Weichai Transactions

In March 2017, the Company and Weichai executed the SPA in which the Company issued stock and a warrant to Weichai for aggregate proceeds of $60.0 million (the “Weichai Transaction”), comprised of:


•	2,728,752 shares of Common Stock;


•	2,385,624 shares of Series B Redeemable Convertible Preferred Stock (“Series B Convertible Preferred Stock”) convertible on a two-for-one basis into 4,771,248 shares of Common Stock; and


•	The Weichai Warrant as discussed further below.

The Company used proceeds from the sale of the above securities pursuant to the SPA and borrowings under the Wells Fargo Credit Agreement to pay off the outstanding TPG Term Loan (the “TPG Term Loan”) with TPG Specialty Lending, Inc. (“TPG”), discussed in Note 6. Debt.

In August 2017, Gary S. Winemaster, former Chairman of the Board, Chief Executive Officer and President, and nonexecutive Chief Strategy Officer, separately sold 200,000 additional shares of Common Stock to Weichai.

Series B Convertible Preferred Stock

The Series B Convertible Preferred Stock was automatically convertible into Common Stock upon stockholder approval, as defined in the SPA. Commencing on September 30, 2017, Weichai was entitled to cumulative dividends at a stated rate of 10% per share, payable quarterly upon declaration by the Board, or as a liquidation preference for the Series B Convertible Preferred Stock. Any unpaid and deferred cash dividends would be deemed canceled and null upon conversion of the Series B Convertible Preferred Stock.

In the event of liquidation, dissolution or winding-up of the Company, the holders of the Series B Convertible Preferred Stock would have been entitled to receive out of the assets of the Company available for distribution to stockholders of the Company, before any distributions on the Common Stock or any other junior stock, an amount equal to the greater of the liquidation preference ($16.00 per share), plus accrued and unpaid dividends, or the amount that would otherwise be payable on an as-converted basis assuming the conversion of the Series B Convertible Preferred Stock into Common Stock.

The Series B Convertible Preferred Stock also included a $23.1 million contingent beneficial conversion feature (“BCF”) that was considered to be “in the money” and “contingently beneficial” to Weichai, the warrant holder, upon the actual exercise of the Weichai Warrant, at Weichai’s option at the commitment date, March 31, 2017, as the Company’s stock price was greater than the conversion price at the commitment date. The Series B Convertible Preferred Stock and the Common Stock were assigned value based on their relative fair values after reducing the net proceeds from the Weichai Transaction by the fair value of the Weichai Warrant, as required by accounting guidance. The resulting discount on the Series B Convertible Preferred Stock was accreted, with the remaining unaccreted amount included in the deemed dividend discussed below under “Deemed Dividend and Beneficial Conversion Feature.”

In November 2017, the Company entered into a Securities Exchange Agreement (the “Exchange Agreement”) with Weichai that resulted in conversion of the 2,385,624 shares of Series B Convertible Preferred Stock into 4,771,248 shares of Common Stock.

Weichai Warrant

The Weichai Warrant was exercisable for a ninety (90) day period from September 30, 2018 to December 31, 2018 at a price per share of Common Stock equal to 85% of the Volume-Weighted Average Price (“VWAP”) during the 20-day trading period immediately preceding the warrant exercise date or at a price per share of Common Stock equal to 50% of such preceding VWAP if the Company was delisted from NASDAQ as of September 30, 2018. The Weichai Warrant exercise price was subject to further reduction pursuant to a formula that provided for such adjustment in case the Company’s 2017 adjusted earnings before interest expense, income taxes, depreciation and amortization (“EBITDA”) (as defined within the SPA) was less than $22.0 million, or its net book value per share as of December 31, 2016 was less than $8.00, provided that the aggregate amount of such downward adjustments would not exceed $15.0 million.

The Exchange Agreement executed on November 30, 2017 amended the Weichai Warrant (the “Restated Warrant”) in addition to converting the Series B Convertible Preferred Stock to Common Stock as noted above. Under the Exchange Agreement, the Restated Warrant (i) was exercisable for Common Stock without obtaining stockholder approval, (ii) was no longer exercisable for Series B Convertible Preferred Stock and (iii) permitted the Company to accelerate the exercise of the Restated Warrant prior to September 30, 2018, to the extent that the Company required additional financing for any reason.

In September 2018, the Weichai Warrant was amended under the terms of a second amended and restated warrant (“Amended and Restated Warrant”) to defer its exercise date to a 90-day period commencing April 1, 2019, to adjust the exercise price to a price per share of the Company’s Common Stock equal to the lesser of (i) 50% of the VWAP during the 20 consecutive trading day period preceding October 1, 2018 and (ii) 50% of the VWAP during the 20 consecutive trading day period preceding the date of exercise, subject to an adjustment that could reduce the exercise price by up to $15.0 million. In the event that the adjustment exceeded the exercise price, the excess would be due to the warrant holder.

