UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-K

 

 

 

 

(Mark One)

 

 

    

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

 

For the fiscal year ended December 31, 2019

 

 

 

 

    

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

 

For the transition period from             to            

 

Commission file number: 1-34392

 

Plug Power Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

 

Delaware

    

22-3672377

(State or Other Jurisdiction

 

(I.R.S. Identification

of Incorporation or Organization)

 

Number)

 

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 $.01 per share

 

PLUG

 

The NASDAQ Capital Market

 

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(g) of the Act:    None

 

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

 

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

 

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

 

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

 

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

 

 

 

 

 

 

Large accelerated filer ☐

Accelerated Filer ☒

Non-accelerated filer ☐

Smaller reporting company ☐

Emerging growth company ☐

 

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

 

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

 

The aggregate market value of the registrant’s voting and non-voting common stock held by non-affiliates of the registrant was approximately $521,797,028 based on the last reported sale of the common stock on The Nasdaq Capital Market on June 28, 2019, the last business day of the registrant's most recently completed second fiscal quarter.

 

As of March 9, 2020, 321,289,882 shares of the registrant’s common stock were issued and outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

Certain information contained in Plug Power Inc.’s Proxy Statement relating to its 2020 Annual Meeting of Stockholders is incorporated by reference in Items 10, 11, 12, 13 and 14 of Part III. Plug Power Inc. intends to file such Proxy Statement with the Securities and Exchange Commission not later than 120 days after the end of its fiscal year ended December 31, 2019.

 

 

 

INDEX TO FORM 10‑K

 

 

 

 

 

 

Page

 

PART I

 

Item 1. 

Business

5

Item 1A. 

Risk Factors

9

Item 1B. 

Unresolved Staff Comments

24

Item 2. 

Properties

24

Item 3. 

Legal Proceedings

24

Item 4. 

Mine Safety Disclosures

24

 

PART II

 

Item 5. 

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

25

Item 6. 

Selected Financial Data

26

Item 7. 

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

27

Item 7A. 

Quantitative and Qualitative Disclosures About Market Risk

48

Item 8. 

Financial Statements and Supplementary Data

49

Item 9. 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

49

Item 9A. 

Controls and Procedures

49

Item 9B. 

Other Information

50

 

PART III

 

Item 10. 

Directors, Executive Officers and Corporate Governance

50

Item 11. 

Executive Compensation

50

Item 12. 

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

51

Item 13. 

Certain Relationships and Related Transactions, and Director Independence

51

Item 14. 

Principal Accounting Fees and Services

51

 

PART IV

 

Item 15. 

Exhibits, Financial Statement Schedules

52

Item 16.

Form 10-K Summary

56

 

 

 

 

 

 

 

 

 

 

2

PART I

 

Forward‑Looking Statements

 

The following discussion should be read in conjunction with our consolidated financial statements and notes thereto included within this Annual Report on Form 10-K. In addition to historical information, this Annual Report on Form 10‑K and the following discussion contain statements that are not historical facts and are considered forward-looking within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act.  These forward-looking statements contain projections of our future results of operations or of our financial position or state other forward-looking information. In some cases you can identify these statements by forward-looking words such as “anticipate,” “believe,” “could,” “continue,” “estimate,” “expect,” “intend,” “may,” “should,” “will,” “would,” “plan,” “projected” or the negative of such words or other similar words or phrases which are predictions of or indicate future events or trends and which do not relate solely to historical matters. We believe that it is important to communicate our future expectations to our investors. However, forward-looking statements involve numerous risks and uncertainties and depend on assumptions, data or methods which may be incorrect or imprecise. There may be events in the future that we are not able to accurately predict or control and that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. Investors are cautioned not to unduly rely on forward-looking statements. Actual results may differ materially from those discussed as a result of various factors, including, but not limited to:

·

the risk that we continue to incur losses and might never achieve or maintain profitability;

·

the risk that we will need to raise additional capital to fund our operations and such capital may not be available to us;

·

the risk of dilution to our stockholders and/or stock price should we need to raise additional capital;

·

the risk that our lack of extensive experience in manufacturing and marketing products may impact our ability to manufacture and market products on a profitable and large-scale commercial basis;

·

the risk that unit orders may not ship, be installed and/or converted to revenue, in whole or in part;

·

the risk that a loss of one or more of our major customers, or if one of our major customers delays payment of or is unable to pay its receivables, a material adverse effect could result on our financial condition;

·

the risk that a sale of a significant number of shares of stock could depress the market price of our common stock;

·

the risk that our convertible senior notes, if settled in cash, could have a material effect on our financial results;

·

the risk that our convertible note hedges may affect the value of our convertible senior notes and our common stock;

·

the risk that negative publicity related to our business or stock could result in a negative impact on our stock value and profitability;

·

the risk of potential losses related to any product liability claims or contract disputes;

·

the risk of loss related to an inability to maintain an effective system of internal controls;

·

our ability to attract and maintain key personnel;

·

the risks related to the use of flammable fuels in our products;

·

the risk that pending orders may not convert to purchase orders, in whole or in part;

·

the cost and timing of developing, marketing and selling our products;

·

the risks of delays in or not completing our product development goals;

·

our ability to obtain financing arrangements to support the sale or leasing of our products and services to customers;

·

our ability to achieve the forecasted gross margin on the sale of our products;

·

the cost and availability of fuel and fueling infrastructures for our products;

·

the risks, liabilities, and costs related to environmental, health and safety matters;

·

the risk of elimination of government subsidies and economic incentives for alternative energy products;

·

market acceptance of our products and services, including GenDrive, GenSure and GenKey systems;

·

our ability to establish and maintain relationships with third parties with respect to product development, manufacturing, distribution and servicing, and the supply of key product components;

·

the cost and availability of components and parts for our products;

·

the risk that possible new tariffs could have a material adverse effect on our business;

·

our ability to develop commercially viable products;

·

our ability to reduce product and manufacturing costs;

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·

our ability to successfully market, distribute and service our products and services internationally;

·

our ability to improve system reliability for our products;

·

competitive factors, such as price competition and competition from other traditional and alternative energy companies;

·

our ability to protect our intellectual property;

·

the risk of dependency on information technology on our operations and the failure of such technology;

·

the cost of complying with current and future federal, state and international governmental regulations;

·

our subjectivity to legal proceedings and legal compliance;

·

the risks associated with past and potential future acquisitions; and

·

the volatility of our stock price.

The risks included here are not exhaustive, and additional factors could adversely affect our business and financial performance, including factors and risks included in other sections of this Annual Report on Form 10-K, including under Part I, Item 1A, Risk Factors.  Moreover, we operate in a very competitive and rapidly changing environment.  New risk factors emerge from time to time and it is not possible for management to predict all such risk factors, nor can we assess the impact of all such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from these contained in any forward-looking statements. While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. These forward-looking statements speak only as of the date on which the statements were made. Except as may be required by applicable law, we do not undertake or intend to update any forward-looking statements after the date of this Annual Report on Form 10‑K.

 

References in this Annual Report on Form 10-K to “Plug Power,” the “Company,” “we,” “our” or “us” refer to Plug Power Inc., including as the context requires, its subsidiaries.

 

4

Item 1.  Business

 

Background 

 

As a leading provider of comprehensive hydrogen fuel cell turnkey solutions, Plug Power 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 over 30,000 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 hydrocarbon fuels such as liquid petroleum gas, or LPG, natural gas, propane, methanol, ethanol, gasoline or biofuels. Plug Power develops complete hydrogen generation, delivery, storage and refueling solutions for customer locations. Currently, the Company obtains the majority of its hydrogen by purchasing it from fuel suppliers for resale to customers.

 

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.  

