10-Q 1 plug-20190630x10q.htm 10-Q plug_Current folio_10Q

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

 

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

 

FOR THE QUARTERLY PERIOD ENDED June 30, 2019

 

OR

 

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

 

FOR THE TRANSITION PERIOD FROM                    TO                   

 

Commission File Number: 1-34392

 

PLUG POWER INC.

(Exact name of registrant as specified in its charter)

 

 

 

 

Delaware

 

22-3672377

(State or Other Jurisdiction of

 

(I.R.S. Employer

Incorporation or Organization)

 

Identification Number)

 

968 ALBANY SHAKER ROAD, LATHAM, NEW YORK 12110

(Address of Principal Executive Offices, including Zip Code)

 

(518) 782-7700

(Registrant’s telephone number, including area code)

 

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

 

 

 

 

Title of each class

Trading
Symbol(s)

Name of each exchange on
which registered

Common Stock, par value $0.01
per share

PLUG

The Nasdaq Capital Market

Series A Junior Participating
Cumulative Preferred Stock, par
value $.01 per share

 

The Nasdaq Capital Market

 

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

 

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

 

 

 

 

 

 

 

Large accelerated filer ☐

Accelerated filer ☒

Non-accelerated filer ☐

 

Smaller reporting company 

Emerging growth company 

 

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

 

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

 

The number of shares of common stock, par value of $0.01 per share, outstanding as of August 9, 2019 was 251,963,724.

 

 

INDEX to FORM 10-Q

 

 

Page

 

 

PART I.   FINANCIAL INFORMATION 

 

 

 

Item 1 – Interim Condensed Consolidated Financial Statements (Unaudited) 

3

 

 

Condensed Consolidated Balance Sheets 

3

 

 

Condensed Consolidated Statements of Operations 

4

 

 

Condensed Consolidated Statements of Comprehensive Loss 

5

 

 

Condensed Consolidated Statements of Stockholders’ (Deficit) Equity  

6

 

 

Condensed Consolidated Statements of Cash Flows 

7

 

 

Notes to Interim Condensed Consolidated Financial Statements 

8

 

 

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

35

 

 

Item 3 – Quantitative and Qualitative Disclosures About Market Risk 

53

 

 

Item 4 – Controls and Procedures 

53

 

 

PART II.   OTHER INFORMATION 

 

 

 

Item 1 – Legal Proceedings 

54

 

 

Item 1A – Risk Factors 

54

 

 

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

54

 

 

Item 3 – Defaults Upon Senior Securities 

54

 

 

Item 4 – Mine Safety Disclosures 

54

 

 

Item 5 – Other Information 

55

 

 

Item 6 – Exhibits 

55

 

 

Signatures 

56

 

 

 

 

2

 

PART 1.  FINANCIAL INFORMATION

 

Item 1 — Interim Financial Statements (Unaudited)

 

Plug Power Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(In thousands, except share and per share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

    

June 30,

    

December 31,

 

 

2019

 

2018

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

19,845

 

$

38,602

Restricted cash

 

 

19,400

 

 

17,399

Accounts receivable

 

 

26,592

 

 

37,347

Inventory

 

 

73,190

 

 

47,910

Prepaid expenses and other current assets

 

 

14,001

 

 

14,357

Total current assets

 

 

153,028

 

 

155,615

 

 

 

 

 

 

 

Restricted cash

 

 

96,082

 

 

54,152

Property, plant, and equipment, net of accumulated depreciation of $15,882 and $14,403, respectively

 

 

14,228

 

 

12,869

Leased property, net

 

 

170,455

 

 

146,751

Goodwill

 

 

8,961

 

 

9,023

Intangible assets, net

 

 

5,398

 

 

3,890

Other assets

 

 

8,842

 

 

8,026

Total assets

 

$

456,994

 

$

390,326

 

 

 

 

 

 

 

Liabilities, Redeemable Preferred Stock, and Stockholders’ (Deficit) Equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

36,946

 

$

34,824

Accrued expenses

 

 

4,522

 

 

7,864

Deferred revenue

 

 

11,730

 

 

12,055

Finance obligations

 

 

30,663

 

 

74,264

Current portion of long-term debt

 

 

15,928

 

 

16,803

Other current liabilities

 

 

3,017

 

 

560

Total current liabilities

 

 

102,806

 

 

146,370

Deferred revenue

 

 

24,519

 

 

28,021

Common stock warrant liability

 

 

525

 

 

105

Finance obligations

 

 

157,531

 

 

118,076

Convertible senior notes, net

 

 

66,844

 

 

63,247

Long-term debt

 

 

83,776

 

 

133

Other liabilities

 

 

13

 

 

18

Total liabilities

 

 

436,014

 

 

355,970

 

 

 

 

 

 

 

Redeemable preferred stock:

 

 

 

 

 

 

Series C redeemable convertible preferred stock, $0.01 par value per share (aggregate involuntary liquidation preference $16,664); 10,431 shares authorized; Issued and outstanding: 2,620 at both June 30, 2019 and December 31, 2018

 

 

709

 

 

709

Series E redeemable convertible preferred stock, $0.01 par value per share (aggregate involuntary liquidation preference $35,000 at both June 30, 2019 and December 31, 2018); Shares authorized: 35,000 at both June 30, 2019 and December 31, 2018; Issued and outstanding: 35,000 at June 30, 2019 and December 31, 2018

