from China or other countries could increase our costs and could have a material adverse effect on our business and our results of operations.

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We may be unable to establish or maintain relationships with third parties for certain aspects of continued product development, manufacturing, distribution and servicing and the supply of key components for our products.

 

We may also need to maintain and may need to enter into additional strategic relationships in order to complete our current product development and commercialization plans. We may also require partners to assist in the sale, servicing and supply of components for our current products and anticipated products, which are in development. If we are unable to identify, enter into, and maintain satisfactory agreements with potential partners, including those relating to the supply, distribution, service and support of our current products and anticipated products, we may not be able to complete our product development and commercialization plans on schedule or at all. We may also need to scale back these plans in the absence of needed partners, which could adversely affect our future prospects for development and commercialization of future products. While we have entered into relationships with suppliers of some key components for our products, we do not know when or whether we will secure supply relationships for all required components and subsystems for our products, or whether such relationships will be on terms that will allow us to achieve our objectives. Our business prospects, results of operations and financial condition could be harmed if we fail to secure relationships with entities that can develop or supply the required components for our products and provide the required distribution and servicing support. Additionally, the agreements governing our current relationships allow for termination by our partners under certain circumstances, some of which are beyond our control. If any of our current strategic partners were to terminate any of its agreements with us, there could be a material adverse impact on the continued development and profitable commercialization of our products and the operation of our business, financial condition, results of operations and prospects.

 

Our purchase orders may not ship, be commissioned or installed, or convert to revenue.

 

Some of the orders we accept from customers require certain conditions or contingencies to be satisfied, or may be cancelled, prior to shipment or prior to commissioning or installation, some of which are outside of our control. Historically, shipments made against these orders have generally occurred between ninety days and twenty‑four months from the date of acceptance of the order. Orders for the Company’s products and services approximated $225.0 million and $285 million for the years ended December 31, 2018 and 2017 respectively. The Company’s backlog for products and services approximated $540.0 million and $500.0 million as of December 31, 2018 and 2017, respectively.  The time periods from receipt of an order to shipment date and installation vary widely and are determined by a number of factors, including the terms of the customer contract and the customer’s deployment plan. There may also be product redesign or modification requirements that must be satisfied prior to shipment of units under certain of our agreements. If the redesigns or modifications are not completed, some or all of our orders may not ship or convert to revenue. In certain cases, we publicly disclose anticipated, pending orders with prospective customers; however, those prospective customers may require certain conditions or contingencies to be satisfied prior to issuing a purchase order to us, some of which are outside of our control. Such conditions or contingencies that may be required to be satisfied before we receive a purchase order may include, but are not limited to, successful product demonstrations or field trials. Converting orders into revenue is also dependent upon our customers’ ability to obtain financing. Some conditions or contingencies that are out of our control may include, but are not limited to, government tax policy, government funding programs, and government incentive programs. Additionally, some conditions and contingencies may extend for several years. We may have to compensate customers, by either reimbursement, forfeiting portions of associated revenue, or other methods depending on the terms of the customer contract, based on the failure on any of these conditions or contingencies. While not probable, this could have an adverse impact on our revenue and cash flow.

 

We are dependent on information technology in our operations and the failure of such technology may adversely affect our business.

 

We may experience problems with the operation of our current information technology systems or the technology systems of third parties on which we rely, as well as the development and deployment of new information technology systems, that could adversely affect, or even temporarily disrupt, all or a portion of our operations until resolved. Inabilities and delays in implementing new systems can also affect our ability to realize projected or expected cost savings. Despite the implementation of network security measures, our information technology could be penetrated by outside parties (such as computer hackers or cyber terrorists) intent on extracting information, corrupting information or disrupting business processes. Such unauthorized access could disrupt our business and could result in a loss of assets or reputational damage. Additionally, any systems failures could impede our ability to timely collect and report financial results in accordance with applicable laws.

 

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Our products use flammable fuels that are inherently dangerous substances.

 

Our fuel cell systems use hydrogen gas in catalytic reactions. While our products do not use this fuel in a combustion process, hydrogen gas is a flammable fuel that could leak and combust if ignited by another source. Further, any such accidents involving our products or other products using similar flammable fuels could materially suppress demand for, or heighten regulatory scrutiny of, our products.

 

The risk of product liability claims and associated adverse publicity is inherent in the development, manufacturing, marketing and sale of fuel cell products, including products fueled by hydrogen, a flammable gas. Any liability for damages resulting from malfunctions or design defects could be substantial and could materially adversely affect our business, financial condition, results of operations and prospects. In addition, an actual or perceived problem could adversely affect the market’s perception of our products resulting in a decline in demand for our products, which may materially and adversely affect our business, financial condition, results of operations and prospects.

 

We are subject to legal proceedings and legal compliance risks that could harm our business.

 

From time to time, we may be subject to contract disputes or litigation. In connection with any disputes or litigation in which we are involved, we may incur costs and expenses in connection with defending ourselves or in connection with the payment of any settlement or judgment or compliance with any ruling in connection therewith if there is an unfavorable outcome. The expense of defending litigation may be significant. The amount of time to resolve lawsuits is unpredictable and defending ourselves may divert management’s attention from the day‑to‑day operations of our business, which could adversely affect our business, financial condition, results of operations and cash flows. In addition, an unfavorable outcome in any such litigation could have a material adverse effect on our business, results of operations, financial condition and cash flows.

 

We may not be able to protect important intellectual property and we could incur substantial costs defending against claims that our products infringe on the proprietary rights of others.

 

PEM fuel cell technology was first developed in the 1950s, and fuel processing technology has been practiced on a large scale in the petrochemical industry for decades. Accordingly, we do not believe that we can establish a significant proprietary position in the fundamental component technologies in these areas. However, our ability to compete effectively will depend, in part, on our ability to protect our proprietary system‑level technologies, systems designs and manufacturing processes. We rely on patents, trademarks, and other policies and procedures related to confidentiality to protect our intellectual property. However, some of our intellectual property is not covered by any patent or patent application. Moreover, we do not know whether any of our pending patent applications will issue or, in the case of patents issued or to be issued, that the claims allowed are or will be sufficiently broad to protect our technology or processes. Even if all of our patent applications are issued and are sufficiently broad, our patents may be challenged or invalidated. We could incur substantial costs in prosecuting or defending patent infringement suits or otherwise protecting our intellectual property rights. While we have attempted to safeguard and maintain our proprietary rights, we do not know whether we have been or will be completely successful in doing so. Moreover, patent applications filed in foreign countries may be subject to laws, rules and procedures that are substantially different from those of the United States, and any resulting foreign patents may be difficult and expensive to obtain and enforce. In addition, we do not know whether the U.S. Patent & Trademark Office will grant federal registrations based on our pending trademark applications. Even if federal registrations are granted to us, our trademark rights may be challenged. It is also possible that our competitors or others will adopt trademarks similar to ours, thus impeding our ability to build brand identity and possibly leading to customer confusion. We could incur substantial costs in prosecuting or defending trademark infringement suits.

 

Further, our competitors may independently develop or patent technologies or processes that are substantially equivalent or superior to ours. If we are found to be infringing third party patents, we could be required to pay substantial royalties and/or damages, and we do not know whether we will be able to obtain licenses to use such patents on acceptable terms, if at all. Failure to obtain needed licenses could delay or prevent the development, manufacture or sale of our products, and could necessitate the expenditure of significant resources to develop or acquire non‑infringing intellectual property.

 

We may need to pursue lawsuits or legal action in the future to enforce our intellectual property rights, to protect our trade secrets and domain names, and to determine the validity and scope of the proprietary rights of others. If third parties prepare and file applications for trademarks used or registered by us, we may oppose those applications and be

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required to participate in proceedings to determine the priority of rights to the trademark. Similarly, competitors may have filed applications for patents, may have received patents and may obtain additional patents and proprietary rights relating to products or technology that block or compete with ours. We may have to participate in interference proceedings to determine the priority of invention and the right to a patent for the technology. Litigation and interference proceedings, even if they are successful, are expensive to pursue and time consuming, and we could use a substantial amount of our management and financial resources in either case.

 

Confidentiality agreements to which we are party may be breached, and we may not have adequate remedies for any breach. Our trade secrets may also be known without breach of such agreements or may be independently developed by competitors. Our inability to maintain the proprietary nature of our technology and processes could allow our competitors to limit or eliminate any competitive advantages we may have.

 

We face risks associated with our plans to market, distribute and service our products and services internationally.

 

We have begun to market, distribute, sell and service our product offerings internationally. We have limited experience operating internationally, including developing and manufacturing our products to comply with the commercial and legal requirements of international markets. Our success in international markets will depend, in part, on our ability and that of our partners to secure relationships with foreign sub‑distributors, and our ability to manufacture products that meet foreign regulatory and commercial requirements. Additionally, our planned international operations are subject to other inherent risks, including potential difficulties in enforcing contractual obligations and intellectual property rights in foreign countries and fluctuations in currency exchange rates. Also, to the extent our operations and assets are located in foreign countries, they are potentially subject to nationalization actions over which we will have no control.

For example, we operate in France under the name HyPulsion to develop and sell hydrogen fuel cell systems for the European material handling market. However, for the reasons discussed above, HyPulsion may not be able to accomplish its goals or become profitable.

 

Doing business in foreign markets requires us to be able to respond to rapid changes in market, legal, and political conditions in these countries. As we expand in international markets, we may face numerous challenges, including unexpected changes in regulatory requirements, potential conflicts or disputes that countries may have to deal with, fluctuations in currency exchange rates, longer accounts receivable requirements and collections, difficulties in managing international operations, potentially adverse tax consequences, restrictions on repatriation of earnings and the burdens of complying with a wide variety of international laws. Any of these factors could adversely affect our results of operations and financial condition. The success of our international expansion will depend, in part, on our ability to succeed in differing legal, regulatory, economic, social and political environments.

 

If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud.

 

Effective internal controls over financial reporting are necessary for us to provide reliable and accurate financial reports and effectively prevent fraud. We have devoted significant resources and time to comply with the internal control over financial reporting requirements of the Sarbanes‑Oxley Act of 2002. In addition, Section 404 under the Sarbanes‑Oxley Act of 2002 requires that we assess the design and operating effectiveness of our controls over financial reporting. We are currently required to have our auditors attest to the effectiveness of our internal control over financial reporting. Our compliance with the annual internal control report requirement will depend on the effectiveness of our financial reporting and data systems and controls. Inferior internal controls increase the possibility of errors and could cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our stock and our access to capital.

 

In addition, our internal control systems rely on people trained in the execution of the controls. Loss of these people or our inability to replace them with similarly skilled and trained individuals or new processes in a timely manner could adversely impact our internal control mechanisms.