 

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

 

Unless the context indicates otherwise, the terms “Company,” “Plug Power,” “we,” “our” or “us” as used herein refers to Plug Power Inc. and its subsidiaries.

 

Business Strategy

 

Plug Power is a leading provider of cost-effective, reliable, clean hydrogen and zero-emission fuel cell solutions. We are committed to developing effective, economical and reliable fuel cell related products, systems and services allowing users to operate sustainably, consistently and efficiently. Building on our substantial fuel cell application and product integration experience, we are focused on generating strong relationships with customers who value high-asset utilization, increased reliability, efficiency and zero-emission power solution.

 

Our business strategy leverages our unique fuel cell application and integration knowledge to identify high-asset utilization markets in an increasingly  electrified world, for which we can design and develop innovative systems and customer solutions that provide superior value, ease‑of‑use and environmentally-friendly design.

 

Our primary marketing strategy is to focus our resources on high growth markets such as on-road/e-mobility applications as well as material handling, supply chain/logistics and stationary power around the world. Through established customer relationships, we  have proven ourselves as a trusted partner with a reliable hydrogen and fuel cell solution. Plug Power’s vertically integrated GenKey solution ties together all critical elements to power, fuel, and provides service aftermarket support to customers such as Amazon, The Home Depot, The Southern Company, BMW, Carrefour, and Walmart. We have made significant progress in penetrating the material handling market, supported through the deployment of over 30,000 GenDrive units into commercial applications. We believe we have developed reliable products which allow the end customers to eliminate incumbent lead-acid battery power sources from their operations and realize their sustainability objectives through adoption of zero-emission clean energy alternatives.  In addition, we have deployed our GenKey hydrogen and fuel cell solution to multiple customer sites.

 

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

5

 

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

 

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

 

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

 

Business Organization

 

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

 

Products and Services

 

Plug Power is facilitating the paradigm shift to an increasingly electrified world by innovating cutting-edge hydrogen and fuel cell solutions  In our core business, we provide and continue to develop commercially-viable hydrogen and fuel cell product solutions to replace lead‑acid batteries in electric material handling vehicles and industrial trucks for some of the world’s largest retail-distribution and manufacturing businesses. We are focusing our efforts on industrial mobility applications, 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

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.

 

To promote fuel cell adoption and maintain post‑sale customer satisfaction, we offer a range of service and support options through extended maintenance contracts. Additionally, customers may waive our service option, and choose to service their systems independently. Substantially all of our fuel cells sold in recent years were bundled with maintenance contracts.

 

6

Markets/Geography & Order Status

 

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

 

Orders for the Company’s products and services approximated $481.5 million and $225.0 million for the years ended December 31, 2019 and 2018, respectively.  The Company’s backlog for products and services approximated  $797.4 million and $540.0 million as of December 31, 2019 and 2018, respectively. The Company’s backlog at any given time is comprised of fuel cells, hydrogen installations, maintenance services, and hydrogen fuel deliveries. The specific elements of the backlog will vary in terms of timing of delivery and can vary between 90 days to 10 years, with fuel cells and hydrogen installations being delivered near term and maintenance services and hydrogen fuel deliveries being delivered over a longer period of time. We expect that approximately 36.5% of our backlog will be filled during our 2020 fiscal year. Historically, shipments made against product orders generally occur between ninety days and twentyfour months from the date of acceptance of the order.

 

For the year ended December 31, 2019, 2018 and 2017, respectively 49.6%,  66.7% and 71.8% of our total consolidated revenues were associated primarily with two customers. For purposes of assigning a customer to a sale/leaseback transaction completed with a financial institution, the Company considers the end user of the assets to be the ultimate customer. A loss or decline in business with either of these customers, could have an adverse impact on our business, financial condition and results of operations.

 

We assemble our products at our manufacturing facilities in Latham, New York, Clifton Park, New York and Spokane, Washington, and provide our services and installations at customer locations and service centers in Illinois and Ohio.

 

Working Capital Items

 

We currently maintain inventory levels adequate for our short-term needs based upon present levels of production.  We consider the component parts of our different products to be generally available and current suppliers to be reliable and capable of satisfying anticipated needs.

 

Distribution, Marketing and Strategic Relationships

 

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

 

Environmental Issues

 

No significant pollution or other types of hazardous emission result from the Company’s operations and it is not anticipated that our operations will be materially affected by federal, state or local provisions concerning environmental controls.  Our costs of complying with environmental, health and safety requirements have not been material.

 

We do not believe that existing or pending climate change legislation, regulation, or international treaties or accords are reasonably likely to have a material effect in the foreseeable future on our business or markets that we serve, nor on our results of operations, capital expenditures or financial position.  We will continue to monitor emerging developments in this area.

 

Competition

 

We experience competition in all areas of our business. The markets we address for motive power are characterized by the presence of well‑established battery and combustion generator products.  We believe the principal

7

competitive factors in the markets in which we operate include product features, including size and weight, relative price and performance, lifetime operating cost, including any maintenance and support, product quality and reliability, safety, ease of use, rapid integration with existing equipment and processes, customer support design innovation, marketing and distribution capability, service and support and corporate reputation.

 

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

 

Intellectual Property

 

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

 

We have a total of 109 issued patents currently active with the USPTO and at the close of 2019, we had seven U.S. patent applications pending. Additionally, we have 20 trademarks registered with the USPTO and 2  trademark applications pending.

 

Government Regulation

 

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

 

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

 

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

 

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

 

Raw Materials and Suppliers

 

Most components essential to our business are generally available from multiple sources.  We believe there are component suppliers and manufacturing vendors whose loss to us could have a material adverse effect upon our business and financial condition. We are mitigating these potential risks by introducing alternate system architectures which we

8

expect will allow us to diversify our supply chain with multiple fuel cell stack and air supply component vendors. We are also working closely with these vendors and other key suppliers on coordinated product introduction plans, strategic inventories, and internal and external manufacturing schedules and levels. Historically, we have not experienced significant delays in the supply or availability of our key raw materials or components provided by our suppliers, nor have we experienced a significant price increase for raw materials or components.  We do not anticipate any such delays or significant price increases in our fiscal year 2020.

 

Research and Development

 

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

 

We may also expand the range of our product offerings and intellectual property through licensing and/or acquisition of third‑party business and technology. Our research and development expense totaled $33.7 million, $33.9 million, and $28.7 million during the years ended December 31, 2019, 2018, and 2017, respectively. We also had cost of research and development contract revenue of $0.2 million, zero, and $0.3 million during the years ended December 31, 2019, 2018, and 2017, respectively. These expenses represent the cost of research and development programs that are partially funded under cost reimbursement research and development arrangements with third parties and are reported within other cost of revenue on the consolidated statements of operations.

 

Employees

 

As of December 31, 2019, we had 835 employees, including 206 temporary employees. We consider our relationship with our employees to be positive.

 

Financial Information About Geographic Areas

 

Please refer to our Geographic Information included in our consolidated financial statements and notes thereto included in Part II, Item 8 “Financial Statements and Supplementary Data” of this Annual Report on Form 10‑K.

 

Available Information

 

Our Annual Report on Form 10‑K, Quarterly Reports on Form 10‑Q, Current Reports on Form 8‑K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available free of charge, other than an investor’s own internet access charges, on the Company’s website at www.plugpower.com as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the Securities and Exchange Commission, or the SEC. The information contained on our website is not included as a part of, or incorporated by reference into, this Annual Report on Form 10‑K. The SEC also maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The SEC’s website address is http://www.sec.gov.

 

Item 1A.  Risk Factors

 

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

 

 

 

 

9

A. MARKET RISKS

 

Our products and performance depend largely on the availability of hydrogen gas and an insufficient supply of hydrogen could negatively affect our sales and deployment of our products and services.