 

 

30,926

 

 

30,934

Stockholders’ (deficit) equity:

 

 

 

 

 

 

Common stock, $0.01 par value per share; 750,000,000 shares authorized; Issued (including shares in treasury): 246,975,173 at June 30, 2019 and 234,160,661 at December 31, 2018

 

 

2,470

 

 

2,342

Additional paid-in capital

 

 

1,328,911

 

 

1,289,714

Accumulated other comprehensive income

 

 

1,460

 

 

1,584

Accumulated deficit

 

 

(1,312,815)

 

 

(1,260,290)

Less common stock in treasury: 15,020,437 at June 30, 2019 and 15,002,663 at December 31, 2018

 

 

(30,681)

 

 

(30,637)

Total stockholders’ (deficit) equity

 

 

(10,655)

 

 

2,713

Total liabilities, redeemable preferred stock, and stockholders’ (deficit) equity

 

$

456,994

 

$

390,326

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

 

3

 

Plug Power Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(In thousands, except share and per share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

 

    

2019

    

2018

 

2019

    

2018

Net revenue:

 

 

 

 

 

 

 

 

 

 

 

 

Sales of fuel cell systems and related infrastructure

 

$

38,547

 

$

18,820

 

$

40,767

 

$

29,433

Services performed on fuel cell systems and related infrastructure

 

 

5,282

 

 

5,691

 

 

11,495

 

 

11,174

Power Purchase Agreements

 

 

6,307

 

 

5,438

 

 

11,014

 

 

10,810

Fuel delivered to customers

 

 

6,932

 

 

5,280

 

 

12,385

 

 

10,230

Net revenue

 

 

57,068

 

 

35,229

 

 

75,661

 

 

61,647

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

Sales of fuel cell systems and related infrastructure

 

 

23,129

 

 

15,377

 

 

25,450

 

 

25,499

Services performed on fuel cell systems and related infrastructure

 

 

6,218

 

 

6,103

 

 

12,341

 

 

11,837

Power Purchase Agreements

 

 

8,713

 

 

9,638

 

 

17,711

 

 

18,288

Fuel delivered to customers

 

 

8,854

 

 

6,421

 

 

16,775

 

 

12,317

Total cost of revenue

 

 

46,914

 

 

37,539

 

 

72,277

 

 

67,941

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit (loss)

 

 

10,154

 

 

(2,310)

 

 

3,384

 

 

(6,294)

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

8,933

 

 

8,427

 

 

16,306

 

 

17,075

Selling, general and administrative

 

 

13,627

 

 

12,241

 

 

22,951

 

 

20,550

Total operating expenses

 

 

22,560

 

 

20,668

 

 

39,257

 

 

37,625

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating loss

 

 

(12,406)

 

 

(22,978)

 

 

(35,873)

 

 

(43,919)

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and other expense, net

 

 

(7,861)

 

 

(6,136)

 

 

(16,206)

 

 

(9,241)

Change in fair value of common stock warrant liability

 

 

1,706

 

 

334

 

 

(420)

 

 

1,592

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss before income taxes

 

$

(18,561)

 

$

(28,780)

 

$

(52,499)

 

$

(51,568)

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax benefit

 

 

 —

 

 

2,912

 

 

 —

 

 

5,865

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to the Company

 

$

(18,561)

 

$

(25,868)

 

$

(52,499)

 

$

(45,703)

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stock dividends declared and accretion of discount

 

 

(26)

 

 

(13)

 

 

(26)

 

 

(26)

Net loss attributable to common shareholders

 

$

(18,587)

 

$

(25,881)

 

$

(52,525)

 

$

(45,729)

Net loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

$

(0.08)

 

$

(0.12)

 

$

(0.23)

 

$

(0.21)

Weighted average number of common shares outstanding

 

 

231,114,868

 

 

214,315,312

 

 

225,899,224

 

 

220,650,537

 

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

 

4

 

Plug Power Inc. and Subsidiaries

Condensed consolidated Statements of Comprehensive Loss

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended 

 

Six months ended

 

 

June 30,

 

June 30,

 

    

2019

    

2018

    

2019

    

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to the Company

 

$

(18,561)

 

$

(25,868)

 

$

(52,499)

 

$

(45,703)

Other comprehensive income (loss) - foreign currency translation adjustment

 

 

86

 

 

(762)

 

 

(124)

 

 

(350)

Comprehensive loss

 

$

(18,475)

 

$

(26,630)

 

$

(52,623)

 

$

(46,053)

 

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

 

5

 

Plug Power Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ (Deficit) Equity

(In thousands, except share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

    

    

    

 

    

    

 

    

Accumulated

    

    

    

    

 

    

    

 

    

 

 

 

 

 

 

 

 

Additional

 

Other

 

 

 

 

 

 

 

 

 

Total

 

 

Common Stock

 

 Paid-in

 

Comprehensive

 

Treasury Stock

 

Accumulated

 

Stockholders’

 

    

Shares

    

Amount

    

Capital

    

Income

    

Shares

    

Amount

    

Deficit

    

(Deficit) Equity

December 31, 2018

 

234,160,661

 

$

2,342

 

$

1,289,714

 

$

1,584

 

15,002,663

 

$

(30,637)

 

$

(1,260,290)

 

$

2,713

Net loss attributable to the Company

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(52,499)

 

 