 

Our future plans could be harmed if we are unable to attract or retain key personnel.

 

We have attracted a highly skilled management team and specialized workforce, including scientists, engineers, researchers, manufacturing, marketing and sales professionals. Our future success will depend, in part, on our ability to attract and retain qualified management and technical personnel. We do not know whether we will be successful in hiring

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or retaining qualified personnel. Our inability to hire qualified personnel on a timely basis, or the departure of key employees, could materially and adversely affect our development and profitable commercialization plans and, therefore, our business prospects, results of operations and financial condition.

 

Potential future acquisitions could be difficult to integrate, divert the attention of key personnel, disrupt our business and impair our financial results.

 

As part of our business strategy, we intend to consider acquisitions of companies, technologies and products. Acquisitions, involve numerous risks, any of which could harm our business, including, difficulty in integrating the technologies, products, operations and existing contracts of a target company and realizing the anticipated benefits of the combined businesses; difficulty in supporting and transitioning customers, if any, of the target company; inability to achieve anticipated synergies or increase the revenue and profit of the acquired business; potential disruption of our ongoing business and distraction of management; the price we pay or other resources that we devote may exceed the value we realize; or the value we could have realized if we had allocated the purchase price or other resources to another opportunity and inability to generate sufficient revenue to offset acquisition costs. In addition, if we finance acquisitions by issuing equity securities, our existing stockholders may be diluted. As a result, if our forecasted assumptions for these acquisitions and investments are not accurate, we may not achieve the anticipated benefits of any such acquisitions, and we may incur costs in excess of what we anticipate. 

 

Our business may become subject to increased government regulation.

 

Our products are subject to certain federal, local, and non‑U.S. laws and regulations, including, for example, state and local ordinances relating to building codes, public safety, electrical and gas pipeline connections, hydrogen transportation and siting and related matters. See “Business—Government Regulations” for additional information. Further, as products are introduced into the market commercially, governments may impose new regulations. We do not know the extent to which any such regulations may impact our ability to manufacture, distribute, install and service our products. Any regulation of our products, whether at the federal, state, local or foreign level, including any regulations relating to the production, operation, installation, and servicing of our products may increase our costs and the price of our products.

 

Provisions in our charter documents and Delaware law may discourage or delay an acquisition of the Company by a third party that stockholders may consider favorable.

 

Our certificate of incorporation, our bylaws, and Delaware corporate law contain provisions that could make it harder for a third party to acquire us without the consent of our board of directors. These provisions include those that: authorize the issuance of up to 5,000,000 shares of preferred stock in one or more series without a stockholder vote; limit stockholders’ ability to call special meetings; establish advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted on by stockholders at stockholder meetings; and provide for staggered terms for our directors. We have a shareholders rights plan that may be triggered if a person or group of affiliated or associated persons acquires beneficial ownership of 15% or more of the outstanding shares of our common stock. In addition, in certain circumstances, Delaware law also imposes restrictions on mergers and other business combinations between us and any holder of 15% or more of our outstanding common stock.

 

Item 1B.  Unresolved Staff Comments

 

There are no unresolved comments regarding our periodic or current reports from the staff of the SEC that were issued 180 days or more preceding the end of our year ended December 31, 2018. 

 

Item 2.  Properties

 

Our principal offices are located in Latham, New York, where we lease a 140,000 square foot facility that includes our headquarter office building, our manufacturing facility, and our research and development center. In addition, we lease a 29,200 square foot facility in Spokane, Washington that includes an office building and a manufacturing facility and a 38,400 square foot manufacturing facility in Clifton Park, New York. We also lease service centers in Dayton, Ohio and Romeoville, Illinois. See Note 18, Commitments and Contingencies to the Consolidated Financial Statements, Part II, Item 8 of this Form 10‑K for further discussion of the leases. We believe that our facilities are sufficient to accommodate our anticipated production volumes for at least the next two years.

17


 

 

Item 3.  Legal Proceedings

 

On August 28, 2018, a lawsuit was filed on behalf of eight individuals against the Company and five corporate co-defendants in the 9th Judicial District Court, Rapides Parish, Louisiana. The lawsuit relates to the previously disclosed May 2018 accident involving a forklift powered by the Company’s fuel cell at a Procter & Gamble facility in Louisiana. The lawsuit alleges claims against the Company and the co-defendants for defect in construction and/or composition, design defect, inadequate warning, breach of express warranty and negligence. The lawsuit claims an unspecified amount of damages for wrongful death and personal injuries, among other damages.  The Company intends to vigorously defend the litigation. Given the early stage of this matter, the Company is unable to determine the likelihood of an adverse outcome.  However, the Company does not expect the lawsuit to have a material impact on the Company’s financial position, liquidity or results of operations, or to otherwise have a material adverse effect on the Company.

 

Item 4.  Mine Safety Disclosures

 

Not applicable.

 

18


 

PART II

 

Item 5.  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 

 

Market Information.  Our common stock is traded on the NASDAQ Capital Market under the symbol “PLUG.” As of March 8, 2019, there were approximately 701 record holders of our common stock. However, management believes that a significant number of shares are held by brokers under a “nominee name” and that the number of beneficial shareholders of our common stock exceeds 92,193. 

 

Dividend Policy.  We have never declared or paid cash dividends on our common stock and do not anticipate paying cash dividends in the foreseeable future. Any future determination as to the payment of dividends will depend upon capital requirements and limitations imposed by our credit agreements, if any, and such other factors as our board of directors may consider.

 

Five‑Year Performance Graph.  Below is a line graph comparing the percentage change in the cumulative total return of the Company’s common stock, based on the market price of the Company’s common stock, with the total return of companies included within the NASDAQ Clean Edge Green Energy Index (CELS) and the companies included within the Russell 2000 Index (RUT) for the period commencing December 31, 2013 and ending December 31, 2018. The calculation of the cumulative total return assumes a $100 investment in the Company’s common stock, the NASDAQ Clean Edge Green Energy Index (CELS) and the Russell 2000 Index (RUT) Index on December 31, 2013 and the reinvestment of all dividends, if any.

 

Picture 1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Index

 

2013

 

2014

 

2015

 

2016

 

2017

 

2018

 

Plug Power Inc.

    

$

100.00

    

$

193.55

    

$

136.13

    

$

77.42

    

$

152.26

    

$

80.00

    

NASDAQ Clean Edge Green Energy Index

 

$

100.00

 

$

96.36

 

$

89.32

 

$

86.09

 

$

112.59

 

$

97.76

 

Russell 2000 Index

 

$

100.00

 

$

103.53

 

$

97.62

 

$

116.63

 

$

131.96

 

$

115.89

 

 

See also Part III Item 12 in this Annual Report on Form 10‑K for additional detail related to security ownership and related stockholder matters, and for additional detail on equity compensation plan matters.

 

19


 

Item 6.  Selected Financial Data

 

The following tables set forth selected financial data and other operating information of the Company. The selected statement of operations and balance sheet data for 2018,  2017, 2016, 2015,  and 2014, as set forth below are derived from the audited Consolidated Financial Statements of the Company. The information is only a summary and you should read it in conjunction with the Company’s audited Consolidated Financial Statements and related notes and other financial information included herein and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

 

 

2018

 

2017

 

2016

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands, except share and per share data)

 

Statements Of Operations:

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net revenue (1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales of fuel cell systems and related infrastructure

 

$

107,292

 

$

62,631

 

$

39,985

 

$

78,002

 

$

48,306

 

Services performed on fuel cell systems and related infrastructure (2)

 

 

22,002

 

 

16,202

 

 

17,347

 

 

13,204

 

 

9,909

 

Power Purchase Agreements

 

 

22,869

 

 

12,869

 

 

13,687

 

 

5,718

 

 

2,137

 

Fuel delivered to customers

 

 

22,469

 

 

8,167

 

 

10,916

 

 

5,075

 

 

1,959

 

Other

 

 

 —

 

 

284

 

 

884

 

 

481

 

 

1,919

 

Net revenue

 

$

174,632

 

$

100,153

 

$

82,819

 

$

102,480

 

$

64,230

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales of fuel cell systems and related infrastructure

 

$

84,439

 

$

54,815

 

$

29,543

 

$

67,703

 

$

43,378

 

Services performed on fuel cell systems and related infrastructure (2)

 

 

23,698

 

 

19,814

 

 

19,071

 

 

21,717

 

 

19,256

 

Provision for loss contracts related to service

 

 

 —

 

 

 —

 

 

(1,071)

 

 

10,050

 

 

 

Power Purchase Agreements (2)

 

 

36,161

 

 

31,292

 

 

16,601

 

 

5,665

 

 

1,052

 

Fuel delivered to customers

 

 

27,712

 

 

22,013

 

 

13,864

 

 

6,695

 

 

2,204

 

Other

 

 

 —

 

 

308

 

 

865

 

 

540

 

 

3,202

 

Total cost of revenue

 

$

172,010

 

$

128,242

 

$

78,873

 

$

112,370

 

$

69,092

 

Gross profit (loss)

 

$

2,622

 

$

(28,089)

 

$

3,946

 

$

(9,890)

 

$

(4,862)

 

Research and development expense

 

 

33,907

 

 

28,693

 

 

21,177

 

 

14,948

 

 

6,469

 

Selling, general and administrative expenses

 

 

38,198

 

 

45,010

 

 

34,288

 

 

34,164

 

 

26,601

 

Other (expense) income, net

 

 

(17,849)

 

 

(25,288)

 

 

(6,360)

 

 

3,312

 

 

(50,881)

 

Loss before income taxes

 

$

(87,332)

 

$

(127,080)

 

$

(57,879)

 

$

(55,690)

 

$

(88,813)

 

Income tax benefit

 

 

9,217

 

 

 —

 

 

392

 

 

 

 

325

 

Net loss attributable to the Company

 

$

(78,115)

 

$

(127,080)

 

$

(57,487)

 

$

(55,690)

 

$

(88,488)

 

Preferred stock dividends declared and accretion of discount

 

 

(52)

 

 

(3,098)

 

 

(104)

 

 

(105)

 

 

(156)

 

Net loss attributable to common shareholders

 

$

(78,167)

 

$

(130,178)

 

$

(57,591)

 

$

(55,795)

 

$

(88,644)

 

Loss per share, basic and diluted

 

$

(0.36)

 

$

(0.60)

 

$

(0.32)

 

$

(0.32)

 

$

(0.56)

 

Weighted average number of common shares outstanding

 

 

218,882,337

 

 

216,343,985

 

 

180,619,860

 

 

176,067,231

 

 

159,228,815

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(at end of the period)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrestricted cash and cash equivalents

 

$

38,602

 

$

24,828

 

$

46,014

 

$

63,961

 

$

146,205

 

Total assets (3)

 

 

390,326

 

 

270,810

 

 

240,832

 

 

209,456

 

 

204,151

 

Noncurrent liabilities (3)

 

 

209,600

 

 

80,734

 

 

79,637

 

 

40,861

 

 

19,008

 

Stockholders’ equity

 

 

2,713

 

 

73,646

 

 

85,088

 

 

124,736

 

 

158,283

 

Working capital

 

 

9,245

 

 

3,886

 

 

44,448

 

 

88,524

 

 

167,039

 

 

 

 

 

 

(1)

Revenue amounts reported in prior periods have been reclassified to be presented net of provision for common stock warrants, as referenced in Note 2, Summary of Significant Accounting Policies to the Consolidated Financial Statements.