 

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

 

We will continue to be dependent on certain third-party key suppliers for components in our products. The failure of a supplier to develop and supply components in a timely manner or at all, or our inability to obtain substitute sources of these components on a timely basis or on terms acceptable to us, could impair our ability to manufacture our products or could increase our cost of production.

 

We rely on certain key suppliers for critical components in our products, and there are numerous other components for our products that are sole sourced. If we fail to maintain our relationships with our suppliers or build relationships with new suppliers, or if suppliers are unable to meet our demand, we may be unable to manufacture our products, or our products may be available only at a higher cost or after a delay.  In addition, to the extent that our supply partners use technology or manufacturing processes that are proprietary, we may be unable to obtain comparable components from alternative sources.

 

The failure of a supplier to develop and supply components in a timely manner or at all, or to develop or supply components that meet our quality, quantity and cost requirements, or our inability to obtain substitute sources of these components on a timely basis or on terms acceptable to us, could impair our ability to manufacture our products or could increase our cost of production. If we cannot obtain substitute materials or components on a timely basis or on acceptable terms, we could be prevented from delivering our products to our customers within required timeframes.  Any such delays could result in sales and installation delays, cancellations, penalty payments or loss of revenue and market share, any of which could have a material adverse effect on our business, results of operations, and financial condition.

 

Volatility in commodity prices and product shortages may adversely affect our gross margins.

 

Some of our products contain commodity-priced materials. Commodity prices and supply levels affect our costs. For example, platinum is a key material in our PEM fuel cells. Platinum is a scarce natural resource and we are dependent upon a sufficient supply of this commodity.

 

Any shortages could adversely affect our ability to produce commercially viable fuel cell systems and significantly raise our cost of producing our fuel cell systems. While we do not anticipate significant near‑ or long‑term shortages in the supply of platinum, a shortage could adversely affect our ability to produce commercially viable PEM fuel cells or raise our cost of producing such products.  Our ability to pass on such increases in costs in a timely manner depends on market conditions, and the inability to pass along cost increases could result in lower gross margins.

 

Our ability to source parts and raw materials from our suppliers could be disrupted or delayed in our supply chain which could adversely affect our results of operations.

 

Our operations require significant amounts of necessary parts and raw materials. We deploy a continuous, companywide process to source our parts and raw materials from fewer suppliers, and to obtain parts from suppliers in low-cost countries where possible. If we are unable to source these parts or raw materials, our operations may be disrupted, or we could experience a delay or halt in certain of our manufacturing operations. We believe that our supply management and production practices are based on an appropriate balancing of the foreseeable risks and the costs of alternative practices. Nonetheless, reduced availability or interruption in supplies, whether resulting from more stringent regulatory requirements; supplier financial condition; increases in duties and tariff costs; disruptions in transportation; an outbreak of

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a severe public health pandemic, such as the recent coronavirus outbreak in China; severe weather; the occurrence or threat of wars or other conflicts, could have an adverse effect on our financial condition, results of operations and cash flows.

 

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

 

We sell most of our products to a range of customers that include a few anchor customers, and while we are continually seeking to expand our customer base, we expect this will continue for the next several years.  For example, for the year ended December 31, 2019, 49.6% of our total consolidated revenues were associated primarily with two customers. For the year ended December 31, 2018, 66.7% of  our total consolidated revenues were associated primarily with two customers. For the year ended December 31, 2017, 71.8% of our total consolidated revenues were associated primarily with two customers. Any decline in business with significant customers could have an adverse impact on our business, financial condition and results of operations. Our future success is dependent upon the continued purchases of our products by a small number of customers.  If we are unable to broaden our customer base and expand relationships with potential customers, our business will continue to be impacted by demand fluctuations due to our dependence on a small number of customers. Demand fluctuations can have a negative impact on our revenues, business, financial condition, results of operations and cash flows. Our dependence on a small number of major customers exposes us to additional risks. A slowdown, delay or reduction in a customer’s orders could result in excess inventories or unexpected quarterly fluctuations in our operating results and liquidity.  Each of our major customers has significant purchasing leverage over us to require changes in sales terms including pricing, payment terms and product delivery schedules, which could adversely affect our business, financial condition, results of operations and cash flows. At December 31, 2019, two customers comprised approximately 63.4% of the total accounts receivable balance. At December 31, 2018, two customers comprised approximately 52.3% of the total accounts receivable balance.  If one of our major customers delays payment of or is unable to pay their receivables, that could have a material adverse effect on our business, financial condition, results of operations and cash flows. 

 

Weakness in the economy, market trends and other conditions affecting the profitability and financial stability of our customers could negatively impact our sales growth and results of operations.

 

The demand for our products and services is sensitive to the production activity, capital spending and demand for products and services of our customers. Many of our customers operate in markets that are subject to cyclical fluctuations resulting from market uncertainty, trade and tariff policies, costs of goods sold, currency exchange rates, central bank interest rate changes, foreign competition, offshoring of production, oil and natural gas prices, geopolitical developments, labor shortages, inflation, deflation, and a variety of other factors beyond our control. Any of these factors could cause customers to idle or close facilities, delay purchases, reduce production levels, or experience reductions in the demand for their own products or services.

 

Any of these events could also reduce the volume of products and services these customers purchase from us or impair the ability of our customers to make full and timely payments  and could cause increased pressure on our selling prices and terms of sale. Accordingly, a significant or prolonged slowdown in activity in the United States or any other major world economy, or a segment of any such economy, could negatively impact our sales growth and results of operations.

 

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

 

We have begun to market, distribute, sell and service our product offerings internationally. We have limited experience operating internationally, including developing and manufacturing our products to comply with the commercial and legal requirements of international markets. Our success in international markets will depend, in part, on our ability and that of our partners to secure relationships with foreign sub‑distributors, and our ability to manufacture products that meet foreign regulatory and commercial requirements. Additionally, our planned international operations are subject to other inherent risks, including potential difficulties in enforcing contractual obligations and intellectual property rights in foreign countries, and could be adversely affected due to  fluctuations in currency exchange rates, political and economic instability, acts or threats of terrorism, changes in governmental policies or policies of central banks, expropriation, nationalization and/or confiscation of assets, price controls, fund transfer restrictions, capital controls, exchange rate controls, taxes, unfavorable political and diplomatic developments, changes in legislation or regulations and other additional developments or restrictive  actions over which we will have no control.

 

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Doing business in foreign markets requires us to be able to respond to rapid changes in market, legal, and political conditions in these countries. As we expand in international markets, we may face numerous challenges, including unexpected changes in regulatory requirements; potential conflicts or disputes that countries may have to deal with; required compliance with anti-bribery laws, such as the U.S. Foreign Corrupt Practices Act, data privacy requirements, labor laws and anti-competition regulations; export or import restrictions; laws and business practices favoring local companies; fluctuations in currency exchange rates; longer payment cycles and difficulties in collecting accounts receivables; difficulties in managing international operations; potentially adverse tax consequences, tariffs, customs charges, bureaucratic requirements and other trade barriers; restrictions on repatriation of earnings and the burdens of complying with a wide variety of international laws. Any of these factors could adversely affect our results of operations and financial condition. The success of our international expansion will depend, in part, on our ability to succeed in navigating the different legal, regulatory, economic, social and political environments. For example, the United Kingdom formally left the European Union on January 31, 2020, at which point a transition period began. The United Kingdom is expected to continue to follow certain European Union rules during the transition period; however, the ongoing process of negotiations between the United Kingdom and the European Union will determine the future terms of the United Kingdom's relationship with the European Union, including access to European Union markets, either during the transitional period or more permanently. We have no control over and cannot predict the effect of the United Kingdom's exit from the European Union nor over whether and to which effect any other member state will decide to exit the European Union in the future. These developments, as well as potential crises and forms of political instability arising therefrom or any other as of yet unforeseen development, may harm our business.