(52,499)

Other comprehensive loss

 

 —

 

 

 —

 

 

 —

 

 

(124)

 

 —

 

 

 —

 

 

 —

 

 

(124)

Stock-based compensation

 

780,985

 

 

 8

 

 

5,115

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

5,123

Stock dividend

 

10,147

 

 

 —

 

 

26

 

 

 —

 

 —

 

 

 —

 

 

(26)

 

 

 —

Issuance of common stock, net

 

11,881,637

 

 

119

 

 

28,146

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

28,265

Stock option exercises

 

141,743

 

 

 1

 

 

248

 

 

 —

 

17,774

 

 

(44)

 

 

 —

 

 

205

Provision for common stock warrants

 

 —

 

 

 —

 

 

5,662

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

5,662

June 30, 2019

 

246,975,173

 

$

2,470

 

$

1,328,911

 

$

1,460

 

15,020,437

 

$

(30,681)

 

$

(1,312,815)

 

$

(10,655)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

229,073,517

 

$

2,291

 

$

1,250,899

 

$

2,194

 

587,151

 

$

(3,102)

 

$

(1,178,636)

 

$

73,646

Net loss attributable to the Company

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(45,703)

 

 

(45,703)

Other comprehensive income

 

 —

 

 

 —

 

 

 —

 

 

(350)

 

 —

 

 

 —

 

 

 —

 

 

(350)

Stock-based compensation

 

202,523

 

 

 2

 

 

4,323

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

4,325

Stock dividend

 

13,273

 

 

 —

 

 

26

 

 

 —

 

 —

 

 

 —

 

 

(26)

 

 

 —

Stock option exercises

 

366,412

 

 

 4

 

 

98

 

 

 —

 

17,606

 

 

(35)

 

 

 —

 

 

67

Equity component of convertible senior notes, net of issuance costs and income tax benefit

 

 —

 

 

 —

 

 

31,837

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

31,837

Purchase of capped call

 

 —

 

 

 —

 

 

(16,000)

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(16,000)

Purchase of common stock forward

 

 —

 

 

 —

 

 

 —

 

 

 —

 

14,397,906

 

 

(27,500)

 

 

 —

 

 

(27,500)

Exercise of warrants

 

100

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

Provision for common stock warrants

 

 —

 

 

 —

 

 

5,806

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

5,806

June 30, 2018

 

229,655,825

 

$

2,297

 

$

1,276,989

 

$

1,844

 

15,002,663

 

$

(30,637)

 

$

(1,224,365)

 

$

26,128

 

 

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

6

 

Plug Power Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

Six months ended

 

 

June 30,

 

 

2019

    

2018

Operating Activities

 

 

 

 

 

 

Net loss attributable to the Company

 

$

(52,499)

 

$

(45,703)

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

 

 

 

 

 

 

Depreciation of property, plant and equipment, and leased property

 

 

5,496

 

 

5,795

Amortization of intangible assets

 

 

338

 

 

335

Stock-based compensation

 

 

5,123

 

 

4,325

Provision for bad debts and other

 

 

907

 

 

 —

Amortization of debt issuance costs and discount on convertible senior notes

 

 

4,340

 

 

2,438

Provision for common stock warrants

 

 

5,662

 

 

5,806

Change in fair value of common stock warrant liability

 

 

420

 

 

(1,592)

Loss on disposal of leased assets

 

 

212

 

 

 —

Income tax benefit

 

 

 —

 

 

(5,865)

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

 

 

 

 

 

 

Accounts receivable

 

 

9,848

 

 

(16,178)

Inventory

 

 

(25,280)

 

 

6,488

Prepaid expenses and other assets

 

 

(460)

 

 

1,556

Accounts payable, accrued expenses, and other liabilities

 

 

1,232

 

 

(6,685)

Deferred revenue

 

 

(3,827)

 

 

4,101

Net cash used in operating activities

 

 

(48,488)

 

 

(45,179)

Investing Activities

 

 

 

 

 

 

Purchases of property, plant and equipment

 

 

(2,844)

 

 

(2,343)

Purchases of intangible assets

 

 

(1,860)

 

 

(879)

Purchases for construction of leased property

 

 

(1,987)

 

 

(13,138)

Proceeds from sale of leased assets

 

 

375

 

 

 —

Net cash used in investing activities

 

 

(6,316)

 

 

(16,360)

Financing Activities

 

 

 

 

 

 

Proceeds from issuance of preferred stock, net of transaction costs

 

 

(8)

 

 

 —

Proceeds from public offerings, net of transaction costs

 

 

28,265

 

 

 —

Proceeds from exercise of stock options

 

 

205

 

 

67

Proceeds from issuance of convertible senior notes, net

 

 

 —

 

 

95,856

Purchase of capped call and common stock forward

 

 

 —

 

 

(43,500)

Principal payments on long-term debt

 

 

(17,521)

 

 

(5,721)

Proceeds from long-term debt

 

 

99,546

 

 

 —

Proceeds from sale/leaseback transactions accounted for as finance leases

 

 

 —

 

 

20,000

Repayments of finance obligations

 

 

(56,070)

 

 

(17,760)

Increase in finance obligations

 

 

25,609

 

 

 —

Net cash provided by financing activities

 

 

80,026

 

 

48,942

Effect of exchange rate changes on cash

 

 

(48)

 

 

(36)