On April 23, 2019, Weichai exercised the Weichai Warrant resulting in the Company issuing 4,049,759 shares of the Company’s Common Stock and Weichai becoming the owner of 51.5% of the outstanding shares of the Company’s Common Stock. The exercise proceeds for the warrants of $1.6 million were based on 50% of the VWAP during the 20 consecutive trading day period preceding April 23, 2019 and $15.0 million reduction in the exercise price described above. The Company recorded expense of $1.4 million related to the Weichai Warrant during 2019 including the impact of the exercise.

Valuation and Accounting for Issuance and Conversion to Common Stock, Series B Convertible Preferred Stock (and Related Beneficial Conversion Feature) and Weichai Warrant

Detachable warrants issued in a bundled transaction with debt and equity offerings should be accounted for separately. If the warrants are classified as a liability recorded at fair value, then the total proceeds from the transaction are first allocated to the warrants based on their fair value, and residual proceeds are allocated to the remaining instruments based on their relative fair value.

The Weichai Warrant is a freestanding derivative financial instrument that is not indexed solely to the Company’s Common Stock due to the Weichai Warrant’s exercise terms. Therefore, the Weichai Warrant is presented at fair value in the Company’s Consolidated Balance Sheets in Warrant liability for $35.1 million and $24.7 million at December 31, 2018 and 2017, respectively. Changes in fair value of a loss of $10.4 million and $4.0 million, respectively, are reported in Loss from change in fair value of warrants in the Company’s 2018 and 2017 Consolidated Statements of Operations. See Note 7. Fair Value of Financial Instruments for additional details and assumptions used in valuing the Weichai Warrant, as well as the 2018 and 2017 fair value adjustments.

The carrying values of the Common Stock and the Series B Convertible Preferred Stock were determined based on their relative fair values to the $39.3 million in aggregate remaining proceeds: $14.3 million was allocated to Common Stock and $25.0 million was allocated to the Series B Convertible Preferred Stock.

Deemed Dividend and Beneficial Conversion Feature

The difference between the stated proceeds related to the Common Stock and the Series B Convertible Preferred Stock of $38.7 million, pursuant to the SPA, and the net proceeds allocated to the Series B Convertible Preferred Stock based on relative fair value of $24.6 million (net of $0.4 million in transaction costs), is a discount of $14.1 million related to the Series B Convertible Preferred Stock, which was fully accreted onto the Consolidated Balance Sheet as part of the deemed dividend of $37.9 million, which was recorded in additional paid-in capital, as the Company had no retained earnings from the issuance date on March 31, 2017 until November 30, 2017, the date the Series B Convertible Preferred Stock was converted into Common Stock. The remaining portion of the deemed dividend was comprised of the $23.1 million BCF, which was recorded on the conversion date.

Additionally, the Company recorded the exercise of the conversion option by reclassifying the $62.5 million carrying value of the Series B Convertible Preferred Stock to Common Stock, par value of $0.001 per share, with the remainder to Additional paid-in capital.

Deemed dividends on Series B Convertible Preferred Stock were considered for calculations of loss per common share on in 2017. See Note 13. Loss Per Share.

The Series B Convertible Preferred Stock also included a nondetachable contingent BCF that was considered to be “in the money” and “contingently beneficial” to Weichai, the warrant holder, upon the actual exercise of the warrant, at Weichai’s option at the commitment date, March 31, 2017, as the Company’s stock price was greater than the conversion price at the commitment date.

The contingent BCF was recognized when the Series B Convertible Preferred Stock was converted into Common Stock. The carrying value for the contingent BCF was determined to be $23.1 million, based on conversion of 4,771,248 shares and a per-share value of $4.85. The contingent BCF was included in Deemed dividend on Series B Convertible Preferred Stock in the Company's Statement of Operations and Statement of Stockholders' Equity when converted in November 2017.

Weichai Collaboration Arrangement

The Company and Weichai executed a strategic collaboration agreement (the “Collaboration Agreement”) on March 20, 2017, in order to achieve their respective strategic objectives and enhance the strategic cooperation alliance to share experiences, expertise and resources. Among other things, the collaboration arrangement established a joint steering committee, permitted Weichai to second a limited number of certain technical, marketing, sales, procurement and finance personnel to work at the Company and established several collaborations, related to stationary natural-gas applications and Weichai diesel engines. The collaboration arrangement provided for the steering committee to create various sub-committees with operating roles and otherwise governs the treatment of intellectual property of parties prior to the collaboration and the intellectual property developed during the collaboration. The collaboration arrangement has a term of three years.

The Company evaluates whether an arrangement is a collaborative arrangement at its inception based on the facts and circumstances specific to the arrangement. The Company also reevaluates whether an arrangement qualifies or continues to qualify as a collaborative arrangement whenever there is a change in either the roles of the participants or the participants’ exposure to significant risks and rewards dependent on the ultimate commercial success of the endeavor. For those collaborative arrangements where it is determined that the Company is the principal participant, costs incurred and revenue generated from third parties are recorded on a gross basis in the financial statements. For the year ended December 31, 2018, sales to Weichai were insignificant. The Company purchased $3.5 million of inventory from Weichai during 2018. Sales and purchases in 2017 were insignificant.