 

Our products and services face intense competition.

 

The markets for energy products are intensely competitive. Some of our competitors in the motive power sector (predominantly incumbent technologies) are much larger than we are and may have the manufacturing, marketing and sales capabilities to complete research, development and commercialization of profitable, commercially viable products more quickly and effectively than we can. There are many companies engaged in all areas of traditional and alternative energy generation in the United States and abroad, including, among others, major electric, oil, chemical, natural gas, battery, generator and specialized electronics firms, as well as universities, research institutions and foreign government‑sponsored companies. These firms are engaged in forms of power generation such as advanced battery technologies, generator sets, fast charged technologies and other types of fuel cell technologies. In addition, the primary current value proposition for our customers stems from productivity gains in using our solutions. Longer term, given evolving market dynamics and changes in alternative energy tax credits, if we are unable to successfully develop future products that are competitive with competing technologies in terms of price, reliability and longevity, customers may not buy our products. Technological advances in alternative energy products, battery systems or other fuel cell technologies may make our products less attractive or render them obsolete.

 

B. FINANCIAL AND LIQUIDITY RISKS

 

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

 

Customers representing most of our revenue lease, rather than purchase, our products. These lease arrangements require us and our customers to finance the purchase of such products, either ourselves or through third‑party financing sources. To date, we have been successful in obtaining or providing the necessary financing arrangements. There is no certainty, however, that we will be able to continue to obtain or provide adequate financing for these arrangements on acceptable terms, or at all, in the future. Failure to obtain or provide such financing may result in the loss of material customers and product sales, which could have a material adverse effect on our business, financial condition and results of operations. Further, if we are required to continue to pledge or restrict substantial amounts of our cash to support these financing arrangements, such cash will not be available to us for other purposes, which may have a material adverse effect on our liquidity and financial position. For example, approximately $230.0 million of our cash is currently restricted to support such leasing arrangements, which prevents us from using such cash for other purposes.

 

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

 

On December 31, 2019, we had cash and cash equivalents of $139.5 million, restricted cash of $230.0 million and net working capital of $162.5 million. This compares to $38.6 million, $71.6 million and $9.2 million of cash and cash equivalents, restricted cash and net working capital, respectively, on December 31, 2018.

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

 

We cannot assure you that any necessary additional financing will be available on terms favorable to us, or at all. We believe that it could be difficult to raise additional funds and there can be no assurance as to the availability of additional financing or the terms upon which additional financing may be available. Additionally, even if we raise sufficient capital through additional equity or debt financings, strategic alternatives or otherwise, there can be no assurance that the revenue or capital infusion will be sufficient to enable us to develop our business to a level where it will be profitable or generate positive cash flow. If we incur additional debt, a substantial portion of our operating cash flow may be dedicated to the payment of principal and interest on such indebtedness, thus limiting funds available for our business activities. The terms of any debt securities issued could also impose significant restrictions on our operations. Broad market and industry factors may seriously harm the market price of our common stock, regardless of our operating performance, and may adversely impact our ability to raise additional funds. If we raise additional funds through collaborations and/or licensing arrangements, we might be required to relinquish significant rights to our technologies or grant licenses on terms that are not favorable to us.

 

We have incurred losses and anticipate continuing to incur losses.

 

We have not achieved operating profitability in any quarter since our formation and we will continue to incur net losses until we can produce sufficient revenue to cover our costs. Our net losses were approximately $85.5 million in 2019, $78.1 million in 2018 and $127.1 million in 2017. As of December 31, 2019, we had an accumulated deficit of $1.3 billion. We anticipate that we will continue to incur losses until we can produce and sell our products on a large‑scale and cost‑effective basis. We cannot guarantee when we will operate profitably, if ever. In order to achieve profitability, we must successfully execute our planned path to profitability in the early adoption markets on which we are focused. The profitability of our products depends largely on material and manufacturing costs and the market price of hydrogen. The hydrogen infrastructure that is needed to support our growth readiness and cost efficiency must be available and cost efficient. We must continue to shorten the cycles in our product roadmap with respect to improvement in product reliability and performance that our customers expect. We must execute on successful introduction of our products into the market. We must accurately evaluate our markets for, and react to, competitive threats in both other technologies (such as advanced batteries) and our technology field. Finally, we must continue to lower our products’ build costs and lifetime service costs. If we are unable to successfully take these steps, we may never operate profitably, and, even if we do achieve profitability, we may be unable to sustain or increase our profitability in the future.

 

Our indebtedness could adversely affect our liquidity, financial condition and our ability to fulfill our obligations and operate our business.

 

At December 31, 2019, our total outstanding indebtedness was approximately $222.4 million, consisting of $39.6 million of the $40.0 million in aggregate principal amount of 7.5% Convertible Senior Note due on January 5, 2023, $70.6 million of the $100.0 million in aggregate principal amount of 5.5% Convertible Senior Notes due on March 15, 2023 and $112.2 million of outstanding indebtedness primarily associated with out Term Loan Facility,  with

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Generate Lending, LLC, or the Term Loan Facility, and other long-term debt.

Our high level of indebtedness could have negative consequences on our future operations, including:

 

·

we may have difficulty satisfying our obligations with respect to our outstanding debt;

·

we may have difficulty obtaining financing in the future for working capital, capital expenditures, acquisitions or other purposes;

·

we may need to use all, or a substantial portion, of our available cash flow to pay interest and principal on our debt, which will reduce the amount of money available to finance our operations and other business activities;

·

our vulnerability to general economic downturns and adverse industry conditions could increase;

·

our flexibility in planning for, or reacting to, changes in our business and in our industry in general could be limited;

·

our amount of debt and the amount we must pay to service our debt obligations could place us at a competitive disadvantage compared to our competitors that may have less debt; and

·

our failure to comply with the covenants in the agreement governing our Term Loan Facility which, among other things, limit our ability to incur debt and sell assets, could result in an event of default that, if not cured or waived, could have a material adverse effect on our business or prospects.

 

Our level of indebtedness will require that we use a substantial portion of our cash flow from operations to pay principal of, and interest on, our indebtedness, which will reduce the availability of cash to fund working capital requirements, capital expenditures, research and development and other general corporate or business activities.  Our ability to generate cash to repay our indebtedness is subject to the performance of our business, as well as general economic, financial, competitive and other factors that are beyond our control. If our business does not generate sufficient cash flow from operating activities or if future borrowings are not available to us in amounts sufficient to enable us to fund our liquidity needs, our operating results and financial condition may be adversely affected.

 

The agreement governing our Term Loan Facility contains covenant restrictions that may limit our ability to operate our business.

 

We may be unable to respond to changes in business and economic conditions, engage in transactions that might otherwise be beneficial to us, or obtain additional financing, because the agreement governing our Term Loan Facility contains covenant restrictions that limit our ability to, among other things: incur additional debt, create liens, make acquisitions, make loans, pay dividends, dissolve, or enter into leases and asset sale.  In addition, the agreement requires that we comply with a collateral coverage covenant that was first measured on December 31, 2019. Our ability to comply with these covenants is dependent on our future performance, which will be subject to many factors, some of which are beyond our control, including prevailing economic conditions. In addition, our failure to comply with this covenant could result in a default under our other debt instruments, which could permit the holders to accelerate such debt. If any of our debt is accelerated, we may not have sufficient funds available to repay such debt, which could materially and negatively affect our financial condition and results of operations.