Increase (decrease) in cash, cash equivalents and restricted cash

 

 

25,174

 

 

(12,633)

Cash, cash equivalents, and restricted cash beginning of period

 

 

110,153

 

 

68,055

Cash, cash equivalents, and restricted cash end of period

 

$

135,327

 

$

55,422

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

Cash paid for interest

 

$

8,673

 

$

4,915

 

 

 

 

 

 

 

Summary of non-cash investing and financing activity

 

 

 

 

 

 

Recognition of right of use asset

 

$

34,530

 

$

2,513

 

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

 

7

 

1.  Nature of Operations

 

Description of Business

 

Plug Power Inc., or the Company, is a leading provider of alternative energy technology focused on the design, development, commercialization and manufacture of hydrogen and fuel cell systems used primarily for the electric mobility and stationary power markets.  As part of the global drive to electrification, the Company has recently leveraged product proven in the material handling vehicle space to enter new, adjacent, electric vehicle markets, specifically electric delivery vans.

 

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.

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.

 

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.

8

 

Liquidity

 

Our cash requirements relate primarily to working capital needed to operate and grow our business, including funding operating expenses, growth in inventory to support both shipments of new units and servicing the installed base, growth in equipment leased to customers under long-term arrangements, funding the growth in our GenKey “turn-key” solution, which includes the installation of our customers’ hydrogen infrastructure as well as delivery of the hydrogen fuel,  continued development and expansion of our products, payment of lease/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 $52.6 million for the six months ended June 30, 2019 and $78.2 million, $130.2 million and $57.6 million for the years ended December 31, 2018, 2017, and 2016, respectively,  and had an accumulated deficit of $1.3 billion at June 30, 2019.

 

During the six months ended June 30, 2019, cash used in operating activities was $48.5 million, consisting of a net loss attributable to the Company of $52.5 million, net outflows from fluctuations in working capital and other assets and liabilities of $18.5 million, and offset by the impact of non-cash charges/gains of $22.5 million. The changes in working capital were related to an increase in inventory, and prepaid expenses and other assets combined with a decrease in deferred revenue and offset by decreases in accounts receivable and increases in accounts payable, accrued expenses, and other liabilities. As of June 30, 2019, we had cash and cash equivalents of $19.8 million and net working capital of $50.2 million. By comparison, at December 31, 2018, we had cash and cash equivalents of $38.6 million and net working capital of $9.2 million.

 

Net cash used in investing activities for the six months ended June 30, 2019, totaled $6.3 million and included purchases of property plant and equipment, purchases of intangible assets, outflows associated with materials, labor, and overhead necessary to construct new leased property and proceeds in connection with sales of leased assets. Cash outflows related to equipment that we sell and equipment we lease directly to customers are included in net cash used in operating activities and net cash used in investing activities, respectively. Net cash provided by financing activities for the six months ended June 30, 2019 totaled $80.0 million and primarily resulted from net proceeds of  $28.3 million from the sale of our common stock, $100.0 million from a new debt facility, some of which was used to pay approximately $50.3 million of finance obligations and $17.6 million of previously outstanding long-term debt, including accrued interest.  In addition, there was a $25.6 million increase in cash flows from new finance obligations.

 

   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. See Note 8, Convertible Senior notes for more details.

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

9

 

its varied Power Purchase Agreements (PPAs).  In connection with certain operating leases, the financial institutions require 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 June 30, 2019 is $121.3 million, which have been secured with restricted cash, security deposits and pledged service escrows of $122.8 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 were $84.7 million at June 30, 2019. Transactions completed under the Wells Fargo MLA in 2018 and 2019 were accounted for as operating leases and therefore the sales of the fuel cell systems and hydrogen infrastructure were recognized as revenue for the year ended December 31, 2018 and three and six months ended June 30, 2019. 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 MLA transactions in 2018 and 2019 required a letter of credit for the unguaranteed portion totaling $28.5 million.

 

During the second quarter of 2019, the Company entered into additional, similar master lease agreements with Wells Fargo and Crestmark to finance subscription programs with other customers. These financings were done in the form of sale/leaseback arrangements and accounted for as operating leases, hence sales of the fuel cell equipment were included in the three months ended June 30, 2019.  Total remaining lease payments under these leases at June 30, 2019 were $26.3 million. These lease payments are secured by cash collateral and letters of credit backed by restricted cash.

 

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. See Note 10, Redeemable Preferred Stock for additional information.

 

In March 2019, the Company entered into a loan and security agreement with Generate Lending, LLC (Generate Capital) borrowing $85.0 million. The initial proceeds of the loan were used to pay in full the Company’s long-term debt and accrued interest of $17.6 million, under the loan agreement with NY Green Bank, a Division of the New York State Energy Research & Development Authority (NY Green Bank) and terminate approximately $50.3 million of certain equipment leases with Generate Plug Power SLB II, LLC as well as repurchase of the associated leased equipment. During April 2019, the Company borrowed an additional $15.0 million under this debt facility. See Note 7, Long-Term Debt for additional information.

 

In March 2019, the Company sold 10 million shares of common stock for an issue price of $2.35 per share resulting in net proceeds of $23.5 million.

 

In the second quarter of 2019, the Company issued 2.1 million shares of common stock through its At Market Issuance Sales Agreement (ATM) resulting in net proceeds of $5.5 million. There were no ATM transactions in the first quarter of 2019.

