10-Q 1 plug-20200331x10q.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 MARCH 31, 2020

 

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

 

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 May 08, 2020 was  324,283,734.

 

 

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 

55

 

 

Item 4 – Controls and Procedures 

56

 

 

PART II.   OTHER INFORMATION 

 

 

 

Item 1 – Legal Proceedings 

56

 

 

Item 1A – Risk Factors 

56

 

 

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

73

 

 

Item 3 – Defaults Upon Senior Securities 

73

 

 

Item 4 – Mine Safety Disclosures 

73

 

 

Item 5 – Other Information 

73

 

 

Item 6 – Exhibits 

74

 

 

Signatures 

75

 

 

 

 

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)

 

 

 

 

 

 

 

 

 

    

March 31,

    

December 31,

 

 

2020

 

2019

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

74,340

 

$

139,496

Restricted cash

 

 

56,804

 

 

54,813

Accounts receivable

 

 

24,437

 

 

25,448

Inventory

 

 

92,972

 

 

72,391

Prepaid expenses and other current assets

 

 

28,500

 

 

21,192

Total current assets

 

 

277,053

 

 

313,340

 

 

 

 

 

 

 

Restricted cash

 

 

176,070

 

 

175,191

Property, plant, and equipment, net of accumulated depreciation of $18,292 and $17,417, respectively

 

 

16,591

 

 

14,959

Leased property, net

 

 

252,802

 

 

244,740

Goodwill

 

 

8,673

 

 

8,842

Intangible assets, net

 

 

5,296

 

 

5,539

Other assets

 

 

12,059

 

 

8,573

Total assets

 

$

748,544

 

$

771,184

 

 

 

 

 

 

 

Liabilities, Redeemable Preferred Stock, and Stockholders’ Equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

35,503

 

$

40,376

Accrued expenses

 

 

14,273

 

 

14,213

Deferred revenue

 

 

11,557

 

 

11,691

Finance obligations

 

 

52,047

 

 

49,507

Current portion of long-term debt

 

 

27,819

 

 

26,461

Other current liabilities

 

 

10,423

 

 

8,543

Total current liabilities

 

 

151,622

 

 

150,791

Deferred revenue

 

 

22,912

 

 

23,369

Finance obligations

 

 

272,171

 

 

265,228

Convertible senior notes, net

 

 

112,878

 

 

110,246

Long-term debt

 

 

79,119

 

 

85,708

Other liabilities

 

 

13

 

 

13

Total liabilities

 

 

638,715

 

 

635,355

 

 

 

 

 

 

 

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 March 31, 2020 and 2019

 

 

709

 

 

709

Series E redeemable convertible preferred stock, $0.01 par value per share; Shares authorized: 35,000 at both March 31, 2020 and December 31, 2019; Issued and outstanding: zero at March 31, 2020 and 500 at December 31, 2019

 

 

 —

 

 

441

Stockholders’ equity:

 

 

 

 

 

 

Common stock, $0.01 par value per share; 750,000,000 shares authorized; Issued (including shares in treasury): 322,220,469 at March 31, 2020 and 318,637,560 at December 31, 2019

 

 

3,222

 

 

3,186

Additional paid-in capital

 

 

1,519,257

 

 

1,507,116

Accumulated other comprehensive income

 

 

1,164

 

 

1,400

Accumulated deficit

 

 

(1,383,299)

 

 

(1,345,807)

Less common stock in treasury: 15,261,007 at March 31, 2020 and 15,259,045 at December 31, 2019

 

 

(31,224)

 

 

(31,216)

Total stockholders’ equity

 

 

109,120

 

 

134,679

Total liabilities, redeemable preferred stock, and stockholders’ equity

 

$

748,544

 

$

771,184

 

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

 

 

March 31,

 

    

2020

    

2019

Net revenue:

 

 

 

 

 

 

Sales of fuel cell systems and related infrastructure

 

$

20,387

 

$

2,544

Services performed on fuel cell systems and related infrastructure

 

 

6,521

 

 

6,343

Power Purchase Agreements

 

 

6,496

 

 

6,110

Fuel delivered to customers

 

 

7,333

 

 

6,582

Other

 

 

76

 

 

 —

Net revenue

 

 

40,813

 

 

21,579

Cost of revenue:

 

 

 

 

 

 

Sales of fuel cell systems and related infrastructure

 

 

13,744

 

 

2,321

Services performed on fuel cell systems and related infrastructure

 

 

8,181

 

 

6,123

Power Purchase Agreements

 

 

14,243

 

 

8,998

Fuel delivered to customers

 

 

9,035

 

 

7,921

Other

 

 

81

 

 

 —

Total cost of revenue

 

 

45,284

 

 

25,363

 

 

 

 

 

 

 

Gross loss

 

 

(4,471)

 

 

(3,784)

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

Research and development

 

 

10,412

 

 

7,373

Selling, general and administrative

 

 

11,013

 

 

9,324

Total operating expenses

 

 

21,425

 

 

16,697

 

 

 

 

 

 

 

Operating loss

 

 

(25,896)

 

 

(20,481)

 

 

 

 

 

 

 

Interest and other expense, net

 

 

(11,583)

 

 

(8,345)

Change in fair value of common stock warrant liability

 

 

 —

 

 

(2,126)

 

 

 

 

 

 

 

Loss before income taxes

 

$

(37,479)

 

$

(30,952)

 

 

 

 

 

 

 

Income tax benefit

 

 

 —

 

 

 —

 

 

 

 

 

 

 

Net loss attributable to the Company

 

$

(37,479)

 

$

(30,952)

 

 

 

 

 

 

 

Preferred stock dividends declared and accretion of discount

 

 

(13)

 

 

(52)

Net loss attributable to common stockholders

 

$

(37,492)

 

$

(31,004)