 

Although we are currently in compliance with the covenants contained in the agreement governing our Term Loan Facility, we cannot assure you that we will be able to remain in compliance with such covenants in the future.  An event of default under the  agreement governing our Term Loan Facility could have a material adverse effect on our liquidity, financial condition, and results of operations. 

 

Convertible debt securities that may be settled in cash could have a material effect on our reported financial results.

Under Accounting Standards Codification 470-20, Debt with Conversion and Other Options, or ASC 470-20, an entity must separately account for the liability and equity components of the convertible debt instruments (such as our $40.0 million in aggregate principal amount of 7.5% Convertible Senior Note due on January 5, 2023 and our $100.0 million in aggregate principal amount of 5.5% Convertible Senior Notes due on March 15, 2023) that may be settled entirely or partially in cash upon conversion in a manner that reflects the issuer’s economic interest cost. The effect of ASC 470-20 on the accounting for the convertible senior notes is that the equity component is required to be included in

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the additional paid-in capital section of stockholders’ equity on our consolidated balance sheet at the issuance date and the value of the equity component would be treated as debt discount for purposes of accounting for the debt component of the convertible senior notes. As a result, we are required to record a non-cash interest expense as a result of the amortization of the discounted carrying value of the convertible senior notes to their face amount over the term of the convertible senior notes. As a result, we report larger net losses (or lower net income) in our financial results because ASC 470-20 requires interest to include the amortization of the debt discount, which could adversely affect our reported or future financial results or the trading price of our common stock.

 

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

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

In connection with the pricing of the 5.5% convertible senior notes due in 2023, which we refer to herein as the $100 million Convertible Senior Notes, we entered into convertible note hedge transactions with one or more of the initial purchasers of the $100 million Convertible Senior Notes and/or their respective affiliates or other financial institutions, or the option counterparties. The convertible note hedge transactions are generally expected to reduce the potential dilution upon any conversion of $100 million Convertible Senior Notes and/or provide a source of cash to settle a portion of its cash payments related to any excess over the principal amount upon conversion of any $100 million Convertible Senior Notes.

The option counterparties and/or their respective affiliates may modify their hedge positions by entering into or unwinding various derivatives with respect to our common stock and/or purchasing or selling our common stock in secondary market transactions prior to the maturity of the $100 million Convertible Senior Notes (and are likely to do so during any observation period related to a conversion of $100 million Convertible Senior Notes or following any repurchase of $100 million Convertible Senior Notes by us on any fundamental change repurchase date or otherwise). This activity could also cause or avoid an increase or a decrease in the market price of our common stock. In addition, if any such convertible note hedge transaction fails to become effective, the option counterparties may unwind their hedge positions with respect to our common stock, which could adversely affect the value of our common stock. The potential effect, if any, of these transactions and activities on the market price of our common stock will depend in part on market conditions and cannot be ascertained at this time. Any of these activities could adversely affect the value of our common stock.

 

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

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

 

C. OPERATIONAL RISKS

 

We may not be able to expand our business or manage our future growth effectively.

 

We may not be able to expand our business or manage future growth. We plan to continue to improve our manufacturing processes and build additional manufacturing production over the next five years, which will require successful execution of:

 

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·

expanding our existing customers and expanding to new markets;

·

ensuring manufacture, delivery and installation of our products;

·

implementing and improving additional and existing administrative, financial and operations systems, procedures and controls;

·

hiring additional employees;

·

expanding and upgrading our technological capabilities;

·

managing relationships with our customers and suppliers and strategic partnerships with other third parties;

·

maintaining adequate liquidity and financial resources; and

·

continuing to increase our revenues from operations.

 

Ensuring delivery of our products is subject to many market risks, including scarcity, significant price fluctuations and competition. Maintaining adequate liquidity is dependent upon a variety of factors, including continued revenues from operations, working capital improvements, and compliance with our debt instruments.   We may not be able to achieve our growth strategy and increase production capacity as planned during the foreseeable future. If we are unable to manage our growth effectively, we may not be able to take advantage of market opportunities, develop new products, satisfy customer requirements, execute our business plan, or respond to competitive pressures.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Our products use flammable fuels that are inherently dangerous substances.

 

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

 

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

 

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

 

Some of the orders we accept from customers require certain conditions or contingencies to be satisfied, or may be cancelled, prior to shipment or prior to commissioning or installation, some of which are outside of our control. Historically, shipments made against these orders have generally occurred between ninety days and twenty‑four months from the date of acceptance of the order. Orders for the Company’s products and services approximated $481.5 million and $225.5 million for the years ended December 31, 2019 and 2018, respectively. The Company’s backlog for products and services approximated $840.6 million and $540.0 million as of December 31, 2019 and 2018, respectively. The time periods from receipt of an order to shipment date and installation vary widely and are determined by a number of factors, including the terms of the customer contract and the customer’s deployment plan. There may also be product redesign or modification requirements that must be satisfied prior to shipment of units under certain of our agreements. If the redesigns or modifications are not completed, some or all of our orders may not ship or convert to revenue. In certain cases, we publicly disclose anticipated, pending orders with prospective customers; however, those prospective customers may require certain conditions or contingencies to be satisfied prior to entering into a purchase order with us, some of which are outside of our control. Such conditions or contingencies that may be required to be satisfied before we receive a purchase order may include, but are not limited to, successful product demonstrations or field trials. Converting orders into revenue is also dependent upon our customers’ ability to obtain financing. Some conditions or contingencies that are out of our control may include, but are not limited to, government tax policy, government funding programs, and government incentive programs. Additionally, some conditions and contingencies may extend for several years. We may have to compensate customers, by either reimbursement, forfeiting portions of associated revenue, or other methods depending on the terms of the customer contract, based on the failure on any of these conditions or contingencies. While not probable, this could have an adverse impact on our revenue and cash flow.

 

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

 

We may experience problems with the operation of our current information technology systems or the technology systems of third parties on which we rely, as well as the development and deployment of new information technology systems, that could adversely affect, or even temporarily disrupt, all or a portion of our operations until resolved. Inabilities and delays in implementing new systems can also affect our ability to realize projected or expected cost savings. Despite the implementation of network security measures, our information technology could be penetrated by outside parties (such

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as computer hackers or cyber terrorists) intent on extracting information, corrupting information or disrupting business processes. Such unauthorized access could disrupt our business and could result in a loss of assets or reputational damage. Additionally, any systems failures could impede our ability to timely collect and report financial results in accordance with applicable laws.

 

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

 

We have attracted a highly skilled management team and specialized workforce, including scientists, engineers, researchers, manufacturing, marketing and sales professionals. Our future success will depend, in part, on our ability to attract and retain qualified management and technical personnel. We do not know whether we will be successful in hiring or retaining qualified personnel. Our inability to hire qualified personnel on a timely basis, or the departure of key employees, could materially and adversely affect our development and profitable commercialization plans and, therefore, our business prospects, results of operations and financial condition.

 

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

 

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

 

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

 

We may need to pursue lawsuits or legal action in the future to enforce our intellectual property rights, to protect our trade secrets and domain names, and to determine the validity and scope of the proprietary rights of others. If third parties prepare and file applications for trademarks used or registered by us, we may oppose those applications and be required to participate in proceedings to determine the priority of rights to the trademark. Similarly, competitors may have filed applications for patents, may have received patents and may obtain additional patents and proprietary rights relating to products or technology that block or compete with ours. We may have to participate in interference proceedings to determine the priority of invention and the right to a patent for the technology. Litigation and interference proceedings, even if they are successful, are expensive to pursue and time consuming, and we could use a substantial amount of our management and financial resources in either case.

 

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

18

 

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

 

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

 

Our financial results may be adversely affected by changes in accounting principles generally accepted in the United States.