 

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 financings, and 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

10

 

and other operating assumptions. Additionally, the Company has other capital sources available, including the At Market Issuance Sales Agreement.

 

2.  Summary of Significant Accounting Policies

 

Principles of Consolidation

 

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

 

Interim Financial Statements

 

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

 

Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with GAAP have been condensed or omitted. These unaudited interim condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K, filed for the fiscal year ended December 31, 2018.

 

The information presented in the accompanying unaudited interim condensed consolidated balance sheet as of December 31, 2018, has been derived from the Company’s December 31, 2018 audited consolidated financial statements. All other information has been derived from the unaudited interim condensed consolidated financial statements of the Company.

 

 

Leases

 

The Company is a lessee in noncancelable (1) operating leases, primarily related to sale/leaseback transactions with financial institutions for deployment of the Company’s products at certain customer sites, and (2) finance leases, also primarily related to sale/leaseback transactions with financial institutions for similar commercial purposes.  The Company accounts for leases in accordance with ASC Topic 842, Leases (ASC Topic 842). 

 

The Company determines if an arrangement is or contains a lease at contract inception. The Company recognizes a right of use (ROU) asset and a lease liability (i.e. finance obligation) at the lease commencement date.  For operating leases, the lease liability is initially measured at the present value of the unpaid lease payments at the lease commencement date. For finance leases, the lease liability is initially measured in the same manner and date as for operating leases, and is subsequently measured at amortized cost using the effective interest method.

 

Key estimates and judgments include how the Company determines (1) the discount rate it uses to discount the unpaid lease payments to present value, (2) lease term and (3) lease payments.

 

·

ASC Topic 842 requires a lessee to discount its unpaid lease payments using the interest rate implicit

in the lease or, if that rate cannot be readily determined, its incremental borrowing rate. Generally, the Company cannot determine the interest rate implicit in the lease because it does not have access to the lessor’s estimated residual value or the amount of the lessor’s deferred initial direct costs. Therefore, the Company generally uses its incremental borrowing rate as the discount rate for the lease. The Company’s incremental borrowing rate for a lease is the rate of interest it would have to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms.

 

11

 

·

The lease term for all of the Company’s leases includes the noncancelable period of the lease, plus any additional periods covered by either a Company option to extend (or not to terminate) the lease that the Company is reasonably certain to exercise, or an option to extend (or not to terminate) the lease controlled by the lessor.

·

Lease payments included in the measurement of the lease liability comprise fixed payments, and the exercise price of a Company option to purchase the underlying asset if the Company is reasonably certain to exercise the option.

 

The ROU asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for lease payments made at or before the lease commencement date, plus any initial direct costs incurred less any lease incentives received.  For operating leases, the ROU asset is subsequently measured throughout the lease term at the carrying amount of the lease liability, plus initial direct costs, plus (minus) any prepaid (accrued) lease payments, less the unamortized balance of lease incentives received. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

 

For finance leases, the ROU asset is subsequently amortized using the straight-line method from the lease commencement date to the earlier of the end of the useful life of the underlying asset or the end of the lease term unless the lease transfers ownership of the underlying asset to the Company or the Company is reasonably certain to exercise an option to purchase the underlying asset. In those cases, the ROU asset is amortized over the useful life of the underlying asset. Amortization of the ROU asset is recognized and presented separately from interest expense on the lease liability.  The Company’s leases do not contain variable lease payments.  

 

ROU assets for operating and finance leases are periodically reviewed for impairment losses. The Company uses the long-lived assets impairment guidance in ASC Subtopic 360-10, Property, Plant, and Equipment – Overall, to determine whether an ROU asset is impaired, and if so, the amount of the impairment loss to recognize. No impairment losses have been recognized to date. 

 

The Company monitors for events or changes in circumstances that require a reassessment of one of its leases. When a reassessment results in the remeasurement of a lease liability, a corresponding adjustment is made to the carrying amount of the corresponding ROU asset.

 

Operating and finance lease ROU assets are presented within leased property, net on the unaudited interim condensed consolidated balance sheet. The current portion of operating and finance lease liabilities is included in finance obligations within current liabilities and the long-term portion is presented in finance obligations within noncurrent liabilities on the unaudited interim condensed consolidated balance sheet.

 

The Company has elected not to recognize ROU assets and lease liabilities for short-term leases that have a lease term of 12 months or less. The Company has elected to apply the short-term lease recognition and measurement exemption for other classes of leased assets.  The Company recognizes the lease payments associated with its short-term leases as an expense on a straight-line basis over the lease term.

 

Revenue Recognition

 

The Company enters into contracts that may contain one or a combination of fuel cell systems and infrastructure, installation, maintenance, spare parts, fuel delivery and other support services. Contracts containing fuel cell systems and related infrastructure may be sold, or provided to customers under a Power Purchase Agreement (PPA), discussed further below.

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, or when circumstances indicate that warranty costs will be incurred, as applicable.  Only a limited number of fuel cell units are under standard warranty.

 

Revenue is measured based on the transaction price specified in a contract with a customer, subject to the allocation of the transaction price to distinct performance obligations as discussed below. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a customer.