Net loss per share:

 

 

 

 

 

 

Basic and diluted

 

$

(0.12)

 

$

(0.14)

Weighted average number of common stock outstanding

 

 

305,192,201

 

 

220,605,068

 

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 

 

March 31,

 

2020

    

2019

 

 

 

 

 

 

Net loss attributable to the Company

$

(37,479)

 

$

(30,952)

Other comprehensive loss - foreign currency translation adjustment

 

(236)

 

 

(210)

Comprehensive loss

$

(37,715)

 

$

(31,162)

 

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, 2019

 

318,637,560

 

$

3,186

 

$

1,507,116

 

$

1,400

 

15,259,045

 

$

(31,216)

 

$

(1,345,807)

 

$

134,679

Net loss attributable to the Company

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(37,479)

 

 

(37,479)

Other comprehensive loss

 

 —

 

 

 —

 

 

 —

 

 

(236)

 

 —

 

 

 —

 

 

 —

 

 

(236)

Stock-based compensation

 

156,416

 

 

 2

 

 

3,051

 

 

 —

 

1,962

 

 

(8)

 

 

 —

 

 

3,045

Stock dividend

 

3,857

 

 

 —

 

 

13

 

 

 —

 

 —

 

 

 —

 

 

(13)

 

 

 —

Stock option exercises

 

3,206,185

 

 

32

 

 

6,072

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

6,104

Provision for common stock warrants

 

 —

 

 

 —

 

 

2,566

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

2,566

Accretion of discount, preferred stock

 

 —

 

 

 —

 

 

(28)

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(28)

Conversion of preferred stock

 

216,451

 

 

 2

 

 

467

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

469

March 31, 2020

 

322,220,469

 

$

3,222

 

$

1,519,257

 

$

1,164

 

15,261,007

 

$

(31,224)

 

$

(1,383,299)

 

$

109,120

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(30,952)

 

 

(30,952)

Other comprehensive loss

 

 —

 

 

 —

 

 

 —

 

 

(210)

 

 —

 

 

 —

 

 

 —

 

 

(210)

Stock-based compensation

 

324,073

 

 

 3

 

 

2,494

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

2,497

Stock dividend

 

5,034

 

 

 —

 

 

13

 

 

 —

 

 —

 

 

 —

 

 

(13)

 

 

 —

Issuance of common stock, net

 

10,000,000

 

 

100

 

 

23,398

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

23,498

Stock option exercises

 

47,467

 

 

 —

 

 

81

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

81

Provision for common stock warrants

 

 —

 

 

 —

 

 

1,193

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

1,193

March 31, 2019

 

244,537,235

 

$

2,445

 

$

1,316,893

 

$

1,374

 

15,002,663

 

$

(30,637)

 

$

(1,291,255)

 

$

(1,180)

 

 

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)

 

 

 

 

 

 

 

 

 

Three months ended

 

 

March 31,

 

 

2020

    

2019

Operating Activities

 

 

 

 

 

 

Net loss attributable to the Company

 

$

(37,479)

 

$

(30,952)

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

 

 

 

 

 

 

Depreciation of property, plant and equipment, and leased property

 

 

2,850

 

 

2,776

Amortization of intangible assets

 

 

175

 

 

175

Stock-based compensation

 

 

3,045

 

 

2,497

Provision for bad debts and other assets

 

 

 —

 

 

307

Amortization of debt issuance costs and discount on convertible senior notes

 

 

2,716

 

 

2,469

Provision for common stock warrants

 

 

2,566

 

 

1,193

Change in fair value of common stock warrant liability

 

 

 —

 

 

2,126

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

 

 

 

 

 

 

Accounts receivable

 

 

1,011

 

 

4,978

Inventory

 

 

(20,581)

 

 

(17,564)

Prepaid expenses, and other assets

 

 

(10,794)

 

 

1,018

Accounts payable, accrued expenses, and other liabilities

 

 

(2,933)

 

 

(2,781)

Deferred revenue

 

 

(591)

 

 

(2,505)

Net cash used in operating activities

 

 

(60,015)

 

 

(36,263)

Investing Activities

 

 

 

 

 

 

Purchases of property, plant and equipment

 

 

(2,507)

 

 

(1,468)

Purchases for construction of leased property

 

 

(3,848)

 

 

(806)

Net cash used in investing activities

 

 

(6,355)

 

 

(2,274)

Financing Activities

 

 

 

 

 

 

Proceeds from issuance of preferred stock, net of transaction costs

 

 

 —

 

 

(3)

Proceeds from public offerings, net of transaction costs

 

 

 —

 

 

23,498

Proceeds from exercise of stock options

 

 

6,104

 

 

81

Principal payments on long-term debt

 

 

(5,315)

 

 

(17,153)

Proceeds from long-term debt

 

 

 —

 

 

84,761

Repayments of finance obligations

 

 

(5,730)

 

 

(53,534)

Increase in finance obligations

 

 

9,024

 

 

 —

Net cash provided by financing activities

 

 

4,083

 

 

37,650

Effect of exchange rate changes on cash

 

 

 1

 

 

(35)

Decrease in cash, cash equivalents and restricted cash

 

 

(62,286)

 

 

(922)

Cash, cash equivalents, and restricted cash beginning of period

 

 

369,500

 

 

110,153

Cash, cash equivalents, and restricted cash end of period

 

$

307,214

 

$

109,231

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

Cash paid for interest

 

$

5,155

 

$

4,858

 

 

 

 

 

 

 

Summary of non-cash investing and financing activity

 

 

 

 

 

 

Recognition of right of use asset

 

$

6,189

 

$

 —

Conversion of preferred stock to common stock

 

 

441

 

 

 —

 

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

7

 

 

 

Notes to Interim Condensed Consolidated Financial Statements 

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.