(2)

Presentation of certain service arrangements and the amortization of the associated finance obligations has been corrected in the 2017, 2016 and 2015 selected financial data. See Note 2, Summary of Significant Accounting Policies to the Consolidated Financial Statements.

(3)

Effective January 1, 2018, the Company early adopted ASC Topic 842, Leases (ASC Topic 842).  The most significant impact was the recognition of right of use assets and finance obligations for operating leases on the consolidated balance sheet, as well as recognition of gross profit on sale/leaseback transactions. See Note 2, Summary of Significant Accounting Policies to the Consolidated Financial Statements.

20


 

 

 

 

 

 

Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The discussion contained in this Form 10‑K contains “forward‑looking statements,” within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act, that involve risks and uncertainties. Our actual results could differ materially from those discussed in this Form 10‑K. In evaluating these statements, you should review Part I, Item 1A: Risk Factors and our Consolidated Financial Statements and notes thereto included in Part II, Item 8: Financial Statements and Supplementary Data of this Form 10‑K.

 

Overview

 

Plug Power Inc., or the Company, is a leading provider of alternative energy technology focused on the design, development, commercialization and manufacture of hydrogen and fuel cell systems used primarily for the material handling and stationary power markets.  As part of the global drive to electrification, the Company has recently entered new electric vehicle markets, specifically ground support equipment and electric delivery vans. These applications promote the advancement of hydrogen fueling and accelerate commercialization of hydrogen-fueled products.

 

We are focused on proton exchange membrane, or PEM, fuel cell and fuel processing technologies, fuel cell/battery hybrid technologies, and associated hydrogen storage and dispensing infrastructure from which multiple products are available. A fuel cell is an electrochemical device that combines hydrogen and oxygen to produce electricity and heat without combustion. Hydrogen is derived from hydrocarbon fuels such as liquid petroleum gas (LPG), propane, methanol, ethanol, gasoline or biofuels. The Company develops complete hydrogen generation, delivery, storage and refueling solutions for customer locations. Currently the Company obtains the majority of its hydrogen by purchasing it from fuel suppliers for resale to customers.

 

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

 

Our current products and services include:

 

GenDrive: GenDrive is our hydrogen fueled PEM fuel cell system providing power to material handling electric vehicles, including class 1, 2, 3 and 6 electric forklifts and ground support equipment;

 

GenFuel:  GenFuel is our hydrogen fueling delivery, generation, storage and dispensing system;

 

GenCare: GenCare is our ongoing ‘internet of things’-based maintenance and on-site service program for GenDrive fuel cells, GenSure products, GenFuel products and ProGen engines;

 

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

 

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

 

ProGen:  ProGen is our fuel cell stack and engine technology currently used globally in mobility and stationary fuel cell systems, and as engines in electric delivery vans;

 

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

21


 

We provide our products worldwide through our direct product sales force, and by leveraging relationships with original equipment manufacturers, or OEMs, and their dealer networks. We manufacture our commercially-viable products in Latham, NY.

Results of Operations

 

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

 

In the third quarter of 2018, it was determined that the presentation in our consolidated statements of operations of certain service arrangements and the amortization of the associated finance obligations had not been appropriately accounted for resulting in an overstatement of our revenue and cost of revenue.  This previous presentation resulted in a gross up of these line items and had no impact on our gross profit (loss) or net loss.  The Company corrected the 2017 and 2016 annual financial statements to be consistent with the current period presentation and will correct comparable financial information in future filings. The amount reclassified from revenue on service performed on fuel cell systems and related infrastructure to cost of revenue on PPAs for years ended December 31, 2017 and 2016 was $3.8 million and $3.6 million, respectively.  The amount reclassified from cost of revenue on service performed on fuel cell systems and related infrastructure to cost of revenue on PPAs for the years ended December 31, 2017 and 2016 was $3.1 million and $3.1 million, respectively.  The Company does not consider the impact of the prior period correction to be material to the prior period consolidated financial statements. The Company also removed related fuels cell units and infrastructure sites from its services metrics, for purposes of discussing its results of operations.

 

In 2017, in separate transactions, the Company issued to each of Amazon and Walmart warrants to purchase shares of the Company’s common stock.  The Company recorded a portion of the estimated fair value of the warrants as a reduction of revenue based upon the projected number of shares of common stock expected to vest under the warrants, the proportion of purchases by Amazon, Walmart and their affiliates within the period relative to the aggregate purchase levels required for vesting of the respective warrants, and the then-current fair value of the warrants.  Beginning in September 2018, the provision for common stock warrants is allocated to our individual revenue line items based on estimated contractual cash flows by revenue stream. Prior period amounts have been reclassified to be consistent with current period presentation. The amount of provision for common stock warrants recorded as a reduction of revenue during the year ended December 31, 2018, 2017 and 2016, respectively is shown in the table below (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

 

2018

 

2017

 

2016

 

 

 

 

 

 

 

 

 

 

Sales of fuel cell systems and related infrastructure

 

$

4,877

 

$

8,657

 

$

 —

Services performed on fuel cell systems and related infrastructure

 

 

1,951

 

 

3,463

 

 

 —

Power Purchase Agreements

 

 

262

 

 

7,412

 

 

 —

Fuel delivered to customers

 

 

3,100

 

 

10,135

 

 

 —

Total

 

$

10,190

 

$

29,667

 

$

 —

 

 

22


 

Revenue, cost of revenue, gross profit/(loss) and gross margin for the years ended December 31, 2018, 2017, and 2016, was as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Cost of

    

Gross

    

Gross

 

 

 

Net Revenue

 

Revenue

 

Profit/(Loss)

 

Margin

 

For the year ended December 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

Sales of fuel cell systems and related infrastructure

 

$

107,292

 

$

84,439

 

$

22,853

 

21.3

%

Services performed on fuel cell systems and related infrastructure

 

 

22,002

 

 

23,698

 

 

(1,696)

 

(7.7)

%

Power Purchase Agreements

 

 

22,869

 

 

36,161

 

 

(13,292)

 

(58.1)

%

Fuel delivered to customers

 

 

22,469

 

 

27,712

 

 

(5,243)

 

(23.3)

%

Other

 

 

 —

 

 

 —

 

 

 —

 

 —

%

Total

 

$

174,632

 

$

172,010

 

$

2,622

 

1.5

%

For the year ended December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

Sales of fuel cell systems and related infrastructure

 

$

62,631

 

$

54,815

 

$

7,816

 

12.5

%

Services performed on fuel cell systems and related infrastructure

 

 

16,202

 

 

19,814

 

 

(3,612)

 

(22.3)

%

Power Purchase Agreements

 

 

12,869

 

 

31,292

 

 

(18,423)

 

(143.2)

%

Fuel delivered to customers

 

 

8,167

 

 

22,013

 

 

(13,846)

 

(169.5)

%

Other

 

 

284

 

 

308

 

 

(24)

 

(8.5)

%

Total

 

$

100,153

 

$

128,242

 

$

(28,089)

 

(28.0)

%

For the year ended December 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

Sales of fuel cell systems and related infrastructure

 

$

39,985

 

$

29,543

 

$

10,442

 

26.1

%

Services performed on fuel cell systems and related infrastructure

 

 

17,347

 

 

19,071

 

 

(1,724)

 

(9.9)

%

Power Purchase Agreements

 

 

13,687

 

 

16,601

 

 

(2,914)

 

(21.3)

%

Fuel delivered to customers

 

 

10,916

 

 

13,864

 

 

(2,948)

 

(27.0)

%

Other

 

 

884

 

 

865

 

 

19

 

2.1

%

Provision for loss contracts related to service

 

 

 —

 

 

(1,071)

 

 

1,071

 

(100.0)

%

Total

 

$

82,819

 

$

78,873

 

$

3,946

 

4.8

%

 

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

 

Revenue from sales of fuel cell systems and related infrastructure for the year ended December 31, 2018 increased $44.7 million, or 71.3%, to $107.3 million from $62.6 million for the year ended December 31, 2017. Included within revenue was provision for common stock warrants of $4.9 million and $8.7 million for the years ended December 31, 2018 and 2017, respectively, contributing to the increase in revenue. The main driver for the increased revenue was an increase in GenDrive and infrastructure sites, recognized as revenue, as well as pricing mix. The number of GenDrive units shipped and hydrogen installations remained flat at approximately 5,000 and 17 for the years ended December 31, 2018 and 2017, respectively.  The inconsistency between the increase in fuel cells and infrastructure recognized as revenue, as compared to the flat trend in shipments, as mentioned above, is due to sale/leaseback transactions accounted for as operating leases in 2018 as opposed to finance lease in 2017  (which also included the recognition of gross profit under ASC Topic 842 as opposed to the previous standard, as discussed further below).

 

Revenue from sales of fuel cell systems and related infrastructure for the year ended December 31, 2017 increased $22.6 million, or 56.6%, to $62.6 million from $40.0 million for the year ended December 31, 2016. Included within revenue was provision for common stock warrants of $8.7 million for the year ended December 31, 2017, offsetting the increase in revenue. There was no provision of common stock warrants for the year ended 2016. The main driver for the increased revenue was an increase in GenDrive deployment volume and infrastructure site increases, as well as pricing mix. There were 3,293 units recognized as revenue during the year ended December 31, 2017, compared to 1,383 for the year ended December 31, 2016. An additional 1,785 units were shipped in 2017 and held as leased assets. As such, the Company will recognize revenue on these units over the life of the related PPA under “Power Purchase Agreements” in the Consolidated Statement of Operations. Ten hydrogen installations occurred during the year ended December 31, 2017, for which the Company recognized revenue.  In addition, seven additional sites were constructed and held as leased assets.

23


 

There were seven hydrogen installations for the year ended December 31, 2016, for which the Company recognized revenue.  In addition, 11 additional sites were constructed and held as leased property during the year ended December 31, 2016.