12

 

 

The Company accounts for each distinct performance obligation of within its arrangements as a distinct unit of accounting if the items under the performance obligation have value to the customer on a standalone basis. The Company considers a performance obligation to be distinct and have a standalone value if the customer can benefit from the good or service either on its own or together with other resources readily available to the customer and the Company’s promise to transfer the goods or service to the customer is separately identifiable from other promises in the contract. The Company allocates revenue to each distinct performance obligation based on relative standalone selling prices.

 

Payment terms for sales of fuel cells, infrastructure and service to customers are 30 to 90 days. Sale/leaseback transactions with financial institutions are invoiced and collected upon transaction closing. Service is prepaid upfront in a majority of the arrangements.  The Company does not adjust the transaction price for a significant financing component when the performance obligation is expected to be fulfilled within a year.

 

The Company presents the provision for common stock warrants within each revenue-related line item on the unaudited interim condensed consolidated statements of operations. This presentation reflects a discount that those common stock warrants represent, and therefore revenue is net of these non-cash charges.  The provision of common stock warrants is allocated to the relevant revenue-related line items based upon the expected mix of the revenue for each respective contract.

 

Nature of goods and services

 

The following is a description of principal activities from which the Company generates its revenue.

 

(i)Sales of Fuel Cell Systems and Related Infrastructure

 

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.

 

The Company considers comparable list prices, as well as historical average pricing approaches to determine standalone selling prices for GenDrive fuel cells. The Company uses observable evidence from similar products in the market to determine standalone selling prices for GenSure stationary backup power units and hydrogen fueling infrastructure. Once relative standalone selling prices are determined, the Company proportionately allocates the transaction price to each 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. 

 

(ii)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. The transaction price allocated to services as discussed above is generally recognized as revenue over time on a straight-line basis over the expected service period.

 

In substantially all of its commercial transactions, the Company sells extended maintenance contracts that generally provide for a five to ten year service period from the date of product installation. Services include monitoring, technical support, maintenance and services that provide for 97-98% uptime of the fleet. These services are accounted for as a separate performance obligation, and accordingly, revenue generated from these transactions, subject to the proportional allocation of transaction price, is deferred and recognized in income over the term of the contract, generally on a straight-line basis. Additionally, the Company may enter into annual service and extended maintenance contracts that are billed monthly. Revenue generated from these transactions is recognized in income on a straight-line basis over the term of the contract. Costs are recognized as incurred over the term of the contract. Sales of spare parts are included within service revenue on the accompanying unaudited interim condensed consolidated statements of operations. When costs are projected to exceed revenues over the life of the extended maintenance contract, an accrual for loss contracts is recorded. 

13

 

Costs are estimated based upon historical experience and consider the estimated impact of the Company’s cost reduction initiatives.  The actual results may differ from these estimates.

 

Upon expiration of the extended maintenance contracts, customers either choose to extend the contract or switch to purchasing spare parts and maintaining the fuel cell systems on their own.

 

(iii)Power Purchase Agreements

 

Revenue from PPAs primarily represents payments received from customers who make monthly payments to access the Company’s GenKey solution.

 

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, a majority of the related infrastructure, and, in some cases service are sold to the third-party financial institution and leased back to the Company through either an operating or finance lease.

 

Certain of the Company’s sale/leaseback transactions with third-party financial institutions are required to be accounted for as financing leases.  As a result, no upfront revenue was recognized at the closing of these transactions and a finance obligation for each lease was established.  The fuel cell systems and related infrastructure that are provided to customers through these PPAs are considered leased property on the accompanying unaudited interim condensed consolidated balance sheet.  Costs to service the leased property, depreciation of the leased property, and other related costs are considered cost of PPA revenue on the accompanying unaudited interim condensed consolidated statements of operations.  Interest cost associated with finance leases is presented within interest and other expense, net on the accompanying unaudited interim condensed consolidated statement of operations.

 

The Company also has sale/leaseback transactions with financial institutions, which were required to be accounted for as an operating lease. The Company has rental expense associated with these sale/leaseback agreements with financial institutions.  Rental expense is recognized on a straight-line basis over the life of the agreements and is characterized as cost of PPA revenue on the accompanying unaudited interim condensed consolidated statements of operations.

 

The Company adopted ASC Topic 842, effective January 1, 2018. As part of the adoption, the Company elected the practical expedient to not separate lease and non-lease components (i.e. maintenance services) within its rental income related to all PPA-related assets.

 

(iv)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 or generated on site.

 

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

 

Contract costs

 

The Company expects that incremental commission fees paid to employees as a result of obtaining sales contracts are recoverable and therefore the Company capitalizes them as contract costs.

 

14

 

Capitalized commission fees are amortized on a straight-line basis over the period of time over which the transfer of goods or services to which the assets relate occur, typically ranging from 5 to 10 years. Amortization of the capitalized commission fees is included in selling, general, and administrative expenses.

 

The Company recognizes the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets that the Company otherwise would have recognized is one year or less. These costs are included in selling, general, and administrative expenses.