1.  Nature of Operations

 

Description of Business

 

As a leading provider of comprehensive hydrogen fuel cell turnkey solutions, Plug Power Inc., or the Company, is seeking to build a green hydrogen economy.  The Company is focused on hydrogen and fuel cell systems that are used to power electric motors primarily in the electric mobility and stationary power markets, given the ongoing paradigm shift in the power, energy, and transportation industries to address climate change, energy security, and meet sustainability goals.  Plug Power created the first commercially viable market for hydrogen fuel cell, or the HFC technology.  As a result, the Company has deployed approximately 32,000 fuel cell systems, and has become the largest buyer of liquid hydrogen, having built and operated a hydrogen network across North America. 

 

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 multiple sources. The majority of liquid hydrogen in the US is produced using the steam methane reforming process and utilizing by-product hydrogen from chlor alkali production. By-product hydrogen from a chlor alkali plant is considered to be low carbon hydrogen and in some cases, considered green hydrogen, depending on the source of electricity and geographic location. We source a significant amount of liquid hydrogen based on the chlor alkali process today. In addition, we are looking to increase the mix of our hydrogen usage to be green and zero carbon produced using renewables and electrolyzer with a goal to have over 50% of hydrogen used to be green by 2024. 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.

 

We provide and continue to develop commercially-viable hydrogen and fuel cell solutions .  for industrial mobility applications (including electric forklifts and electric industrial vehicles) at multi‑shift high volume manufacturing and high throughput distribution sites where we believe 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 have proven 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 cell systems, GenSure fuel cell systems, GenFuel hydrogen storage and dispensing products and ProGen fuel cell 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 vertically integrated “turn-key” solution combining either GenDrive or GenSure fuel cell power with GenFuel fuel and GenCare aftermarket service, offering complete simplicity to customers transitioning to fuel cell power; and

8

 

 

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 and their dealer networks. We manufacture our commercially-viable products in Latham, NY and Spokane, WA.

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 stockholders of $37.5 million and $31.0 million for the three months ended March 31, 2020, and 2019, respectively, and had an accumulated deficit of $1.4 billion at March 31, 2020.

 

We have historically funded our operations primarily through public and private offerings of equity and debt, as well as short-term borrowings, long-term debt and project financings. 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 and debt offerings, including our at-the-market offering, 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.

 

During the three months ended March 31, 2020, net cash used in operating activities was $60.0 million, consisting primarily of a net loss attributable to the Company of $37.5 million, and net outflows from fluctuations in working capital and other assets and liabilities of $33.9 million, offset by the impact of noncash charges of $11.4 million. The changes in working capital primarily were related to decreases in accounts receivable and accounts payable, accrued expenses, and other liabilities offset by increases in deferred revenue, inventory, prepaid expenses and, other current assets. As of March 31, 2020, we had cash and cash equivalents of $74.3 million and net working capital of $125.4 million. By comparison, at December 31, 2019, we had cash and cash equivalents of $139.5 million and net working capital of $162.5 million. 

 

Net cash used in investing activities for the three months ended March 31, 2020, totaled $5.1 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 lease directly to customers are included in net cash used in investing activities. Net cash provided by financing activities for the three months ended March 31, 2020 totaled $4.1 million and primarily resulted from proceeds from the exercise of stock options of $6.1 million, increase in

9

 

 

finance obligations of $9.0 million, offset by repayments of long-term debt of $5.3 million and finance obligations of $5.7 million.

Public and Private Offerings of Equity and Debt

 

Common Stock Issuance

 

On April 13, 2020, the Company entered into an At Market Issuance Sales Agreement, or the Sales Agreement, with B. Riley FBR, Inc., as sales agent, or FBR, pursuant to which the Company may offer and sell, from time to time through FBR, shares of Company common stock having an aggregate offering price of up to $75.0 million.  As of the date of this filing, the Company did not issue any shares of common stock pursuant to the Sales Agreement.

 

In December 2019, the Company issued and sold in a registered public offering an aggregate of 46 million shares of its common stock at a purchase price of $2.75 per share for net proceeds of approximately $120.4 million.

 

In March 2019, the Company issued and sold in a registered direct offering an aggregate of 10 million shares of its common stock at a purchase price of $2.35 per share for net proceeds of approximately $23.5 million.

 

Preferred Stock Issuance

 

In November 2018, the Company completed a private placement of an aggregate of 35,000 shares of the Company’s Series E Redeemable Convertible Preferred Stock, par value $0.01 per share, or the Series E Preferred Stock, for net proceeds of approximately $30.9 million. In the third quarter of 2019, the Company redeemed 4,038 shares of Series E Preferred Stock totaling $4.0 million. In the fourth quarter of 2019, the Company converted 30,962 shares of Series E Preferred Stock into 13.8 million shares of its common stock. In January 2020, the Company converted the remainder of the 500 shares of Series E Preferred Stock into 216,000 shares of its common stock. See Note 10, Redeemable Convertible Preferred Stock, for additional information.

 

Convertible Senior Notes

 

In September 2019, the Company issued a $40.0 million in aggregate principal amount of 7.5% convertible senior note due in 2023, which we refer to herein as the $40 million Convertible Senior Note. The Company’s total obligation, net of interest accretion, due to the holder is $48.0 million. The total net proceeds from this offering, after deducting costs of the issuance were $39.1 million. As of March 31, 2020, the outstanding balance of the note, net of related discount and issuance costs, was $40.4 million. See Note 8, Convertible Senior Notes, for more details.