 

Generally accepted accounting principles in the United States, or GAAP, are subject to interpretation by the Financial Accounting Standards Board, or FASB, the American Institute of Certified Public Accountants, the SEC and various bodies formed to promulgate and interpret appropriate accounting principles. See Note 2 to our consolidated financial statements included in this report regarding the effect of new accounting pronouncements on our financial statements. Any difficulties in implementing these pronouncements could cause us to fail to meet our financial reporting obligations, which could result in regulatory discipline and harm investors’ confidence in us. Further, the implementation of new accounting pronouncements or a change in other principles or interpretations could have a significant effect on our financial results. 

 

If our estimates or judgments relating to our critical accounting policies are based on assumptions that change or prove to be incorrect, our operating results could fall below expectations of investors, resulting in a decline in our stock price.

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. For example, our revenue recognition policy is complex, and we often must make estimates and assumptions that could prove to be inaccurate. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Significant assumptions and estimates used in preparing our consolidated financial statements include those related to revenue recognition, loss accrual for service, leases and provision for common stock warrants.  Our operating results may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our operating results to fall below the expectations of investors, resulting in a decline in our stock price.

 

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

 

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

 

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

 

19

D. REGULATORY RISKS

 

The reduction or elimination of government subsidies and economic incentives for alternative energy technologies, or the failure to renew such subsidies and incentives could reduce demand for our products, lead to a reduction in our revenues and adversely impact our operating results and liquidity.

 

We believe that the near‑term growth of alternative energy technologies is affected by the availability and size of government and economic incentives. Many of these government incentives expire, phase out over time, may exhaust the allocated funding, or require renewal by the applicable authority. In addition, these incentive programs could be reduced or discontinued for other reasons. The investment tax credit under the U.S. tax code was renewed in February 2018.  The renewal allows for a 30% investment tax credit which ratchets down to 26% for 2020, 22% for 2021 and 10% for  2022 and later. The reduction, elimination, or expiration of the investment tax credit or other government subsidies and economic incentives, or the failure to renew such tax credit, governmental subsidies, or economic incentives, may result in the diminished economic competitiveness of our products to our customers and could materially and adversely affect the growth of alternative energy technologies, including our products, as well as our future operating results and liquidity.

 

We are subject to various federal, state and local environmental and human health and safety laws and regulations that could impose significant costs and liabilities on us.

Our operations are subject to federal, state, and local environmental and human health and safety laws and regulations, including laws and regulations relating to the use, handling, storage, transportation, disposal and human exposure to hazardous substances and wastes, product safety, emissions of pollution into the environment and human health and safety. We have incurred and expect to continue to incur, costs to comply with these laws and regulations.  Violation of these laws or regulations or the occurrence of an explosion or other accident in connection with our fuel cell systems at our properties or at third party locations could lead to substantial liabilities and sanctions, including fines and penalties, cleanup costs or the requirement to undertake corrective action. Further, environmental laws and regulations, and the administration, interpretation and enforcement thereof, are subject to change and may become more stringent in the future, each of which could materially adversely affect our business, financial condition and results of operations.

Additionally, certain environmental laws impose liability, which can be joint, several and strict, on current and previous owners and operators of real property for the cost of removal or remediation of hazardous  substances and damage to natural resources. These laws often impose liability even if the owner or operator did not know of, or was not responsible for, the release of such hazardous substances. They can also assess liability on persons who arrange for hazardous substances to be sent to disposal or treatment facilities when such facilities are found to be contaminated, and such persons can be responsible for cleanup costs even if they never owned or operated the contaminated facility. Our liabilities arising from past or future releases of, or exposure to, hazardous substances may adversely affect our business, financial condition and results of operations.

Tariffs could have a material adverse effect on our business.

Our business is dependent on the availability of raw materials and components for our products, particularly electrical components common in the semiconductor industry. There is currently significant uncertainty about the future relationship between the United States and various other countries, most significantly China, with respect to trade policies, treaties, tariffs and taxes. The current U.S. presidential administration has called for substantial changes to U.S. foreign trade policy with respect to China and other countries, including the possibility of imposing greater restrictions on international trade and significant increases in tariffs on goods imported into the United States.  In 2018, the Office of the U.S. Trade Representative imposed tariffs on imports into the United States from China, including steel and aluminum imports, and the countries continue to negotiate a trade deal.  An increase in tariffs will cause our cost of raw materials for our products to increase, which could narrow the profits we earn from sales of products requiring such materials. Furthermore, if tariffs, trade restrictions, or trade barriers are placed on products such as ours by foreign governments, especially China, the prices for our products may increase, which may result in the loss of customers and harm to our business, financial condition and results of operations.

Although we currently maintain alternative sources for raw materials, our business is subject to the risk of price fluctuations and periodic delays in the delivery of certain raw materials, which tariffs may exacerbate. Disruptions in the supply of raw materials and components could temporarily impair our ability to manufacture our products for our customers or require us to pay higher prices to obtain these raw materials or components from other sources, which could affect our business and our results of operations. While it is too early to predict how the  enacted tariffs on imported steel

20

and aluminum will impact our business, the imposition of tariffs on items imported by us from China or other countries could increase our costs and could have a material adverse effect on our business and our results of operations.

 

Our business may become subject to increased government regulation.

 

Our products are subject to certain federal, local, and non‑U.S. laws and regulations, including, for example, state and local ordinances relating to building codes, public safety, electrical and gas pipeline connections, hydrogen transportation and siting and related matters. See “Business—Government Regulations” for additional information. In certain jurisdictions, these regulatory requirements may be more stringent than those in the United States. Further, as products are introduced into the market commercially, governments may impose new regulations. We do not know the extent to which any such regulations may impact our ability to manufacture, distribute, install and service our products. Any regulation of our products, whether at the federal, state, local or foreign level, including any regulations relating to the production, operation, installation, and servicing of our products may increase our costs and the price of our products, and noncompliance with applicable laws and regulations could subject us to investigations, sanctions, enforcement actions, fines, damages, civil and criminal penalties or injunctions. If any governmental sanctions are imposed, our business, operating results, and financial condition could be materially adversely affected. In addition, responding to any action will likely result in a significant diversion of management’s attention and resources and an increase in professional fees. Enforcement actions and sanctions could harm our business, operating results and financial condition.

 

Changes in tax laws or regulations or adverse outcomes resulting from examination of our income or other tax returns could adversely affect our operating results and financial condition.

 

We are subject to income taxes in the United States and various foreign jurisdictions.  A number of factors may adversely affect our future effective tax rates, such as the jurisdictions in which our profits are determined to be earned and taxed; changes in the valuation of our deferred tax assets and liabilities; adjustments to estimated taxes upon finalization of various tax returns; changes in available tax credits, grants and other incentives; changes in stock-based compensation expense; the availability of loss or credit carryforwards to offset taxable income; changes in tax laws, regulations, accounting principles or interpretations thereof; or examinations by US federal, state or foreign jurisdictions that disagree with interpretations of tax rules and regulations in regard to positions taken on tax filings. A change in our effective tax rate due to any of these factors may adversely affect our future results from operations.

 

In addition, as our business grows, we are required to comply with increasingly complex taxation rules and practices. We are subject to tax in multiple U.S. tax jurisdictions and in foreign tax jurisdictions as we expand internationally. The development of our tax strategies requires additional expertise and may impact how we conduct our business. If our tax strategies are ineffective or we are not in compliance with domestic and international tax laws, our financial position, operating results and cash flows could be adversely affected.

 

E. STRATEGIC RISKS

 

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

 

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

21

commercialization of our products and the operation of our business, financial condition, results of operations and prospects.