 

Revenue – services performed on fuel cell systems and related infrastructure.  Revenue from services performed on fuel cell systems and related infrastructure represents revenue earned on our service and maintenance contracts and sales of spare parts.  At December 31, 2018, there were 12,083 fuel cell units and 42 hydrogen installations under extended maintenance contracts, an increase from 9,768 and 6,796 fuel cell units and 32 and 22 hydrogen installations at December 31, 2017 and 2016, respectively.

 

Revenue from services performed on fuel cell systems and related infrastructure for the year ended December 31, 2018 increased $5.8 million, or 35.8%, to $22.0 million from $16.2 million for the year ended December 31, 2017.  Included within revenue from services was provision for common stock warrants of $2.0 million and $3.5 million for the years ended December 31, 2018 and 2017, respectively, contributing to the increase in revenue. The increase in service revenues was due to the increase in units under service contracts. The revenue increase was not as significant as the increase in number of units under service contracts mainly due to deployments that occurred later in 2018 and, therefore, did not earn or only partially earned service revenue for 2018 as well as the occurrence of slightly less billable incidents and nonrecurring revenue. The average number of units under extended maintenance contracts in 2018 was 10,782, compared to 8,072 in 2017. This 33.6% increase in average units serviced throughout the year is directionally consistent with the fluctuation in revenue after considering the impact of the noncash provision for common stock warrants.

 

Revenue from services performed on fuel cell systems and related infrastructure for the year ended December 31, 2017 decreased  $1.1 million, or 6.6%, to $16.2 million from $17.3 million for the year ended December 31, 2016. Included within revenue was provision for common stock warrants of $3.5 million for the year ended December 31, 2017, contributing to the decrease in revenue. There was no provision of common stock warrants for the year ended 2016. The increase in service revenues was due to the increase in units under service contracts. The revenue increase was not as significant as the increase in number of units under service contracts mainly due to deployments that occurred later in 2017 and, therefore, did not earn or only partially earned service revenue for 2017 as well as the occurrence of slightly less billable incidents and nonrecurring revenue. The average number of units under extended maintenance contracts in 2017 was 7,947, compared to 6,554 in 2016. This 21.3% increase in average units serviced throughout the year is directionally consistent with the fluctuation in revenue after considering the impact of the noncash provision for common stock warrants.

 

Revenue – Power Purchase Agreements.  Revenue from PPAs represents payments received from customers for power generated through the provision of equipment and service.  The equipment and service can be associated with sale/leaseback transactions in which the Company sells fuel cell systems and related infrastructure to a third-party, leases them back and operates them at customers’ locations who are parties to PPAs with the Company.  Alternatively, the Company can retain the equipment as leased property and provide it to customers under PPAs.  At December 31, 2018, there were 37 GenKey sites associated with PPAs, as compared to 33 at December 31, 2017 and 25 at December 31, 2016. 

 

Revenue from PPAs for the year ended December 31, 2018 increased $10.0 million, or 77.7%, to $22.9 million from $12.9 million for the year ended December 31, 2017.  Included within revenue was provision for common stock warrants of $0.3 million and $7.4 million for the years ended December 31, 2018 and 2017, respectively, contributing to the increase in revenue. The remaining increase is due to the increased number of sites the Company has deployed with these types of arrangements. The average number of sites under PPA arrangements was 35 in 2018, as compared to 30 in 2017.

 

Revenue from PPAs for the year ended December 31, 2017 decreased  $0.8 million, or 6.0%, to $12.9 million from $13.7 million for the year ended December 31, 2016. Included within revenue was provision for common stock warrants of $7.4 million for the year ended December 31, 2017, contributing to the decrease in revenue. There was no provision of common stock warrants for the year ended 2016. This decrease is largely offset by the increased number of sites the Company has deployed with these types of arrangements. The average number of sites under PPA arrangements was 30 in 2017, as compared to 21 in 2016.

 

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

24


 

31, 2018, there were  72 sites associated with fuel contracts, as compared to 58 at December 31, 2017 and 40 at December 31, 2016.  The sites generally are the same as those which had purchased hydrogen installations within the GenKey solution.

 

Revenue associated with fuel delivered to customers for the year ended December 31, 2018 increased $14.3 million, or 175.1%, to $22.5 million from $8.2 million for the year ended December 31, 2017. Included within revenue was provision for common stock warrants of $3.1 million and $10.1 million for the years ended December 31, 2018 and 2017, respectively, contributing to the increase in revenue. The remaining increase in revenue is primarily due to an increase of sites taking fuel deliveries in 2018, compared to 2017.  The average number of sites receiving fuel deliveries was 66 in 2018, as compared to 50 in 2017, as well as increase in price.

 

Revenue associated with fuel delivered to customers for the year ended December 31, 2017 decreased $2.7 million, or 25.2%, to $8.2 million from $10.9 million for the year ended December 31, 2016.  Included within revenue was provision for common stock warrants of $10.1 million for the year ended December 31, 2017, contributing to the decrease in revenue. There was no provision of common stock warrants for the year ended 2016. The increase in revenue is due to an increase of sites taking fuel deliveries in 2017, compared to 2016.  The average number of sites receiving fuel deliveries was 50 in 2017, as compared to 33 in 2016.

 

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

 

Cost of revenue from sales of fuel cell systems and related infrastructure for the year ended December 31, 2018 increased $29.6 million, or 54.0%, to $84.4 million, compared to the year ended December 31, 2017 of $54.8 million, driven by the previously stated greater number of units and hydrogen installations recognized as revenue. Gross margin generated from sales of fuel cell systems and related infrastructure was 21.3% for the year ended December 31, 2018,  up from 12.5% for the year ended December 31, 2017,  due to the level of the provision for common stock warrants recorded, which had a 4.3% and 12.1% impact on revenue, respectively.

Cost of revenue from sales of fuel cell systems and related infrastructure for the year ended December 31, 2017 increased $25.3 million, or 85.5%, to $54.8 million, compared to the year ended December 31, 2016 of $29.5 million, driven by the previously stated greater number of units and hydrogen installations recognized as revenue. Gross margin generated from sales of fuel cell systems and related infrastructure was 12.5% for the year ended December 31, 2017, down from 26.1% for the year ended December 31, 2016, due to increase the level of the provision for common stock warrants recorded, as previously discussed. The provision for common stock warrants had a 12.1% impact on gross margin for the year ended December 31, 2017. Also, impacting the change year over year were product mix changes as well as expediting costs associated with a significant ramp up of production volume related to acquiring a large customer account that required higher deployments during the year ended December 31, 2017 as compared to the same period in 2016.

Cost of revenue – services performed on fuel cell systems and related infrastructure. Cost of revenue from services performed on fuel cell systems and related infrastructure includes the labor, material costs and allocated overhead costs incurred for our product service and hydrogen site maintenance contracts and spare parts.  At December 31, 2018, there were 12,083 fuel cell units and 42 hydrogen installations under extended maintenance contracts, compared to 9,768 and 32 at December 31, 2017  and 6,796 and 22 at December 2016, respectively.  

 

Cost of revenue from services performed on fuel cell systems and related infrastructure for the year ended December 31, 2018 increased $3.9 million, or 19.6%, to $23.7 million, compared to the year ended December 31, 2017 of $19.8 million.  Gross margin improved to (7.7%) for the year ended December 31, 2018 from (22.3%) for the year ended December 31, 2017. The change versus the prior year is due to the decrease in the level of the provision for common stock warrants recorded, as previously discussed, as well as a reduction in costs resulting from changes in product configuration rolled out to new key accounts and leverage of the existing fixed costs in the field.   The provision for common stock warrants had an 8.1% and 17.6% impact on revenue, respectively.

Cost of revenue from services performed on fuel cell systems and related infrastructure for the year ended December 31, 2017 increased $0.7 million, or 3.9%, to $19.8 million, compared to the year ended December 31, 2016 of

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$19.1 million.  Gross margin declined to (22.3%) for the year ended December 31, 2017 from (9.9%) for the year ended December 31, 2016. The change versus the prior year is due to increase in the level of the provision for common stock warrants recorded offset by reduction in costs resulting from changes in product configuration rolled out to new key accounts and leverage of the existing fixed costs in the field.  The provision for common stock warrants a 17.6% impact on revenue for the year ended December 31, 2017.

Cost of revenue—provision for loss contracts related to service.  During 2015, the Company recognized a $10.1 million provision for loss contracts related to service. This provision represented extended maintenance contracts that had projected costs over the remaining life of the contracts that exceeded contractual revenues.  During the year ended December 31, 2016, the Company renegotiated one of its service contracts and replaced 96 of the older fuel cell systems in service at that particular customer.  As a result, the projected costs over the remaining life of the amended contract were estimated to be reduced as compared to the previous estimate, resulting in a lower necessary accrual.  The change in estimate was recorded as a gain within cost of revenue where the original charge was recorded.

Cost of revenue – Power Purchase Agreements.  Cost of revenue from PPAs includes payments made to financial institutions for leased equipment and service used to fulfill the PPAs, and depreciation of leased property.  Leased units are primarily associated with sale/leaseback transactions in which the Company sells fuel cell systems and related infrastructure to a third-party, leases them back, and operates them at customers’ locations who are parties to PPAs with the Company.  Alternatively, the Company can hold the equipment for investment and recognize the depreciation and service cost of the assets as cost of revenue from PPAs.  At December 31, 2018, there were 37 GenKey sites associated with PPAs, as compared to 33 at December 31, 2017 and 25 at December 31, 2016. 

 

Cost of revenue from PPAs for the year ended December 31, 2018 increased $4.9 million, or 15.6%, to $36.2 million from $31.3 million for the year ended December 31, 2017. The increase was a result of the increase in the number of customer sites party to these agreements. Gross margin improved to (58.1%) for the year ended December 31, 2018 from (143.2%) for the year ended December 31, 2017,  primarily due to decrease in the level of the provision for common stock warrants.  The provision for common stock warrants had an 1.1% and 36.5% impact on revenue, respectively.

Cost of revenue from PPAs for the year ended December 31, 2017 increased $14.7 million, or 88.5%, to $31.3 million from $16.6 million for the year ended December 31, 2016. The increase was a result of the increase in the number of customer sites party to these agreements. Gross margin declined to (143.2%) for the year ended December 31, 2017 from (21.3%) for the year ended December 31, 2016, primarily due to increase in the level of the provision for common stock warrants. The provision for common stock warrants had a 36.5% impact on revenue for the year ended December 31, 2017.

Cost of revenue – fuel delivered to customers.  Cost of revenue from fuel delivered to customers represents the purchase of hydrogen from suppliers that ultimately is sold to customers.  As part of the GenKey solution, the Company contracts with fuel suppliers to purchase liquid hydrogen and separately sells to its customers upon delivery.  At December 31, 2018, there were 72 sites associated with fuel contracts, as compared to 58 at December 31, 2017 and 40 at December 31, 2016.  The sites generally are the same as those which had purchased hydrogen installations within the GenKey solution.