 

In March 2018, the Company issued $100.0 million in aggregate principal amount of 5.5% convertible senior notes due in 2023, which we refer to herein as the $100 million Convertible Senior Notes. The total net proceeds from this offering, after deducting costs of the issuance, were approximately $95.9 million. Approximately $43.5 million of the proceeds were used for the cost of the Capped Call and the Common Stock Forward (as defined below), both of which are hedges related to the $100 million Convertible Senior Notes. As of March 31, 2020, the outstanding balance of the notes, net of related accretion and issuance costs, was $72.6 million. See Note 8, Convertible Senior Notes, for more details.

 

Operating and Finance Leases

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).  Transactions completed under the sale/leaseback transactions are generally accounted for as operating leases and therefore the sales of the fuel cell systems and hydrogen infrastructure are recognized as revenue.  In connection with certain sale/leaseback transactions, 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 the Company’s 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

10

 

 

financial institutions under these agreements at March 31, 2020 was $268.1 million, $234.6 million of which were secured with restricted cash, security deposits backing letters of credit, and pledged service escrows.

 

The Company has varied master lease agreements with Wells Fargo Equipment Finance, Inc., or Wells Fargo, to finance the Company’s commercial transactions with various customers. The Wells Fargo lease agreements were entered into during 2017, 2018, and 2019. No sale/leaseback transactions were entered with Wells Fargo during the three months ended March 31, 2020.  Pursuant to the lease agreements, the Company sells fuel cell systems and hydrogen infrastructure to Wells Fargo and then leases them back and operates them at Walmart sites.  The Company has a customer guarantee for a large portion of the transactions entered into in connection with such lease agreements. The Wells Fargo lease agreements required letters of credit for the unguaranteed portion totaling $55.5 million as of March 31, 2020. The total remaining lease liabilities owed to Wells Fargo were $108.0 million at March 31, 2020.

 

Over recent years, including in 2019, the Company has entered into master lease agreements with multiple institutions such as Key Equipment Finance (KeyBank), SunTrust Equipment Finance & Lease Corp. (now known as Truist), and First American Bancorp, Inc. (First American). In the first quarter of 2020, the Company entered into  additional lease agreements with KeyBank and First American. Similar to the Wells Fargo lease agreements, the primary purpose of these agreements is to finance commercial transactions with varied customers. Most of the transactions with these financial institutions required cash collateral for the unguaranteed portions totaling $179.1 million as of March 31, 2020. Similar to the Wells Fargo lease agreements, in many cases the Company has a customer guarantee for a large portion of the transactions. The total remaining lease liabilities owed to these financial institutions were $160.1 million at March 31, 2020.

 

Long-Term Debt

 

In March 2019, the Company entered into a loan and security agreement (Loan Agreement) with Generate Lending, LLC (Generate Capital) pursuant to which the Company borrowed $85.0 million (Term Loan Facility). 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, and terminate approximately $50.3 million of certain equipment leases with Generate Plug Power SLB II, LLC as well as repurchase the associated leased equipment. In April 2019 and November 2019, the Company borrowed an additional $15.0 million and $20.0 million, respectively, under the Term Loan Facility with Generate Capital at 12% interest to fund working capital for ongoing deployments and other general corporate purposes.  On March 31, 2020, the outstanding balance was $107.5 million. The principal and interest payments are paid primarily by restricted cash. See Note 7, Long-Term Debt for additional information.

 

On May 6, 2020, the Company and Generate amended the Loan Agreement to, among other things, (i) provide an incremental term loan facility in the amount of $50.0 million, which has been fully funded, (ii) provide for additional, incremental term loans in an aggregate amount not to exceed $50.0 million, which are available to the Company in Generate Capital’s sole discretion, (iii) reduce the interest rate on all loans to 9.50% from 12.00% per annum, and (iv) extend the maturity date to October 31, 2025 from October 6, 2022. Based on the current amortization schedule, the outstanding balance of $157.5 million under the Term Loan Facility will be fully paid by March 31, 2024.

 

2.  Summary of Significant Accounting Policies

 

Principles of Consolidation

 

The 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

11

 

 

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, 2019.

 

The information presented in the accompanying unaudited interim condensed consolidated balance sheets as of December 31, 2019 has been derived from the Company’s December 31, 2019 audited consolidated financial statements.

 

 

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 Accounting Standards Codification (ASC) Topic 842, Leases (ASC Topic 842), as amended. 

 

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) the lease term and (3) the 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.

 

·

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.

 

12

 

 

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 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 sheets. 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 sheets.  

 

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 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.

 

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 a product or service to a customer.

 

The Company accounts for each distinct performance obligation within its arrangements as a separate 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 typically 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.

 

13

 

 

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 presents the provision for common stock warrants within each revenue-related line item on the unaudited interim 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. See Note 11, Warrant Transaction Agreements, for more details.

 

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. The determination of standalone selling prices of the Company’s performance obligations requires significant judgment, including continual assessment of pricing approaches and available observable evidence in the market.  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 and spare parts is recognized as revenue at a point in time which usually occurs at shipment (and occasionally upon delivery). Revenue on hydrogen infrastructure installations is generally recognized at the point at which transfer of control passes to the customer, which usually occurs upon customer acceptance of the hydrogen infrastructure. In certain instances, control on hydrogen infrastructure installations transfers to the customer over time, and the related revenue is recognized over time as the performance obligation is satisfied. The Company uses an input method to determine the amount of revenue to recognize during each reporting period based on the Company’s efforts to satisfy the performance obligation.  

 

(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 in exchange for an up-front payment. Services include monitoring, technical support, maintenance and services that provide for 97% to 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 unaudited interim 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. 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

14

 

 

 

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 finance 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 classified as leased property, net in the unaudited interim condensed consolidated balance sheets.  Costs to service the leased property, depreciation of the leased property, and other related costs are considered cost of PPA revenue in the unaudited interim condensed consolidated statements of operations. Interest cost associated with finance leases is presented within interest and other expense, net in the unaudited interim condensed consolidated statements of operations.