 

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

 

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

 

F.  RISKS RELATED TO THE OWNERSHIP OF OUR COMMON STOCK

 

Our stock price and stock trading volume have been and could remain volatile, and the value of your investment could decline.

 

The market price of our common stock has historically experienced and may continue to experience significant volatility. In 2019, the sales price of our common stock fluctuated from a high of $4.04 per share to a low of $1.23 per share. Our progress in developing and commercializing our products, our quarterly operating results, announcements of new products by us or our competitors, our perceived prospects, changes in securities analysts’ recommendations or earnings estimates, changes in general conditions in the economy or the financial markets, adverse events related to our strategic relationships, significant sales of our common stock by existing stockholders, including one or more of our strategic partners, and other developments affecting us or our competitors could cause the market price of our common stock to fluctuate substantially. In addition, in recent years, the stock market has experienced significant price and volume fluctuations. This volatility has affected the market prices of securities issued by many companies for reasons unrelated to their operating performance and may adversely affect the price of our common stock. Such market price volatility could adversely affect our ability to raise additional capital. In addition, we may be subject to securities class action litigation as a result of volatility in the price of our common stock, which could result in substantial costs and diversion of management’s attention and resources and could harm our stock price, business, prospects, results of operations and financial condition.

 

Sales of substantial amounts of our common stock in the public markets, or the perception that such sales might occur, could reduce the price that our common stock might otherwise attain and may dilute your voting power and your ownership interest in us.

 

Sales of a substantial number of shares of our common stock in the public market, or the perception that such sales could occur, could adversely affect the market price of our common stock and may make it more difficult for you to sell your common stock at a time and price that you deem appropriate. As of December 31, 2019, there were approximately 43,630,020 shares of common stock issuable upon conversion of the 5.5% Convertible Senior Notes due March 2023 at a conversion price of $2.29 per share, 15,503,876 shares of common stock issuable upon conversion of the 7.5% Convertible Senior Note due January 2023 at a conversion price of $2.58 per share, 2,782,075 shares of common stock issuable upon conversion of the Series C Redeemable Convertible Preferred Stock at a conversion price of $0.2343 per share, and 216,452 shares of common stock issuable upon conversion of the Series E Redeemable Preferred Stock at a conversion price of $2.31 per share. On January 22, 2020, all outstanding shares of Series E Redeemable Preferred Stock were redeemed.  In addition, as of December 31, 2019, we had outstanding options exercisable for an aggregate of 23,013,590 shares of common stock at a weighted average exercise price of $2.48 per share and 110,573,392 shares of common stock issuable upon the exercise of warrants, 26,188,434 of which were vested as of December 31, 2019.

 

22

Moreover, subject to market conditions and other factors, we may conduct future offerings of equity or debt securities.   Sales of substantial amounts of our common stock in the public market, or the perception that these sales could occur, could reduce the market price of our common stock to decline.  In addition, the conversion of the notes or preferred stock or the exercise of outstanding options and warrants and future equity issuances will result in dilution to investors. The market price of our common stock could fall as a result of resales of any of these shares of common stock due to an increased number of shares available for sale in the market.

 

If securities analysts do not publish research or reports or if they publish unfavorable or inaccurate research about our business and our stock, the price of our stock and the trading volume could decline.

 

We expect that the trading market for our common stock will be affected by research or reports that industry or financial analysts publish about us or our business. There are many large, well-established companies active in our industry and portions of the markets in which we compete, which may mean that we receive less widespread analyst coverage than our competitors. If one or more of the analysts who covers us downgrades their evaluations of our company or our stock, the price of our stock could decline. If one or more of these analysts cease coverage of our company, our stock may lose visibility in the market, which in turn could cause our stock price to decline.

 

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

 

Our certificate of incorporation, our bylaws, and Delaware corporate law contain provisions that could have an anti-takeover effect and make it harder for a third party to acquire us without the consent of our board of directors. These provisions may also discourage proxy contests and make it more difficult for our stockholders to take some corporate actions, including the election of directors.  These provisions include: the ability of our board of directors to issue shares of preferred stock in one or more series and to determine the terms of those shares, including preference and voting rights, without a stockholder vote; the exclusive right of our board of directors to elect a director to fill a vacancy created by the expansion of our board of directors or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on our board of directors; the inability of stockholders  to call a special meeting of stockholders; the prohibition on stockholder action by written consent, which forces stockholder action to be taken at an annual or special meeting of our stockholders; advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted on by stockholders at stockholder meetings, which may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of us; the ability of our board of directors, by majority vote, to amend the bylaws, which may allow our board of directors to take additional actions to prevent an unsolicited takeover and inhibit the ability of an acquirer to amend the bylaws to facilitate an unsolicited takeover attempt; and staggered terms for our directors, which effectively prevents stockholders from electing a majority of the directors at any one annual meeting of stockholders.

 

In addition, as a Delaware corporation, we are subject to Section 203 of the Delaware General Corporation Law. These provisions may prohibit large stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging or combining with us for a certain period of time.

 

We do not anticipate paying any dividends on our common stock.

 

We do not anticipate paying any cash dividends on our common stock in the foreseeable future. If we do not pay cash dividends, you would receive a return on your investment in our common stock only if the market price of our common stock is greater at the time you sell your shares than the market price at the time you bought your shares.

 

23

Item 1B.  Unresolved Staff Comments

 

There are no unresolved comments regarding our periodic or current reports from the staff of the SEC that were issued 180 days or more preceding the end of our fiscal year ended December 31, 2019. 

 

Item 2.  Properties

 

Our principal offices are located in Latham, New York, where we lease a 140,000 square foot facility that includes our headquarter office building, our manufacturing facility, and our primary research and development center. We lease a 830 square foot facility in Rochester, New York that includes additional office and research and development space, a 29,200 square foot facility in Spokane, Washington that includes an office building and a manufacturing facility and a 38,400 square foot manufacturing facility in Clifton Park, New York. We also lease service centers in Dayton, Ohio and Romeoville, Illinois. See Note 18, Commitments and Contingencies to the consolidated financial statements, Part II, Item 8 of this Form 10‑K for further discussion of the leases. We believe that our facilities are sufficient to accommodate our anticipated production volumes for at least the next two years.

 

Item 3.  Legal Proceedings

 

On August 28, 2018, a lawsuit was filed on behalf of multiple individuals against the Company and five corporate co-defendants in the 9th Judicial District Court, Rapides Parish, Louisiana. The lawsuit relates to the previously disclosed May 2018 accident involving a forklift powered by the Company’s fuel cell at a Procter & Gamble facility in Louisiana. The lawsuit alleges claims against the Company and co-defendants, including Structural Composites Industries, Deep South Equipment Co., Air Products and Chemicals, Inc., and Hyster-Yale Group, Inc. for claims under the Louisiana Product Liability Act, or LPLA, including defect in construction and/or composition, design defect, inadequate warning, breach of express warranty and negligence for wrongful death and personal injuries, among other damages. Procter & Gamble has intervened in that suit to recover worker’s compensation benefits paid to or for the employees/dependents. Procter & Gamble has also filed suit for property damage, business interruption, loss of revenue, expenses, and other damages. Procter & Gamble alleges theories under the LPLA, breach of warranty and quasi-contractual claims under Louisiana law. Defendants include the Company and several of the same co-defendants from the August 2018 lawsuit, including Structural Composites Industries, Deep South Equipment Co., and Hyster-Yale Group, Inc. The Company intends to vigorously defend both cases. Given the early stage of these matters, the Company is unable to determine the likelihood of an adverse outcome.  While the amount of damages sought in the lawsuits is yet unspecified, the Company does not expect the lawsuits to have a material impact on the Company’s financial position, liquidity or results of operations, or to otherwise have a material adverse effect on the Company.