 

Cash Equivalents

 

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

 

Common Stock Warrant Accounting

 

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

 

Derivative Liabilities

 

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

 

Equity Instruments

 

Common stock warrants that meet certain applicable requirements of ASC Subtopic 815-40, Derivatives and Hedging – Contracts in Entity’s Own Equity, and other related guidance, including the ability of the Company to settle the warrants without the issuance of registered shares or the absence of rights of the grantee to require cash settlement, are accounted for as equity instruments. The Company classifies these equity instruments within additional paid-in capital on the accompanying unaudited interim condensed consolidated balance sheet. Common stock warrants accounted for as equity instruments represent the warrants issued to Amazon and Walmart as discussed in Note 11, Warrant Transaction Agreements.  These warrants are remeasured at each financial reporting date prior to vesting, using the Monte Carlo pricing model.  Once these warrants vest, they are no longer remeasured.  This pricing model, which is based, in part, upon unobservable inputs for which there is little or no market data, requires the Company to develop its own assumptions. Changes in fair value resulting from remeasurement of common stock warrants issued in connection with the Amazon Transaction Agreement and the Walmart Transaction Agreement, as described in Note 11, Warrant Transaction Agreements, and are recorded as cumulative catch up adjustments as a reduction of revenue.

 

Convertible Senior Notes

The Company accounts for the issued Convertible Senior Notes with separate liability and equity components. The carrying amount of the liability component was initially determined by estimating the fair value of a similar debt instrument that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was determined by deducting the estimated fair value of the liability component from the par value of the Convertible Senior Notes as a whole as of the date of issuance. This difference represents a debt discount that is amortized to interest expense, with a corresponding increase to the carrying amount of the liability component, over the

15

 

term of the Convertible Senior Notes using the effective interest rate method. The equity component is not remeasured as long as it continues to meet the conditions for equity classification. The Company has allocated issuance costs incurred to the liability and equity components. Issuance costs attributable to the liability component are being amortized to expense over the respective term of the Convertible Senior Notes, and issuance costs attributable to the equity components were netted with the respective equity component in additional paid-in capital.

 

Use of Estimates

 

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

 

Reclassifications and Correction of Immaterial Errors

 

Reclassifications are made, whenever necessary, to prior period financial statements to conform to the current period presentation. The provision for common stock warrants presented historically as one line item on the condensed consolidated statements of operations has been allocated to each of the relevant revenue line items. This reclassification did not have an impact on gross profit (loss) or net loss within the unaudited interim condensed consolidated statements of operations or major categories within the condensed consolidated statements of cash flows in the periods presented.

 

In the third quarter of 2018, it was determined that the presentation in our unaudited interim condensed 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 prior period unaudited interim condensed consolidated 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 the three and six months ended June 30, 2018 was $0.8 million and $1.6 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 three and six months ended June 30, 2018 was $1.0 million and $2.2 million, respectively. The Company does not consider the impact of the prior period correction to be material to the prior period unaudited interim condensed consolidated financial statements.

 

Recently Adopted Accounting Pronouncements

 

In June 2018, an accounting update was issued to simplify the accounting for nonemployee share-based payment transactions  resulting from expanding the scope of ASC Topic 718, Compensation-Stock Compensation, to include share-based payment transactions for acquiring goods and services from nonemployees. An entity should apply the requirements of ASC Topic 718 to nonemployee awards except for specific guidance on inputs to an option pricing model and the attribution of cost (that is, the period of time over which share-based payment awards vest and the pattern of cost recognition over that period). The amendments specify that ASC Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The amendments also clarify that ASC Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under ASC Topic 606, Revenue from Contracts with Customers. The amendments in this accounting update are effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. Early adoption is permitted, but no earlier than an entity’s adoption date of ASC Topic 606. The Company adopted this update on January 1, 2019 and it did not have a material effect on the unaudited interim condensed consolidated financial statements.

 

 

 

16

 

Recently Issued and Not Yet Adopted Accounting Pronouncements

 

In May 2019, Accounting Standards Update (ASU) 2019-05, Financial Instruments – Credit Losses, was issued to provide an option to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost basis. Adoption of this update is optional and within scope of Topic 326, Financial Instruments – Credit Losses, effective for fiscal years beginning after December 15, 2019. The Company is evaluating the adoption method and impact this update will have on the consolidated financial statements.

 

In April 2019, Accounting Standards Update (ASU) 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, was issued to make improvements to updates 2016-01, Financial Instruments – Overall (Subtopic 825-10), 2016-13, Financial Instruments – Credit Losses (Topic 326) and 2017-12, Derivatives and Hedging (Topic 815). This is update is effective for fiscal years beginning after December 15, 2019. The Company is evaluating the adoption method and impact this update will have on the consolidated financial statements.

 

In November 2018, Accounting Standards Update (ASU) 2018-18, Collaborative Arrangements (Topic 808),  was issued to clarify the interaction between ASC Topic 808, Collaborative Arrangements, and Topic 606. Adoption of this update is effective for all reporting periods beginning after December 15, 2019. The Company is evaluating the impact this update will have on the consolidated financial statements.

 

In August 2018, Accounting Standards Update (ASU) 2018-05, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40),  was issued to help entities evaluate the accounting for fees paid by a customer in cloud computing arrangement (hosting arrangement) by providing guidance for determining when the arrangement includes a software license. The amendments in this update are effective for public companies beginning after December 15, 2019. Early adoption of the amendments in this update are permitted. The Company is evaluating the adoption method and impact this update will have on the consolidated financial statements.

 

In January 2017, Accounting Standards Update (ASU) 2017-04, Intangibles – Goodwill and Other (Topic 350), was issued to simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test.  Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. This accounting update is effective for years beginning after December 15, 2019.  Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The company is evaluating the adoption method and does not think that this will have a material impact on the consolidated financial statements.