 

Cost of revenue from fuel delivered to customers for the year ended December 31, 2018 increased $5.7 million, or 25.9%, to $27.7 million from $22.0 million for the year ended December 31, 2017.  The increase is due primarily to higher volume of liquid hydrogen delivered to customer sites as a result of an increase in the number of hydrogen installations completed under GenKey agreements and higher fuel costs.  Gross margin percent improved to (23.3%) during the year ended December 31, 2018 compared to (169.5%) during the year ended December 31, 2017 due to decrease in the level of the provision for common stock warrants.  The provision for common stock warrants had an 12.1% and 55.4% impact on revenue, respectively. Also, impacting the change year of year were improvements in efficiencies from changes in system design.

Cost of revenue from fuel delivered to customers for the year ended December 31, 2017 increased $8.1 million, or 58.8%, to $22.0 million from $13.9 million for the year ended December 31, 2016.  The increase is due primarily to higher volume of liquid hydrogen delivered to customer sites as a result of an increase in the number of hydrogen installations completed under GenKey agreements and higher fuel costs.  Gross margin percent declined to (169.5%) during the year ended December 31, 2017 compared to (27.0%) during the year ended December 31, 2016 due to increase

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in the level of the provision for common stock warrants. The provision for common stock warrants had a 55.4% impact on revenue for the year ended December 31, 2017. Also, impacting the change year over year were improvements in efficiencies from changes in system design.

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

 

Research and development expense for the year ended December 31, 2018 increased $5.2 million, or 18.2%, to $33.9 million, from $28.7 million for the year ended December 31, 2017.  The increase was primarily related to an increase in programs associated with improving product reliability to reduce ongoing service costs.

Research and development expense for the year ended December 31, 2017 increased $7.5 million, or 35.5%, to $28.7 million, from $21.2 million for the year ended December 31, 2016.  This increase was primarily related to an increase in development in ProGen, and personnel related expenses from higher headcount, focused on refinement of hydrogen infrastructure design, multiple product cost-down programs and prototyping for stack performance enhancement.

 

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

Selling, general and administrative expenses for the year ended December 31, 2018,  decreased $6.8 million, or 15.1%, to $38.2 million from $45.0 million for the year ended December 31, 2017.  This decrease primarily is due to the lack of provision for the common stock warrants in 2018.

Selling, general and administrative expenses for the year ended December 31, 2017, increased $10.7 million, or 31.3%, to $45.0 million from $34.3 million for the year ended December 31, 2016.  This increase primarily is due to the provision for the common stock warrants issued to Amazon.com NV Investment Holdings LLC, as referenced below, as well as costs associated with increased headcount and increased insurance costs.

On April 4, 2017, the Company issued to Amazon.com NV Investment Holdings LLC a warrant to acquire up to 55,286,696 shares of common stock, subject to certain vesting events. The first tranche of 5,819,652 warrant shares vested upon the issuance of the warrant and was not contingent on future sales, and as a result, $7.1 million, the fair value of the first tranche warrant shares, including legal and other fees associated with the negotiation and completion of the agreement, was recognized as selling, general and administrative expense on the accompanying consolidated statement of operations for the year ended December 31, 2017.

Interest and other expense, net. Interest and other expense, net consists of interest and other expenses related to our long-term debt, convertible senior notes, obligations under finance leases and our finance obligations, as well as foreign currency exchange losses, offset by interest and other income consisting primarily of interest earned on our cash and cash equivalents, foreign currency exchange gains and other income. The Company has a series of finance leases with Generate Lending LLC and Wells Fargo and a loan and security agreement with NY Green Bank.  In March of 2018, the Company issued convertible senior notes in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended.

 

Net interest and other expense for the year ended December 31, 2018,  increased  $12.0 million as compared to the year ended December 31, 2017.  The increase is attributed to the increase in the outstanding balance of finance obligations and issuance of convertible senior notes, as mentioned above. 

 

Net interest and other expense for the year ended December 31, 2017, decreased $0.6 million as compared to the year ended December 31, 2016.  The decrease is attributed to a reduction of one-time fees incurred in 2016, offset by increases in the outstanding finance obligation balance.

 

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

 

During the year ended December 31, 2018, the Company recognized an income tax benefit of $9.2 million, as a result of intraperiod tax allocation rules under ASC Topic 740-20, Intraperiod Tax Allocation,  under which the Company recognized the benefit for current losses as a result of an entry to additional paid-in capital related to the issuance of the Senior Convertible Notes. The Company has not changed its overall conclusion with respect to the need for a valuation allowance against its net deferred tax assets, which remain fully reserved. The remaining net deferred tax asset generated from our net operating loss has been offset by a full valuation allowance because it is more likely than not that the tax benefits of the net operating loss carry forward will not be realized. The Company also recognizes accrued interest and penalties related to unrecognized tax benefits, if any, as a component of income tax expense. During the years ended December 31, 2018 and 2017, there were no unrecognized tax benefits. During the year ended December 31, 2016 the Company released its liability for unrecognized tax benefits of $392 thousand, as the related statute of limitations expired.

 

Liquidity and Capital Resources

 

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

 

We have experienced and continue to experience negative cash flows from operations and net losses.  The Company incurred net losses attributable to common shareholders of $78.2 million, $130.2 million and $57.6 million for the years ended December 31, 2018, 2017, and 2016, respectively, and has an accumulated deficit of $1.3 billion at December 31, 2018.

 

During the year ended December 31, 2018, cash used in operating activities was $57.6 million, consisting primarily of a net loss attributable to the Company of $78.1 million, offset by the impact of noncash charges of $25.1 million, and net outflows from fluctuations in working capital and other assets and liabilities of $4.6 million. The changes in working capital primarily were related to reduction of inventory and an increase in deferred revenue offset by increases in accounts receivable and prepaid expenses, and a decrease in accounts payable, accrued expenses, and other liabilities. As of December 31, 2018, we had cash and cash equivalents of $38.6 million and net working capital of $9.2 million. By comparison, at December 31, 2017, we had cash and cash equivalents of $24.8 million and net working capital of $3.9 million. 

 

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Net cash used in investing activities for the year ended December 31, 2018, totaled $19.6 million and included purchases of property, plant and equipment and outflows associated with materials, labor, and overhead necessary to construct new leased property. Cash outflows related to equipment that we sell and equipment we lease directly to customers are included in net cash used in operating activities and net cash used in investing activities, respectively. Net cash provided by financing activities for the year ended December 31, 2018 totaled $119.3 million and primarily resulted from net proceeds of $52.4 million from the issuance of Convertible Senior Notes, net of purchases of a capped call and a common stock forward, $30.9 million from the issuance of preferred stock and a $44.9 million net increase in finance obligations, offset by $16.2 million of principal payments on long-term debt.

In March 2018, we issued $100.0 million in aggregate principal amount of 5.5% Convertible Senior Notes due in 2023 (Convertible Senior Notes). The total net proceeds from this offering, after considering costs of the issuance, were approximately $95.9 million. Approximately $43.5 million of the proceeds were used for the cost of a capped call and a common stock forward, both of which are hedges related to the Convertible Senior Notes. The remaining net proceeds from the Convertible Senior Notes were or will be used for general corporate purposes, including working capital.

 

The Company enters into sale/leaseback agreements with various financial institutions to facilitate the Company’s commercial transactions with key customers. The Company sells certain fuel cell systems and hydrogen infrastructure to the financial institutions, and leases the equipment back to support certain customer locations and to fulfill its varied Power Purchase Agreements (PPAs).  In connection with certain operating leases, the financial institutions required the Company to maintain cash balances in restricted accounts securing the Company’s finance obligations. Cash received from customers under the PPAs is used to make payments against our finance obligations. As the Company performs under these agreements, the required restricted cash balances are released, according to a set schedule. The total remaining lease payments to financial institutions under these agreements at December 31, 2018 is  $82.2 million, which have been partially secured with restricted cash, security deposits and pledged service escrows of $80.4 million.

 

The Company has a master lease agreement with Wells Fargo (Wells Fargo MLA) to finance the Company’s commercial transactions with Walmart.  The Wells Fargo MLA was entered into in 2017, and amended in 2018. Pursuant to the Wells Fargo MLA, the Company sells fuel cell systems and hydrogen infrastructure to Wells Fargo and then leases them back and operates them at Walmart sites under lease agreements with Walmart. The total remaining lease payments to Wells Fargo was $67.5 million at December 31, 2018. Transactions completed under the Wells Fargo MLA in 2018 were accounted for as operating leases and therefore recognized as revenue for the year ended December 31, 2018. Transactions completed under the Wells Fargo MLA in 2017 were accounted for as capital leases. The difference in lease classification is due to changes in financing terms and their bearing on lease assessment criteria. Also included in the remaining lease payments to Wells Fargo is a sale/leaseback transaction in 2015 that was accounted for as an operating lease.  In connection with the Wells Fargo MLA, the Company has a customer guarantee for a majority of the transactions. The Wells Fargo transactions in 2018 required a letter of credit for the unguaranteed portion totaling $20.1 million.

 

In November 2018, the Company completed a private placement of an aggregate of 35,000 shares of the Company’s Series E Convertible Preferred Stock, par value $0.01 per share (Series E Preferred Stock), resulting in net proceeds of approximately $30.9 million.

 

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

 

As of December 31, 2018, the Company has approximately $91.1 million of finance obligations and long-term debt classified as current liabilities, approximately $50.0 million of which is due in the second quarter of 2019.  The Company is in the process of negotiating a refinance of a majority of these current liabilities with its primary lender in order to consolidate some of these facilities and extend the repayment schedule.  Should the Company not come to an agreement with this lender, it will need to seek an extension and other capital sources in the near term, such as debt facilities with other lenders and/or equity solutions, which may include the At Market Issuance Sales Agreement.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

    

2018

    

2017

    

2016

 

Cash and cash equivalents at end of period

 

$

38,602

 

$

24,828

 

$

46,014

 

Restricted cash at end of period

 

 

71,551

 

 

43,227

 

 

54,622

 

Working capital at end of period

 

 

9,245

 

 

3,886

 

 

44,448

 

Net loss attributable to common shareholders

 

 

78,167

 

 

130,178

 

 

57,591

 

Net cash used in operating activities

 

 

57,617

 

 

60,182

 

 

29,636

 

Net cash used in investing activities

 

 

19,572

 

 

44,363

 

 

58,075

 

Net cash provided by financing activities

 

 

119,344

 

 

83,011

 

 

69,885

 

 

NY Green Bank Loan

 

The Company, and its subsidiaries Emerging Power Inc. and Emergent Power Inc. are parties to a loan and security agreement with NY Green Bank, a Division of the New York State Energy Research & Development Authority (NY Green Bank), providing for a secured term loan facility in the amount of $45.0 million (Term Loan Facility). The Term Loan Facility was initially entered in December 2016 and provided for a term loan of $25 million. The Term Loan Facility was amended in July 2017 to provide for an additional $20.0 million term loan, increasing the size of the total commitment to $45.0 million. The new Term Loan Facility will be repaid primarily as the Company’s various restricted cash reserves are released over the term of the facility. In June 2018, the timing and amount of the remaining principal payments were modified. On December 31, 2018, the outstanding principal balance under the Term Loan Facility was $17.2 million.