 

The Company also has sale/leaseback transactions with financial institutions, which were required to be accounted for as operating leases. The Company has lease obligations associated with these sale/leaseback agreements with financial institutions paid over the term of the agreements.  At inception of these sale/lease transactions, the Company records a right of use asset value which is amortized over the term of the lease and recognized in conjunction with the interest expense on the obligation collectively as rental expense.  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 unaudited interim condensed consolidated statements of operations.

 

The Company includes all lease and non-lease components (i.e., maintenance services) related to PPAs within PPA revenue.

 

To recognize revenue, the Company, as lessee, is required to determine whether each sale/leaseback arrangement meets operating lease criteria. As part of the assessment of these criteria, the Company estimates certain key inputs to the associated calculations such as: 1) discount rate it uses to discount the unpaid lease payments to present value and 2) useful life of the underlying asset(s):

 

·

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 its leases 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 to estimate the discount rate for each lease.

 

·

In order for a lease to be classified as an operating lease, the lease term cannot exceed 75% (major part) of the estimated useful life of the leased asset.  The average estimated useful life of the fuel cells is 10 years, and the average estimated useful life of the hydrogen infrastructure is 20 years.  These estimated useful lives are compared to the term of each lease to ensure that 75% of the estimated useful life of the assets is not exceeded which allows the Company to meet the operating lease criteria. 

 

(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. Fuel is delivered to customers under stand-ready arrangement, with no long-term commitment.

15

 

 

 

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  unaudited interim 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.

 

Capitalized commission fees are amortized on a straight-line basis over the period of time 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

 

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. At March 31, 2020, cash equivalents consisted of money market accounts. The Company’s cash and cash equivalents are deposited with financial institutions located in the United States and may at times exceed insured limits.

 

Equity Instruments - Common Stock Warrants

 

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  unaudited interim condensed consolidated balance sheets.

 

Common stock warrants accounted for as equity instruments represent the warrants issued to Amazon and Walmart as discussed in Note 11, Warrant Transaction Agreements. The Company adopted FASB Accounting Standards Update 2019-08, Compensation – Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic 606) (ASU 2019-08), which requires entities to measure and classify share-based payment awards granted to a customer by applying the guidance under Topic 718, as of January 1, 2019.  As a result, the amount recorded as a reduction of revenue is measured based on the grant-date fair value of the warrants. Except for the third tranche, the fair value of all warrants was measured at January 1, 2019, the adoption date of ASU 2019-08. For the third tranche, the fair value will be determined when the second tranche vests.

 

In order to calculate warrant charges, the Company uses the Black-Scholes pricing model, which requires key inputs including volatility and risk-free interest rate and certain unobservable inputs for which there is little or no market data, requiring the Company to develop its own assumptions. The Company estimates the fair value of unvested warrant shares, considered to be probable of vesting. Based on this estimated fair value, the Company determines warrant charges, which are recorded as a reduction of revenue in the unaudited interim condensed consolidated statement of operations.

 

Use of Estimates

 

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

16

 

 

Reclassifications

 

Reclassifications are made, whenever necessary, to prior period financial statements to conform to the current period presentation.

 

Recent Accounting Pronouncements 

 

Recently Adopted Accounting Pronouncements

 

In June 2016, Accounting Standards Update (ASU) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, was issued. Also, 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). 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. The Company adopted these standards effective January 1, 2020 and determined the impact of the standards to be immaterial to 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). The Company adopted this standard effective January 1, 2020 and determined the impact of this standard to be immaterial to 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. The Company adopted this standard effective January 1, 2020.

 

In August 2016, Accounting Standards Update (ASU) 2016-15, Statement of Cash Flows (Topic 230)s: Classification of Certain Cash Receipts and Cash Payments, 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. The Company adopted this standard in 2019 and determined the impact of this standard to be immaterial to the consolidated financial statements.

 

Recently Issued and Not Yet Adopted Accounting Pronouncements

 

In March 2020, Accounting Standards Update (ASU) 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, was issued to provide temporary optional expedients and exceptions to the GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. This update is effective starting March 12, 2020 and the Company may elect to apply the amendments prospectively through December 31, 2022. The Company is evaluating the adoption method as well as the impact this update will have on the consolidated financial statements.

 

In March 2020, Accounting Standards Update (ASU) 2020-03, Codification Improvements to Financial Instruments, was issued to make various codification improvements to financial instruments to make the standards easier to understand and apply by eliminating inconsistencies and providing clarifications. This update will be effective at various

17

 

 

dates as described in this ASU. The Company is evaluating the adoption method as well as the impact this update will have on the consolidated financial statements.

 

 

 

 

3.  Earnings Per Share

 

Basic earnings per common stock are computed by dividing net loss attributable to common stockholders by the weighted average number of common stock 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 stock 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 stock 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 shares common stock is summarized as follows:

 

 

 

 

 

 

 

 

At March 31,

 

    

2020

    

2019

Stock options outstanding (1)

 

19,803,872

 

21,109,998

Restricted stock outstanding  (2)

 

4,600,227

 

2,372,347

Common stock warrants (3)

 

110,573,392

 

115,824,142

Preferred stock (4)

 

2,782,075

 

17,933,591

Convertible Senior Notes (5)

 

59,133,896

 

43,630,020

Number of dilutive potential shares of common stock

 

196,893,462

 

200,870,098

 

(1)

During the three months ended March 31, 2020 and 2019, the Company granted zero and 25,000 stock options, respectively.

 

(2)

During the three months ended March 31, 2020 and 2019, the Company granted zero and 25,000 shares of restricted stock, respectively.

 

(3)

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 with Amazon, subject to certain vesting events, as described in Note 11, Warrant Transaction Agreements.  Of these warrants issued, none have been exercised as of March 31, 2020.