 

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

 

In June 2016, Accounting Standards Update (ASU) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, was issued. ASU 2016-13 significantly changes how entities account for credit losses for financial assets and certain other instruments, including trade receivables and contract assets, that are not measured at fair value through net income. The ASU requires a number of changes to the assessment of credit losses, including the utilization of an expected credit loss model, which requires consideration of a broader range of information to estimate expected credit losses over the entire lifetime of the asset, including losses where probability is considered remote. Additionally, the standard requires the estimation of lifetime expected losses for trade receivables and contract assets that are classified as current. This update is effective beginning after January 1, 2020. The Company is evaluating the impact this update will have on the consolidated financial statements.

 

 

 

 

17

 

3.  Earnings Per Share

 

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

 

The dilutive potential common shares are summarized as follows:

 

 

 

 

 

 

 

 

At June 30,

 

    

2019

    

2018

Stock options outstanding (1)

 

21,258,304

 

19,977,576

Restricted stock outstanding  (2)

 

2,504,392

 

207,347

Common stock warrants (3)

 

115,824,142

 

115,824,142

Preferred stock (4)

 

17,933,591

 

2,782,075

Convertible Senior Notes (5)

 

43,630,020

 

43,630,020

Number of dilutive potential common shares

 

201,150,449

 

182,421,160

 

(1)

During the three months ended June 30, 2019 and 2018, the Company granted 339,392 and 484,667 stock options, respectively. During the six months ended June  30, 2019 and 2018, the Company granted 364,392, and 484,667 stock options, respectively.

 

(2)

During the three months ended June  30, 2019 and 2018, the Company granted 339,392 and zero shares of restricted stock, respectively. During the six months ended June 30, 2019 and 2018, the Company granted 364,392 and zero shares of restricted stock, respectively.

 

(3)

In April 2017, the Company issued 5,250,750 warrants with an exercise price of $2.69 per warrant, as described in Note 9, Stockholders’ Equity.  Of these warrants issued in April 2017, none have been exercised as of June  30, 2019.

 

In April 2017, the Company issued warrants to acquire up to 55,286,696 of the Company’s common stock as part of a transaction agreement, subject to certain vesting events, as described in Note 11, Warrant Transaction Agreements.  Of these warrants issued, none have been exercised as of June  30, 2019.

 

In July 2017, the Company issued warrants to acquire up to 55,286,696 of the Company’s common stock as part of a transaction agreement, subject to certain vesting events, as described in Note 11, Warrant Transaction Agreements. Of these warrants issued, none have been exercised as of June  30, 2019.

 

(4)

The preferred stock amount represents the dilutive potential common shares of the Series C and E redeemable convertible preferred stock, based on the conversion price of the preferred stock as of June  30, 2019 and 2018, respectively.  Of the 10,431 Series C redeemable preferred stock issued on May 16, 2013, 7,811 had been converted to common stock through June  30, 2019 and 2018, with the remainder still outstanding.  On November 1, 2018, the Company issued 35,000 shares of Series E redeemable convertible preferred stock.  As of June 30, 2019, all Series E redeemable convertible preferred stock are outstanding.

 

(5)

In March 2018, the Company issued $100.0 million in aggregate principal amount of 5.5% Convertible Senior Notes. See Note 8, Convertible Senior Notes.

 

 

18

 

4.  Inventory

 

             Inventory as of June 30, 2019 and December 31, 2018 consists of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

    

June 30,

    

December 31,

 

 

 

2019

 

2018

 

Raw materials and supplies - production locations

 

$

47,324

 

$

32,941

 

Raw materials and supplies - customer locations

 

 

9,247

 

 

6,755

 

Work-in-process

 

 

12,538

 

 

5,589

 

Finished goods

 

 

4,081

 

 

2,625

 

Inventory

 

$

73,190

 

$

47,910

 

 

 

 

5. Leased Property

 

Leased property at June 30, 2019 and December 31, 2018 consists of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

    

June 30,

    

December 31,

 

 

 

2019

 

2018

 

Right of use assets - operating

 

$

111,176

 

$

76,747

 

Right of use assets - finance

 

 

35,677

 

 

39,905

 

Capitalized costs of lessor assets

 

 

45,690

 

 

41,040

 

Less: accumulated depreciation

 

 

(22,088)

 

 

(10,941)

 

Leased property, net

 

$

170,455

 

$

146,751

 

 

 

6. Intangible Assets

 

The gross carrying amount and accumulated amortization of the Company’s acquired identifiable intangible assets as of June 30, 2019 are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted Average

 

Gross Carrying

 

Accumulated

 

 

 

 

 

 

Amortization Period

 

Amount

 

Amortization

 

Total

 

Acquired technology

 

10 years 

 

$

7,757

 

$

(2,483)

 

$

5,274

 

Customer relationships

 

10 years 

 

 

260

 

 

(136)

 

 

124

 

Trademark

 

5 years 

 

 

60

 

 

(60)

 

 

 —

 

 

 

 

 

$

8,077

 

$

(2,679)

 

$

5,398

 

 

The gross carrying amount and accumulated amortization of the Company’s acquired identifiable intangible assets as of December 31, 2018 are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted Average

 

Gross Carrying

 

Accumulated

 

 

 

 

 

 

Amortization Period

 

Amount

 

Amortization

 

Total

 

Acquired technology

 

9 years 

 

$

5,926

 

$

(2,176)

 

$

3,750