 

Advances under the Term Loan Facility bear interest at a rate equal to the sum of the LIBOR rate for the applicable interest period, plus applicable margin of 9.5%. The interest rate at December 31, 2018 was approximately 11.9%. The term of the loan is three years, with a maturity date of December 23, 2019. As of December 31, 2018, the remaining balance of $17.2 million is scheduled to be repaid during the year ending December 31, 2019.  These payments will be funded in part by restricted cash released, as described in Note 18, Commitments and Contingencies.

 

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

 

The Term Loan Facility is secured by substantially all of the Company’s and the guarantor subsidiaries’ assets, including, among other assets, all intellectual property, all securities in domestic subsidiaries and 65% of the securities in foreign subsidiaries, subject to certain exceptions and exclusions.

 

The Term Loan Facility contains covenants, including, among others, (i) the provision of annual and quarterly financial statements, management rights and insurance policies and (ii) restrictions on incurring debt, granting liens, making acquisitions, making loans, paying dividends, dissolving, and entering into leases and asset sales.  The Term Loan Facility also provides for events of default, including, among others, payment, bankruptcy, covenant, representation and warranty, change of control, judgment and material adverse effect defaults at the discretion of the lender.

 

The Term Loan Facility provides that if there is an event of default due to the Company’s insolvency or if the Company fails to perform, in any material respect, the servicing requirements for fuel cell systems under certain customer agreements, which failure would entitle the customer to terminate such customer agreement, replace the Company or withhold the payment of any material amount to the Company under such customer agreement, then the NY Green Bank has the right to cause a wholly owned subsidiary of the Company to replace the Company in performing the maintenance services under such customer agreement.

 

 

 

 

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Amazon Transaction Agreement

 

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

 

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

 

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

 

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

 

At December 31, 2018 and 2017, 20,368,782 and 13,094,217 of the Amazon Warrant Shares have vested, respectively.  The amount of provision for common stock warrants recorded as a reduction of revenue during the years ended December 31, 2018 and 2017 was $9.8 million and $17.3 million, respectively. 

 

Walmart Transaction Agreement

 

On July 20, 2017, the Company and Walmart entered into a Transaction Agreement (the “Walmart Transaction Agreement”), pursuant to which the Company agreed to issue to Walmart a warrant to acquire up to 55,286,696 shares of the Company’s common stock, subject to certain vesting events (the “Walmart Warrant Shares”). The Company and

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Walmart entered into the Walmart Transaction Agreement in connection with existing commercial agreements between the Company and Walmart with respect to the deployment of the Company’s GenKey fuel cell technology across various Walmart distribution centers. The existing commercial agreements contemplate, but do not guarantee, future purchase orders for the Company’s fuel cell technology. The vesting of the warrant shares, is linked to payments made by Walmart or its affiliates (directly or indirectly through third parties) pursuant to transactions entered into after January 1, 2017 under existing commercial agreements.

 

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

 

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

 

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

 

At December 31, 2018 and 2017, 5,819,652 of the Walmart Warrant Shares have vested.  The amount of provision for common stock warrants recorded as a reduction to revenue during the years ended December 31, 2018 and 2017 was $0.4 million and $12.4 million, respectively. 

 

Redeemable Convertible Preferred Stock

 

In November 2018, the Company completed an offering of an aggregate of 35,000 shares of the Company’s Series E Redeemable Preferred Stock, par value $0.01 per share (Series E Stock), resulting in aggregate net proceeds of approximately $30.9 million, after deducting underwriting discounts and commissions and expenses payable by the Company.  The Company is required to redeem the Series E Stock in thirteen monthly installments in the amount of $2.7 million each from May 2019 through May 2020.

 

Each share of Series  E Stock was issued with an initial stated value of $1,000 per share. The Company is required to elect, on a monthly basis, whether it will redeem or convert the installment.  Should the Company elect to redeem, the shares are valued at the stated value.  Should the Company elect to convert, the holder of the shares will receive common

32


 

stock, with a conversion price discounted by  15%  from the then current market value.  The holders of the shares may elect to convert all or any whole amount of shares, at any time at a conversion price of $2.31 per share.  Conversion prices are discounted upon a change in control, certain triggering events, or failure to make a redemption payment.  

 

Except for our Series C Redeemable Convertible Preferred Stock (Series C Stock), which shall rank senior to the Series E Stock as to dividends, distributions and payments upon liquidation, dissolution and winding up, all shares of the Company’s capital stock, including common stock, rank junior in rank to the Series E Stock with respect to dividends, distributions and payments upon liquidation, dissolution and winding up.

 

Holders of the Series E Stock are not entitled to receive dividends except in connection with certain purchase rights and other corporate events, as described in the certificate of designations, or in connection with certain distributions of assets, as described in the certificate of designations, or as, when and if declared by the Company’s Board of Directors acting in its sole and absolute discretion.  Holders of the Series E Stock have no voting rights, except on matters required by law or under the certificate of designations to be submitted to a class vote of the Series E Stock.

 

In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company or other deemed liquidation event, the holders of the Series E Stock are entitled to receive, after any amount that is required to be paid to the Series C Stock and before any amount is paid to the holders of any of capital stock ranking junior to the Series E Stock, an amount per share equal to the greater of (i) 125% of the sum of the stated value plus any declared and unpaid dividends and late charges as provided in the certificate of designations, on the date of such payment and (ii) the amount per share such holder would receive if such holder converted such Series E Stock into common stock immediately prior to the date of such payment.

 

The Company had 2,620 shares of Series C Stock outstanding at December 31, 2018 and 2017. The holder of the Series C Stock is entitled to receive dividends at a rate of 8% per annum, based on the original issue price per share of $248.794, payable in equal quarterly installments in cash or in shares of common stock, at the Company’s option. During the years ended December 31, 2018 and 2017, respectively, all dividends have been paid in shares of common stock. Each share of Series C Stock is convertible into shares of common stock with the number of shares of common stock issuable upon conversion determined by dividing the original issue price per share of $248.794 by the conversion price in effect at the time the shares are converted. The conversion price of the Series C Stock as of December 31, 2018 and December 31, 2017 was $0.2343. The Series C Stock votes together with the common stock on an as-converted basis on all matters.    

 

In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company, or other deemed liquidation event, the holder of the Series C Stock will be entitled to be paid an amount per share equal to the greater of (i) the original issue price, plus any accrued but unpaid dividends or (ii) the amount per share that would have been payable had all shares of the Series C Stock been converted to shares of common stock immediately prior to such liquidation event. The Series C Stock is redeemable at the election of the holder of the Series C  Stock or the Company.

 

Convertible Senior Notes

In March 2018, the Company issued $100.0 million in aggregate principal amount of 5.5% Convertible Senior Notes due on March 15, 2023, in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended.  There are no required principal payments prior to maturity of the Convertible Senior Notes.

The total net proceeds from the Convertible Senior Notes were as follows:

 

 

 

 

 

Amount

 

(in thousands)

Principal amount

$

100,000

Less initial purchasers' discount

 

(3,250)

Less cost of related capped call and common stock forward

 

(43,500)

Less other issuance costs

 

(894)

Net proceeds

$

52,356

33


 

The Convertible Senior Notes bear interest at 5.5%, payable semi-annually in cash on March 15 and September 15 of each year.  The Convertible Senior Notes will mature on March 15, 2023, unless earlier converted or repurchased in accordance with their terms. The Convertible Senior Notes are unsecured and do not contain any financial covenants or any restrictions on the payment of dividends, or the issuance or repurchase of common stock by the Company.

Each $1,000 of principal of the Convertible Senior Notes will initially be convertible into 436.3002 shares of the Company’s common stock, which is equivalent to an initial conversion price of approximately $2.29 per share, subject to adjustment upon the occurrence of specified events.  Holders of these Convertible Senior Notes may convert their Convertible Senior Notes at their option at any time prior to the close of the last business day immediately preceding September 15, 2022, only under the following circumstances:

1)

during any calendar quarter (and only during such calendar quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;

 

2)

during the five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price (as defined in the indenture governing the Convertible Senior Notes) per $1,000 principal amount of notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate for the notes on each such trading day;

 

3)

if the Company calls any or all of the Convertible Senior Notes for redemption, at any time prior to the close of business on the second scheduled trading day immediately preceding the redemption date; or

 

4)

upon the occurrence of certain specified corporate events, such as a beneficial owner acquiring more than 50% of the total voting power of the Company’s common stock, recapitalization of the Company, dissolution or liquidation of the Company, or the Company’s common stock ceases to be listed on an active market exchange.

On or after September 15, 2022, holders may convert all or any portion of their Convertible Senior Notes at any time prior to the close of business on the second scheduled trading day immediately preceding the maturity date regardless of the foregoing conditions.

 

Upon conversion of the Convertible Senior Notes, the Company will pay or deliver, as the case may be, cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, at the Company’s election.  While the Company plans to settle the principal amount of the Convertible Senior Notes in cash subject to available funding at time of settlement, we currently use the if-converted method for calculating any potential dilutive effect of the conversion option on diluted net income per share, subject to meeting the criteria for using the treasury stock method in future periods.

The conversion rate will be subject to adjustment in some events but will not be adjusted for any accrued or unpaid interest. Holders who convert their Convertible Senior Notes in connection with certain corporate events that constitute a “make-whole fundamental change” per the indenture governing the Convertible Senior Notes or in connection with a redemption will be, under certain circumstances, entitled to an increase in the conversion rate. In addition, if the Company undergoes a fundamental change prior to the maturity date, holders may require the Company to repurchase for cash all or a portion of its Convertible Senior Notes at a repurchase price equal to 100% of the principal amount of the repurchased Convertible Senior Notes, plus accrued and unpaid interest.

The Company may not redeem the Convertible Senior Notes prior to March 20, 2021.  The Company may redeem for cash all or any portion of the Convertible Senior Notes, at the Company’s option, on or after March 20, 2021 if the last reported sale price of the Company’s common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive), including at least one of the three trading days immediately preceding the date on which the Company provides notice of redemption, during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption at a redemption price equal to 100% of the principal amount of the Convertible Senior Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.