 

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 with Walmart, subject to certain vesting events, as described in Note 11, Warrant Transaction Agreements. Of these warrants issued, none have been exercised as of March 31, 2020.

 

(4)

The preferred stock amount represents the dilutive potential on the shares of common stock as a result of the conversion of the Series C Redeemable Convertible Preferred Stock (Series C Preferred Stock) and Series E Redeemable Preferred Stock (Series E Preferred S)tock, based on the conversion price of each preferred stock as of March 31 2020, and 2019, respectively. Of the 10,431 shares of Series C Preferred Stock issued on May 16, 2013, 7,811 shares had been converted to common stock as of March 31, 2020, with the remainder still outstanding.  On November 1, 2018, the Company issued 35,000 shares of Series E redeemable convertible preferred stock (Series E Preferred Stock). As of December 31, 2019, 30,462 shares of the Series E Preferred Stock had been converted to common stock and 4,038 shares were redeemed for cash. The remaining 500 shares of Series E Preferred Stock were converted to common stock in January 2020.

 

18

 

 

(5)

In March 2018, the Company issued $100.0 million in aggregate principal amount of 5.5% Convertible Senior Notes. In September 2019, the Company issued a $40.0 million in aggregate principal amount of 7.5% Convertible Senior Note. See Note 8, Convertible Senior Notes.

 

 

 

4.  Inventory

 

             Inventory as of March 31, 2020 and December 31, 2019 consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

    

March 31,

    

December 31,

 

 

 

2020

 

2019

 

Raw materials and supplies - production locations

 

$

59,086

 

$

48,011

 

Raw materials and supplies - customer locations

 

 

10,423

 

 

9,241

 

Work-in-process

 

 

20,234

 

 

12,529

 

Finished goods

 

 

3,229

 

 

2,610

 

Inventory

 

$

92,972

 

$

72,391

 

 

 

5. Leased Property

 

Leased property at March 31, 2020 and December 31, 2019 consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

    

March 31,

    

December 31,

 

 

 

2020

 

2019

 

Right of use assets - operating

 

$

209,924

 

$

198,068

 

Right of use assets - finance

 

 

41,475

 

 

41,475

 

Capitalized costs of lessor assets

 

 

44,107

 

 

41,465

 

Less: accumulated depreciation

 

 

(42,704)

 

 

(36,268)

 

Leased property, net

 

$

252,802

 

$

244,740

 

 

 

6. Intangible Assets

 

The gross carrying amount and accumulated amortization of the Company’s acquired identifiable intangible assets as of March 31, 2020 were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted Average

 

Gross Carrying

 

Accumulated

 

 

 

 

 

 

Amortization Period

 

Amount

 

Amortization

 

Total

 

Acquired technology

 

10  years 

 

$

8,163

 

$

(2,971)

 

$

5,192

 

Customer relationships

 

10  years 

 

 

260

 

 

(156)

 

 

104

 

Trademark

 

5  years 

 

 

60

 

 

(60)

 

 

 —

 

 

 

 

 

$

8,483

 

$

(3,187)

 

$

5,296

 

 

The gross carrying amount and accumulated amortization of the Company’s acquired identifiable intangible assets as of December 31, 2019 were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted Average

 

Gross Carrying

 

Accumulated

 

 

 

 

 

 

Amortization Period

 

Amount

 

Amortization

 

Total

 

Acquired technology

 

10  years 

 

$

8,244

 

$

(2,815)

 

$

5,429

 

Customer relationships

 

10  years 

 

 

260

 

 

(150)

 

 

110

 

Trademark

 

5  years 

 

 

60

 

 

(60)

 

 

 0

 

 

 

 

 

$

8,564

 

$

(3,025)

 

$

5,539

 

 

The change in the gross carrying amount of the acquired technology from December 31, 2019 to March 31, 2020 is due to changes in foreign currency translation.

 

In the second quarter of 2019, the Company acquired intellectual property from EnergyOr for $1.5 million. In addition, the Company agreed to pay the sellers a royalty based on future sales of relevant applications, not to exceed $3.0 million, by May 22, 2025. These royalties are added to the intangible asset balance, as incurred.

 

19

 

 

As part of the agreement to acquire the intellectual property from AFC, the Company shall pay AFC milestone payments not to exceed $2.9 million in total, if certain milestones associated with the production of components related to the acquired technology are met before April 2021. As of March 31, 2020, the Company paid $0.4 million and accrued $0.5 million in relation to the aforementioned milestones.

 

Amortization expense for acquired identifiable intangible assets was $0.2 million for the three months ended March 31, 2020 and 2019. Estimated amortization expense for subsequent years was as follows (in thousands):

 

 

 

 

 

Remainder of 2020

    

$

595

2021

 

 

793

2022

 

 

793

2023

 

 

793

2024 and thereafter

 

 

2,322

Total

 

$

5,296

 

 

7.  Long-Term Debt

 

In March 2019, the Company, and its subsidiaries Emerging Power Inc. and Emergent Power Inc., entered into a loan and security agreement, as amended (the Loan Agreement), with Generate Lending, LLC (Generate Capital), providing for a secured term loan facility in the amount of $100.0 million (the Term Loan Facility). The Company borrowed $85.0 million under the Loan Agreement on the date of closing and borrowed an additional $15.0 million in April 2019.  A portion of the initial proceeds of the loan was used to pay in full the Company’s long-term debt with NY Green Bank, a Division of the New York State Energy Research & Development Authority, including accrued interest of $17.6 million (the Green Bank Loan), and terminate approximately $50.3 million of certain equipment leases with Generate Plug Power SLB II, LLC and repurchase the associated leased equipment. In connection with this transaction, the Company recognized a loss on extinguishment of debt of approximately $0.5 million during the three months ended March 31, 2019. This loss was recorded in interest and other expenses, net in the Company’s unaudited interim condensed consolidated statement of operations. Additionally, $1.7 million was paid to an escrow account related to additional fees due in connection with  the Green Bank Loan if the Company does not meet certain New York State employment and fuel cell deployment targets by March 2021. Amount escrowed is recorded in long-term other assets on the Company’s unaudited interim condensed consolidated balance sheets as of March 31, 2020. The Company presently expects to meet the targets as required under the arrangement. Additionally, in November 2019, the Company borrowed an incremental $20.0 million at 12% interest to fund working capital for ongoing deployments and other general corporate purposes. On March 31, 2020, the outstanding balance under the Term Loan Facility was $107.5 million with a 12% interest rate.

 

On May 6, 2020, the Company and Generate amended the Loan Agreement to, among other things, (i) provide an incremental term loan facility in the amount of $50.0 million, which has been fully funded, (ii) provide for additional, incremental term loans in an aggregate amount not to exceed $50.0 million, which are available to the Company in Generate Capital’s sole discretion, (iii) reduce the interest rate on all loans to 9.50% from 12.00% per annum, and (iv) extend the maturity date to October 31, 2025 from October 6, 2022. 

 

The Loan Agreement includes covenants, limitations, and events of default customary for similar facilities. Interest and a portion of the principal amount is payable on a quarterly basis.  Principal payments will be funded in part by releases of restricted cash, as described in Note 15, Commitments and Contingencies.  Based on the current amortization schedule, the outstanding balance of $157.5 million under the Term Loan Facility will be fully paid by March 31, 2024.  If addition term loans are funded, the entire then-outstanding principal balance of the Term Loan Facility, together with all accrued and unpaid interest, will be due and payable on the maturity date of October 31, 2025. 

 

All obligations under the Loan Agreement are unconditionally guaranteed by Emerging Power Inc. and Emergent Power Inc.  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.

 

20

 

 

 The Loan Agreement 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 and (iii) compliance with a collateral coverage covenant. The Loan Agreement 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. As of March 31, 2020, the Company was in compliance with all the covenants.

 

The Loan Agreement 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 Generate Capital has the right to cause Proton Services Inc., a wholly owned subsidiary of the Company, to replace the Company in performing the maintenance services under such customer agreement.

 

As of March 31, 2020, the Term Loan Facility requires the principal balance at the end of each of the following years amortization may not exceed the following (in thousands):

 

 

 

 

December 31, 2020

$

86,159

December 31, 2021

 

59,373

 

As of May 6, 2020, the Term Loan Facility, including the incremental borrowing subsequent to March 31, 2020, as described above, requires the principal balance at the end of each of the following years amortization may not exceed the following (in thousands):

 

 

 

 

December 31, 2020

$

125,687

December 31, 2021

 

89,301

December 31, 2022

 

51,478

December 31, 2023

 

16,863

 

 

 

8. Convertible Senior Notes

$40 Million Convertible Senior Note

 

In September 2019, the Company issued a $40.0 million aggregate principal amount of 7.5%  Convertible Senior Note due on January 5, 2023 in exchange for net proceeds of $39.1 million, in a private placement to an accredited investor pursuant to Rule 144A under the Securities Act of 1933, as amended, or the Securities Act. There are no required principal payments prior to maturity of the note. Upon maturity of the note, the Company is required to repay 120% of $40.0 million, or $48.0 million. The note bears interest at 7.5% per annum, payable quarterly in arrears on January 5, April 5, July 5 and October 5 of each year beginning on October 5, 2019 and will mature on January 5, 2023 unless earlier converted or repurchased in accordance with its terms. The note is unsecured and does not contain any financial covenants or any restrictions on the payment of dividends, or the issuance or repurchase of common stock by the Company.

The note has an initial conversion rate of 387.5969, which is subject to adjustment in certain events. The initial conversion rate is equivalent to an initial conversion price of approximately $2.58 per share of common stock.  The holder of the note may convert at its option at any time until the close of business on the second scheduled trading day immediately prior to the maturity date for shares of the Company’s common stock, subject to certain limitations. In addition, the note will be automatically converted if (1) the daily volume-weighted average price per share of common stock exceeds 175% of the conversion price (as described above) on each of the 20 consecutive VWAP trading days (as defined in the note) beginning after the issue date of the note and (2) certain equity conditions (as defined in the note) are satisfied. Only if both criteria are met is the note automatically converted. Upon either the voluntary or automatic conversion of the note, the Company will deliver shares of common stock based on (1) the then-effective conversion rate and (2) the original principal amount of $40.0 million and not the maturity principal amount of $48.0 million. The note does not allow cash settlement (entirely or partially) upon conversion. As such, the Company uses the if-converted method for calculating any potential dilutive effect of the conversion option on diluted earnings per share.

21

 

 

The Company concluded the conversion features did not require bifurcation. Specifically, while the Company determined that (i) the conversion features were not clearly and closely related to the host contracts, (ii) the note (i.e., hybrid instrument) is not remeasured at fair value under otherwise applicable GAAP with changes in fair value reported in earnings as they occur and (iii) the conversion features, if freestanding, would meet the definition of a derivative, the Company concluded such conversion features meet the equity scope exception, and therefore, the conversion features are not required to be bifurcated from the note.

If the Company undergoes a fundamental change prior to the maturity date, subject to certain limitations, the holder may require the Company to repurchase for cash all or a portion of the note at a cash repurchase price equal to any accrued and unpaid interest on the note (or portion thereof), plus the greater of (1) 115% of the maturity principal amount of $48.0 million (or portion thereof) and (2) 110% of the product of (i) the conversion rate in effect as of the trading day immediately preceding the date of such fundamental change; (ii) the principal amount of the $40.0 million note to be repurchased divided by $1,000; and (iii) the average of the daily volume-weighted average price per share of the Company’s common stock over the five consecutive VWAP trading days immediately before the effective date of such fundamental change.