34


 

In accounting for the issuance of the Convertible Senior Notes, the Company separated the Convertible Senior Notes into liability and equity components. The initial carrying amount of the liability component of approximately $58.2 million, net of costs incurred, was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component of approximately $37.7 million, net of costs incurred, representing the conversion option, was determined by deducting the fair value of the liability component from the par value of the Convertible Senior Notes. The difference between the principal amount of the Convertible Senior Notes and the liability component (the “debt discount”) is amortized to interest expense using the effective interest method over the term of the Convertible Senior Notes.  The effective interest rate is approximately 16.0%. The equity component of the Convertible Senior Notes is included in additional paid-in capital in the consolidated balance sheet and is not remeasured as long as it continues to meet the conditions for equity classification.

 

We incurred transaction costs related to the issuance of the Convertible Senior Notes of approximately $4.1 million, consisting of initial purchasers' discount of approximately $3.2 million and other issuance costs of $0.9 million. In accounting for the transaction costs, we allocated the total amount incurred to the liability and equity components using the same proportions as the proceeds from the Convertible Senior Notes. Transaction costs attributable to the liability component were approximately $2.4 million, were recorded as debt issuance cost (presented as contra debt in the consolidated balance sheet) and are being amortized to interest expense over the term of the Convertible Senior Notes. The transaction costs attributable to the equity component were approximately $1.7 million and were netted with the equity component in stockholders’ equity.

The Convertible Senior Notes consist of the following at December 31, 2018 (in thousands):

 

 

 

 

Principal amounts:

 

 

  Principal

$

100,000

  Unamortized debt discount (1)

 

(34,706)

  Unamortized debt issuance costs (1)

 

(2,047)

  Net carrying amount

$

63,247

  Carrying amount of the equity component (2)

$

37,702

1)

Included in the consolidated balance sheet within Convertible Senior Notes, net and amortized over the remaining life of the Convertible senior notes using the effective interest rate method.

 

2)

Included in the consolidated balance sheet within additional paid-in capital, net of $1.7 million in equity issuance costs and associated income tax benefit of $9.2 million.

As of December 31, 2018, the remaining life of the Convertible Senior Notes is approximately 51 months.

Based on the closing price of the Company’s common stock of  $1.24 on December 31, 2018, the if-converted value of the Convertible Senior Notes was less than the principal amount.

 

Capped Call and Common Stock Forward

 

(i)

Capped Call

 

In conjunction with the issuance of the Convertible Senior Notes, the Company entered into capped call options (Capped Call) on the Company’s common stock with certain counterparties at a price of $16.0 million. The net cost incurred in connection with the Capped Call has been recorded as a reduction to additional paid-in capital in the consolidated balance sheet.

The Capped Call is generally expected to reduce or offset the potential dilution to the Company’s common stock upon any conversion of the Convertible Senior Notes and/or offset any cash payments the Company chooses to make in excess of the principal amount of converted Convertible Senior Notes, as the case may be, with such reduction and/or offset subject to a cap based on the cap price. The cap price of the Capped Call transactions will initially be $3.82 per share, which represents a premium of 100% over the last reported sale price of the Company’s common stock of $1.91 per share on the date of the transaction, and is subject to certain adjustments under the terms of the Capped Call. The Capped Call becomes exercisable if the conversion option is exercised.

35


 

By entering into the Capped Call, the Company expects to reduce the potential dilution to its common stock (or, in the event the conversion is settled in cash, to provide a source of cash to settle a portion of its cash payment obligation) in the event that at the time of conversion its stock price exceeds the conversion price under the Convertible Senior Notes.

 

(ii)

Common Stock Forward

 

In connection with the sale of the Convertible Senior Notes, the Company also entered into a forward stock purchase transaction (Common Stock Forward), pursuant to which the Company agreed to purchase 14,397,906 shares of its common stock for settlement on or about March 15, 2023. The number of shares of common stock that the Company will ultimately repurchase under the Common Stock Forward is subject to customary anti-dilution adjustments. The Common Stock Forward is subject to early settlement or settlement with alternative consideration in the event of certain corporate transactions.

 

The net cost incurred in connection with the Common Stock Forward of $27.5 million has been recorded as an increase in treasury stock in the consolidated balance sheet.  The related shares were accounted for as a repurchase of common stock.

 

The fair values of the Capped Call and Common Stock Forward are not remeasured each reporting period. 

 

At Market Issuance Sales Agreement

 

On April 3, 2017, the Company entered into an At Market Issuance Sales Agreement (the “Sales Agreement”) with FBR Capital Markets & Co., as sales agent (“FBR”), pursuant to which the Company may offer and sell, from time to time through FBR, shares of common stock par value $0.01 per share having an aggregate offering price of up to $75.0 million. Under the Sales Agreement, in no event shall the Company issue or sell through FBR such a number of shares that exceeds the number of shares or dollar amount of common stock registered. During 2018, the Company issued 3,804,654 shares of common stock and raised net proceeds of $7.0 million, after accruals, underwriting discounts and commissions and other fees and expenses, pursuant to the Sales Agreement. The Company has raised $30.2 million to date during the term of the Sales Agreement.

 

Operating Leases – as Lessor

 

As of December 31, 2018, the Company has several noncancelable operating leases (as lessor), primarily associated with assets deployed at customer sites. These leases expire over the next one to seven years. Leases contain termination clauses with associated penalties, the amount of which cause the likelihood of cancelation to be remote.

 

Future minimum lease payments under noncancelable operating leases (with initial or remaining lease terms in excess of one year) as of December 31, 2018 are (in thousands):

 

 

 

 

 

2019

 

$

27,234

2020

 

 

25,503

2021

 

 

20,781

2022

 

 

12,044

2023

 

 

8,146

2024 and thereafter

 

 

7,946

Total future minimum lease payments

 

$

101,654

 

Operating Leases – as Lessee

 

As of December 31, 2018, the Company has several noncancelable operating leases (as lessee), primarily associated with sale/leaseback transactions that are partially secured by restricted cash (see also Note 1, Nature of Operations to the Consolidated Financial Statements) as summarized below.  These leases expire over the next one to seven years. Minimum rent payments under operating leases are recognized on a straight‑line basis over the term of the lease.  Leases contain termination clauses with associated penalties, the amount of which cause the likelihood of cancelation to be remote.

 

36


 

Future minimum lease payments under noncancelable operating leases (with initial or remaining lease terms in excess of one year) as of December 31, 2018 are (in thousands):

 

 

 

 

 

2019

 

$

22,582

2020

 

 

21,255

2021

 

 

16,512

2022

 

 

11,060

2023

 

 

10,325

2024 and thereafter

 

 

13,352

Total future minimum lease payments

 

 

95,086

Less imputed lease interest

 

 

(24,171)

Total lease liabilities

 

$

70,915

 

The Company has received cash for future services to be performed associated with certain sale/leaseback transactions and recorded the balance as a finance obligation.  The outstanding balance of this obligation at December 31, 2018 is $37.0 million, $5.7 million and $31.3 million of which is classified as short-term and long-term, respectively, on the accompanying consolidated balance sheet. The outstanding balance of this obligation at December 31, 2017 was $10.4 million, $2.5 million and $7.9 million of which is classified as short-term and long-term, respectively, on the accompanying consolidated balance sheet.  The amount is amortized using the effective interest method.

 

Rental expense for all operating leases was $15.8 million and $13.4 million for the years ended December 31, 2018 and 2017, respectively. 

 

The gross profit on sale/leaseback transactions for all operating leases was $16.4 million for the year ended December 31, 2018. Right of use assets obtained in exchange for new operating lease liabilities were $42.2 million for the year ended December 31, 2018.

 

At December 31, 2018 and 2017, security deposits associated with sale/leaseback transactions were $6.8 million and $8.3 million, respectively, and are included in other assets on the consolidated balance sheet.

 

Other information related to the operating leases is presented in the following table:

 

 

 

 

 

 

Year ended

 

 

December 31, 2018

Cash payments

$

14,926

Weighted average remaining lease term (years)

 

4.36

Weighted average discount rate

 

12.1%

 

Finance Leases – As Lessee

 

During the year ended December 31, 2017, the Company entered into sale/leaseback transactions, which were accounted for as finance leases and reported as part of finance obligations on the Company’s consolidated balance sheet.  In June 2018, the timing and amount of the lease payments from certain previous sale/leaseback transactions were amended to extend the due date. The outstanding balance of finance obligations related to sale/leaseback transactions at December 31, 2018 was $81.9 million.

 

 

 

 

 

 

 

 

37


 

Future minimum lease payments under noncancelable finance leases related to sale/leaseback transactions (with initial or remaining lease terms in excess of one year) as of December 31, 2018 are (in thousands):

 

 

 

 

2019

$

59,151

2020

 

6,722

2021

 

6,722

2022

 

4,975

2023

 

3,166

2024 and thereafter

 

16,154

Total future minimum lease payments

 

96,890

Less imputed lease interest

 

(14,986)

Total lease liabilities

$

81,904

 

Finance lease costs include amortization of the right of use assets (i.e. depreciation expense) and interest on lease liabilities (i.e. interest and other expense, net in the consolidated statement of operations). Finance lease costs for the year ended December 31, 2018 is (in thousands):

 

 

 

 

 

Year ended

 

December 31, 2018

Amortization of right of use asset

$

7,549

Interest on finance obligations

 

6,908

Total finance lease cost

$

14,457

 

Right of use assets obtained in exchange for new finance lease liabilities were $2.2 million for the year ended December 31, 2018.

 

The Company has a finance lease associated with its property and equipment in Latham, New York.  Liabilities relating to this agreement of $2.5 million has been recorded as a finance obligation, in the accompanying consolidated balance sheet as of December 31, 2018.  Upon the adoption of ASC 842, the Company reclassified property and equipment of $1.5 million, subject to a finance lease, to right of use assets.

 

Other information related to the finance leases is presented in the following table.

 

 

 

 

 

 

Year ended

 

 

December 31, 2018

Cash payments

$

33,715

Weighted average remaining lease term (years)

 

3.17

Weighted average discount rate

 

11.8%

 

Restricted Cash

 

In connection with certain of the above noted sale/leaseback agreements, cash of $34.3 million is required to be restricted as security and will be released over the lease term. The Company also has certain letters of credit backed by security deposits totaling $36.8 million that are security for the above noted sale/leaseback agreements.

 

The Company also has letters of credit in the aggregate amount of $0.5 million at December 31, 2018 associated with a finance obligation from the sale/leaseback of its building. Cash collateralizing this letter of credit is also considered restricted cash.

 

Income Taxes

 

Under Internal Revenue Code (IRC) Section 382, the use of loss carryforwards may be limited if a change in ownership of a company occurs. If it is determined that due to transactions involving the Company’s shares owned by its

38


 

5 percent or greater shareholders a change of ownership has occurred under the provisions of IRC Section 382, the Company's federal and state net operating loss carryforwards could be subject to significant IRC Section 382 limitations.