In addition, with the consent of the holder of the  note, subject to certain limitations, the Company may redeem all or any portion of the note, at the Company’s option, at a cash redemption price equal to any accrued and unpaid interest on the note (or portion thereof), plus the greater of (1) 105% of the maturity principal amount of $48.0 million (or portion thereof); and (2) 115% of the product of (i) the conversion rate in effect as of the trading day immediately preceding the related redemption date; (ii) the principal amount of the $40.0 million note to be redeemed divided by $1,000; and (iii) the arithmetic average of the daily volume-weighted average price per share of common stock over the five consecutive VWAP trading days immediately before the related redemption date.

 

While the Company concluded the fundamental change redemption option represents an embedded derivative, the Company concluded the value of the embedded derivative to be immaterial given the likelihood of the occurrence of a fundamental change was deemed to be remote. As related to the call option, the Company concluded the call option was clearly and closely related to the host contract, and therefore, did not meet the definition of an embedded derivative.

 

The Company concluded the total debt discount at issuance of the note equaled approximately $8.0 million. This debt discount was attributed to the fact that upon maturity, the Company is required to repay 120% of $40.0 million, or $48.0 million. In addition, the related debt issuance costs were $1.0 million. The debt discount was recorded as debt issuance cost (presented as contra debt in the unaudited interim condensed consolidated balance sheets) and is being amortized to interest expense over the term of the note using the effective interest rate method.

 

The note consisted of the following (in thousands):

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

2020

 

2019

Principal amounts:

 

 

 

 

 

  Principal at maturity

$

48,000

 

$

48,000

  Unamortized debt discount

 

(6,800)

 

 

(7,400)

  Unamortized debt issuance costs

 

(891)

 

 

(969)

  Net carrying amount

$

40,309

 

$

39,631

 

Based on the closing price of the Company’s common stock of $3.54 on March 31, 2020, the if-converted value of the notes was greater than the principal amount. The estimated fair value of the note at March 31, 2020 and December 31, 2019 was approximately $57.3 million and $53.5 million, respectively. The Company utilized a Monte Carlo simulation model to estimate the fair value of the convertible debt. The simulation model is designed to capture the potential settlement features of the convertible debt, in conjunction with simulated changes in the Company's stock price over the term of the note, incorporating a volatility assumption of 70%. This is considered a Level 3 fair value measurement.

22

 

 

$100 Million 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.  There are no required principal payments prior to maturity of the notes.  

The total net proceeds from the  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

 

The notes bear interest at 5.5%, payable semi-annually in cash on March 15 and September 15 of each year.  The notes will mature on March 15, 2023, unless earlier converted or repurchased in accordance with their terms. The 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 principal amount of the notes is convertible into 436.3002 shares of the Company’s common stock, which is equivalent to a conversion price of approximately $2.29 per share, subject to adjustment upon the occurrence of specified events.  Holders of these notes may convert their 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 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 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 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  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 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.

23

 

 

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 notes in connection with certain corporate events that constitute a “make-whole fundamental change” per the indenture governing the 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 notes at a repurchase price equal to 100% of the principal amount of the repurchased notes, plus accrued and unpaid interest.

The Company may not redeem the notes prior to March 20, 2021.  The Company may redeem for cash all or any portion of the 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 notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.

 

In accounting for the issuance of the notes, the Company separated the 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 notes. The difference between the principal amount of the notes and the liability component (the debt discount) is amortized to interest expense using the effective interest method over the term of the notes. The effective interest rate is approximately 16.0%. The equity component of the notes is included in additional paid-in capital in the unaudited interim condensed consolidated balance sheets 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 notes of approximately $4.1 million, consisting of initial purchasers' discount of approximately $3.3 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 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 unaudited interim condensed consolidated balance sheets) and are being amortized to interest expense over the term of the 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 notes consisted of the following (in thousands):

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

2020

 

2019

Principal amounts:

 

 

 

 

 

  Principal

$

100,000

 

$

100,000

  Unamortized debt discount (1)

 

(25,985)

 

 

(27,818)

  Unamortized debt issuance costs (1)

 

(1,446)

 

 

(1,567)

  Net carrying amount

$

72,569

 

$

70,615

  Carrying amount of the equity component (2)

$

37,702

 

$

37,702

 

1)

Included in the unaudited interim condensed consolidated balance sheets within the $100.0 million Convertible Senior Notes, net and amortized over the remaining life of the notes using the effective interest rate method.

 

2)

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

 

Based on the closing price of the Company’s common stock of $3.54 on March 31, 2020, the if-converted value of the notes was greater than the principal amount. The estimated fair value of the notes at March 31, 2020 and December

24

 

 

31, 2019 was approximately $147.4 million and $135.3 million, respectively. The Company utilized a Monte Carlo simulation model to estimate the fair value of the convertible debt. The simulation model is designed to capture the potential settlement features of the convertible debt, in conjunction with simulated changes in the Company's stock price over the term of the notes, incorporating a volatility assumption of 70%. This is considered a Level 3 fair value measurement.

 

Capped Call

 

 In conjunction with the issuance of the $100 million 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 unaudited interim condensed consolidated balance sheets.  

The Capped Call is generally expected to reduce or offset the potential dilution to the Company’s common stock upon any conversion of the $100 million Convertible Senior Notes and/or offset any cash payments the Company is required to make in excess of the principal amount of the converted 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 is initially $3.82 per share, which represents a premium of 100% over the last then-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.

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 $100 million Convertible Senior Notes.

Common Stock Forward

 

In connection with the sale of the $100 million Convertible Senior Notes, the Company also entered into a forward stock purchase transaction, or the Com