 

Based on studies of the changes in ownership of the Company, it has been determined that an IRC Section 382 ownership change occurred in 2013 that limited the amount of pre-change net operating losses that can be used in future years to $13.5 million.  These net operating loss carryforwards will expire, if unused, at various dates from 2020 through 2033.    Net operating losses of $195.4 million incurred after the most recent ownership change are not subject to IRC Section 382 and are available for use in future years.  Accordingly, the Company's deferred tax assets include $208.8 million of U.S. net operating loss carryforwards.  The net operating loss carryforwards available at December 31, 2018, include $42.2 million of net operating loss that was generated in 2018 that does not expire.  The remainder, if unused, will expire at various dates from 2032 through 2037.

 

Approximately $1.9 million of research credit carryforwards generated after the most recent IRC Section 382 ownership change are included in the Company's deferred tax assets. Due to limitations under IRC Section 382, research credit carryforwards existing prior to the most recent IRC Section 382 ownership change will not be used and are not reflected in the Company's gross deferred tax asset at December 31, 2018.  The remaining credit carryforwards will expire during the periods 2033 through 2038.

 

The Tax Cuts and Jobs Act (the "Act") was enacted on December 22, 2017. The Act makes broad and complex changes to the U.S. tax code including a reduction of the U.S. federal corporate tax rate from 35 percent to 21 percent effective for the 2018 tax year.  Accordingly, federal deferred tax assets were adjusted in 2017 by $42.5 million to reflect the reduction in tax rates. Also, in 2017 the valuation allowance was reduced by $42.5 million resulting in no change to the net deferred tax asset.  The deferred tax asset adjustments reduced the tax benefit of the current year losses by 33.5% as shown in the effective tax rate schedule.  The valuation allowance rate impact includes an offsetting 33.5% for the tax rate reduction resulting in no change to the provision for income taxes.    

 

Contractual Obligations

 

Contractual obligations as of December 31, 2018, under agreements with non‑cancelable terms are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Total

    

<1 year

    

1 - 3 Years

    

3 - 5 Years

    

> 5 Years

 

Operating lease obligations(A)

 

$

70,915

 

$

12,865

 

$

30,871

 

$

16,077

 

 

11,102

 

Finance lease obligations(B)

 

 

84,412

 

 

55,697

 

 

11,101

 

 

7,609

 

 

10,005

 

Other finance obligations(C)

 

 

37,013

 

 

5,702

 

 

13,233

 

 

10,165

 

 

7,913

 

Purchase obligations(D)

 

 

5,099

 

 

5,075

 

 

16

 

 

 8

 

 

 —

 

Long-term debt(E)

 

 

16,936

 

 

16,803

 

 

78

 

 

55

 

 

 —

 

 

 

$

214,375

 

$

96,142

 

$

55,299

 

$

33,859

 

$

29,020

 

 

(A)

The Company has several non‑cancelable operating leases that generally have six to seven year terms, primarily associated with sale/leaseback transactions and are partially secured with restricted cash. In addition, under a limited number of arrangements, the Company provides its products and services to customers in the form of a PPA that generally have six to seven year terms. The Company accounts for these non‑cancelable sale/leaseback transactions as operating leases in accordance with Accounting Standards Codification (ASC) Subtopic 842,  Leases, which was early adopted in 2018. The liability recognized on the consolidated balance sheet is presented within finance obligations.  See Note 18, Commitments and Contingencies, to the Consolidated Financial Statements for more detail.

 

(B)

During the years ended December 31, 2017 and 2016, the Company entered into a series of project financings, which are accounted for as finance leases and reported as part of the finance obligations on the Company’s consolidated balance sheet. These obligations are secured with restricted cash.    The Company also has a finance obligation related to a sale/leaseback transaction involving its building.

 

(C)

The Company has received cash for future services to be performed associated with certain sale/leaseback transactions, which was treated as a finance obligation.

 

39


 

(D)

The Company has purchase obligations related to inventory build to meet its sales plan, stack and stack components for new units and servicing existing ones, and the maintenance of its building and storage of documents.

 

(E)

The Company has entered into a long-term debt agreement with NY Green Bank.  Principal and interest payments will be made using the proceeds from the release of restricted cash.

 

Critical Accounting Estimates

 

The preparation of financial statements in conformity with U.S. generally accepted accounting principles and related disclosures requires management to make estimates and assumptions.

 

We believe that the following are our most critical accounting estimates and assumptions the Company must make in the preparation of its Consolidated Financial Statements and related disclosures:

Revenue Recognition:  The Company recognizes revenue under arrangements for products and services, which may include the sale of products and related services, including revenue from installation, service and maintenance, spare parts, hydrogen fueling services (which may include hydrogen supply as well as hydrogen fueling infrastructure) and leased units. The Company also recognizes revenue under research and development contracts, which are primarily cost reimbursement contracts associated with the development of PEM fuel cell technology. Revenue arrangements containing fuel cell systems and related infrastructure may be sold, or provided to customers under a PPA.

 

When sold to customers, the Company accounts for each distinct performance obligation of these arrangements as a separate unit of accounting if the delivered item or items have value to the customer on a standalone basis and meet the “distinct” criteria. There are two ways that a good or service that is promised to a customer is distinct: a) the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer; b) the entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract (that is, the promise to transfer the good or service is distinct within the context of the contract). The Company allocates revenue to each distinct performance obligation based on its relative stand-alone selling price. For GenDrives and related services as well as hydrogen infrastructure services, the Company determines relative stand-alone selling prices using its historical data. For hydrogen infrastructure, an observable approach for similar products in the market is used. Specifically, the Company generally uses an expected cost-plus margin approach in determining its list prices with this data also being used in the determination of stand-alone selling prices. 

 

Once relative stand-alone selling prices are determined, the Company proportionately allocates the transaction price to each distinct performance obligation within the customer  arrangement. The allocated transaction price related to fuel cell systems, spare parts and hydrogen infrastructure is recognized as revenue at a point in time which usually occurs at shipment (and occasionally upon delivery) for fuel cells and spare parts and upon customer acceptance for hydrogen infrastructure, depending on the terms of the arrangement, the point  at which transfer of control passes to the customer and the performance obligation has been satisfied.    Due to unpredictability of the Company’s revenue profile, as well as fleet dynamics, the allocated transaction price related to service and maintenance is recognized as revenue on a straight-line basis over the expected service period.  When fuel cell systems and related infrastructure are provided to customers through a PPA, revenues associated with these agreements are treated as rental income and recognized on a straight-line basis over the life of the agreements.

 

In addition to the above listed performance obligations, the Company also recognizes revenue from tank rentals and fuel deliveries. Both of these promised goods/services are considered stand-alone performance obligations and revenue is recognized at a point in time, when the goods/services are provided.

 

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

 

In a vast majority of its commercial transactions, the Company sells extended maintenance contracts that generally provide for a five to ten year warranty from the date of product installation. These types of contracts are accounted for as a separate performance obligation, and accordingly, revenue generated from these transactions is deferred and recognized in income over the warranty period, generally on a straight-line basis. Additionally, the Company may

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enter into annual service and extended maintenance contracts that are billed monthly. Revenue generated from these transactions is recognized in income on a straight-line basis over the term of the contract. Costs are recognized as incurred over the term of the contract.

 

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

 

The Company purchases hydrogen fuel from suppliers in certain cases (or produces hydrogen onsite) and sells to its customers upon delivery.  Revenue and cost of revenue related to this fuel is recorded as dispensed, and included in the respective “Fuel delivered to customers” lines on the accompanying consolidated statements of operations.

 

One of the critical estimates that management makes is the projection of service costs related to GenDrive units under extended maintenance contracts. This estimate is important in management’s determination of whether a loss contract exists, as well as the amount of any loss. When projected costs to be incurred over the remaining life of the extended maintenance contracts is estimated to exceed contractual revenues, a provision for loss contracts related to service is recorded. An analysis of projected expenses and revenues is performed on each extended maintenance contract. Cost of expected maintenance contracts consist of replacement parts, labor and overhead. A variety of assumptions are included in the estimates of future service costs, including the life of parts, failure rates of parts, and future costs of parts.

 

Valuation of long‑lived assets:  We assess the potential impairment of long‑lived assets, including identifiable intangible assets, whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important that could trigger an impairment review include, but are not limited to, the following:

 

·

significant underperformance relative to expected historical or projected future operating results;

 

·

significant changes in the manner of our use of the acquired assets or the strategy for our overall business;

 

·

significant negative industry or economic trends;

 

·

significant decline in our stock price for a sustained period; and

 

·

our market capitalization relative to net book value.

 

When we determine that the carrying value of long‑lived assets, including identifiable intangible assets, may not be recoverable based upon the existence of one or more of the above indicators of impairment, we would measure any impairment based upon the provisions of Financial Accounting Standards Board (FASB) ASC No. 350‑35‑30‑14, Intangibles—Goodwill and Other, and FASB ASC No. 360‑10‑35‑15, Impairment or Disposal of Long‑Lived Assets, as appropriate. Any resulting impairment loss could have a material adverse impact on our financial condition and results of operations.

 

Warrant Accounting:    The Company accounts for common stock warrants as either derivative liabilities or as equity instruments depending on the specific terms of the respective warrant agreements, as follows:

 

Derivative Liabilities

 

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

 

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There was no expected dividend yield for the warrants granted. If factors change and different assumptions are used, the warrant liability and the change in estimated fair value could be materially different. Generally, as the market price of our common stock increases, the fair value of the 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 consolidated statements of operations as change in fair value of common stock warrant liability.

 

Equity Instruments

 

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

 

Recent Accounting Pronouncements

 

Recently Adopted Accounting Pronouncements

 

In September 2018, the Company early adopted ASC Topic 842, as amended, effective January 1, 2018 and elected the available practical expedients. This adoption had a material impact on the Company’s consolidated statements of operations in that it allowed the Company to recognize gross profit on sale/leaseback transactions of $16.4 million.  The previous accounting standard only allowed revenue on sale/leaseback transactions to be recognized up to the amount of cost of goods sold and gross profit was deferred.  Under ASC Topic 842, revenue can be recognized in full.  Another impact from the adoption of ASC Topic 842 was the recognition of right of use assets and finance obligations for operating leases on the consolidated balance sheet, as well as expanded disclosures. The table below summarizes the impact of this initial adoption to the consolidated balance sheet as of January 1, 2018 (in thousands):

 

 

 

 

Recognition of right of use asset

$

34,416

Decrease in accrued expenses

 

385

Recognition of finance obligation

 

(34,161)

Decrease in prepaid expenses and other assets