 

Item 4.  Mine Safety Disclosures

 

Not applicable.

 

24

PART II

 

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

 

Market Information and Holders of Record.  Our common stock is traded on the NASDAQ Capital Market under the symbol “PLUG.” As of March 9, 2020, there were approximately 735 record holders of our common stock. However, management believes that a significant number of shares are held by brokers in  “street name” and that the number of beneficial stockholders of our common stock exceeds 127,049.  

 

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

 

Five‑Year Performance Graph.  Below is a line graph comparing the percentage change in the cumulative total return of the Company’s common stock, based on the market price of the Company’s common stock, with the total return of companies included within the NASDAQ Clean Edge Green Energy Index (CELS) and the companies included within the Russell 2000 Index (RUT) for the period commencing December 31, 2014 and ending December 31, 2019. The calculation of the cumulative total return assumes a $100 investment in the Company’s common stock, the NASDAQ Clean Edge Green Energy Index (CELS) and the Russell 2000 Index (RUT) Index on December 31, 2014 and the reinvestment of all dividends, if any.

 

PICTURE 1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Index

 

2014

 

2015

 

2016

 

2017

 

2018

 

2019

Plug Power Inc.

    

$

100.00

    

$

70.33

    

$

40.00

    

$

78.67

    

$

41.33

    

$

105.33

NASDAQ Clean Edge Green Energy Index

 

$

100.00

 

$

92.69

 

$

89.34

 

$

116.84

 

$

101.45

 

$

141.46

Russell 2000 Index

 

$

100.00

 

$

94.29

 

$

112.65

 

$

127.46

 

$

111.94

 

$

137.80

 

·

This graph and the accompanying text are not “soliciting material,” are not deemed filed with the SEC and are not to be incorporated by reference in any filing by us under the Securities Act or the Exchange Act, whether made before or after the date hereof and irrespective of any general incorporation language in any such filing.

·

The stock price performance shown on the graph is not necessarily indicative of future price performance.

·

The hypothetical investment in Plug Power Inc.’s common stock presented in the stock performance graph above is based on the closing price of the common stock on December 31, 2014.

25

Item 6.  Selected Financial Data

 

The following tables set forth selected financial data and other operating information of the Company. The selected statement of operations and balance sheet data for 2019, 2018, 2017, 2016, and 2015, as set forth below are derived from the audited consolidated financial statements of the Company. The information is only a summary and you should read it in conjunction with the Company’s audited consolidated financial statements and related notes and other financial information included herein, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

 

 

2019

 

2018

 

2017

 

2016

 

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands, except share and per share data)

 

Statements Of Operations:

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net revenue (1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales of fuel cell systems and related infrastructure

 

$

149,884

 

$

107,292

 

$

62,631

 

$

39,985

 

$

78,002

 

Services performed on fuel cell systems and related infrastructure

 

 

25,217

 

 

22,002

 

 

16,202

 

 

17,347

 

 

13,204

 

Power Purchase Agreements

 

 

25,853

 

 

22,869

 

 

12,869

 

 

13,687

 

 

5,718

 

Fuel delivered to customers

 

 

29,099

 

 

22,469

 

 

8,167

 

 

10,916

 

 

5,075

 

Other

 

 

186

 

 

 —

 

 

284

 

 

884

 

 

481

 

Net revenue

 

$

230,239

 

$

174,632

 

$

100,153

 

$

82,819

 

$

102,480

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales of fuel cell systems and related infrastructure

 

$

96,859

 

$

84,439

 

$

54,815

 

$

29,543

 

$

67,703

 

Services performed on fuel cell systems and related infrastructure

 

 

28,801

 

 

23,698

 

 

19,814

 

 

19,071

 

 

21,717

 

Provision for loss contracts related to service

 

 

 —

 

 

 —

 

 

 —

 

 

(1,071)

 

 

10,050

 

Power Purchase Agreements

 

 

40,056

 

 

36,161

 

 

31,292

 

 

16,601

 

 

5,665

 

Fuel delivered to customers

 

 

36,357

 

 

27,712

 

 

22,013

 

 

13,864

 

 

6,695

 

Other

 

 

200

 

 

 —

 

 

308

 

 

865

 

 

540

 

Total cost of revenue

 

$

202,273

 

$

172,010

 

$

128,242

 

$

78,873

 

$

112,370

 

Gross profit (loss)

 

$

27,966

 

$

2,622

 

$

(28,089)

 

$

3,946

 

$

(9,890)

 

Research and development expense

 

 

33,675

 

 

33,907

 

 

28,693

 

 

21,177

 

 

14,948

 

Selling, general and administrative expenses

 

 

44,333

 

 

38,198

 

 

45,010

 

 

34,288

 

 

34,164

 

Other (expense) income, net

 

 

(35,423)

 

 

(17,849)

 

 

(25,288)

 

 

(6,360)

 

 

3,312

 

Loss before income taxes

 

$

(85,465)

 

$

(87,332)

 

$

(127,080)

 

$

(57,879)

 

$

(55,690)

 

Income tax benefit

 

 

 —

 

 

9,217

 

 

 —

 

 

392

 

 

 

Net loss attributable to the Company

 

$

(85,465)

 

$

(78,115)

 

$

(127,080)

 

$

(57,487)

 

$

(55,690)

 

Preferred stock dividends declared and accretion of discount

 

 

(52)

 

 

(52)

 

 

(3,098)

 

 

(104)

 

 

(105)

 

Net loss attributable to common stockholders

 

$

(85,517)

 

$

(78,167)

 

$

(130,178)

 

$

(57,591)

 

$

(55,795)

 

Loss per share, basic and diluted

 

$

(0.36)

 

$

(0.36)

 

$

(0.60)

 

$

(0.32)

 

$

(0.32)

 

Weighted average number of common stock outstanding

 

 

237,152,780

 

 

218,882,337

 

 

216,343,985

 

 

180,619,860

 

 

176,067,231

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(at end of the period)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrestricted cash and cash equivalents

 

$

139,496

 

$

38,602

 

$

24,828

 

$

46,014

 

$

63,961

 

Total assets (2)

 

 

771,184

 

 

390,326

 

 

270,810

 

 

240,832

 

 

209,456

 

Noncurrent liabilities (2)

 

 

484,564

 

 

209,600

 

 

80,734

 

 

79,637

 

 

40,861

 

Stockholders’ equity

 

 

134,679

 

 

2,713

 

 

73,646

 

 

85,088

 

 

124,736

 

Working capital

 

 

162,549

 

 

9,245

 

 

3,886

 

 

44,448

 

 

88,524

 

 

 

 

 

 

(1)

During the fourth quarter of 2019, the Company early-adopted Accounting Standards Update 2019-08, Compensation – Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic 606) (ASU 2019-08) with retrospective adoption as of January 1, 2019 resulting in changes to previously reported 2019 interim financial information.

 

(2)

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

 

 

 

 

26

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

 

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

 

Overview 

 

As a leading provider of comprehensive hydrogen fuel cell turnkey solutions, Plug Power 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 over 30,000 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 hydrocarbon fuels such as liquid petroleum gas, or LPG, natural gas, propane, methanol, ethanol, gasoline or biofuels. Plug Power develops complete hydrogen generation, delivery, storage and refueling solutions for customer locations. Currently, the Company obtains the majority of its hydrogen by purchasing it from fuel suppliers for resale to customers.

 

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

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.

 

To promote fuel cell adoption and maintain post‑sale customer satisfaction, we offer a range of service and support options through extended maintenance contracts. Additionally, customers may waive our service option, and choose to service their systems independently. Substantially all of our fuel cells sold in recent years were bundled with maintenance contracts.

 

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

27

Results of Operations

 

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

 

Information pertaining to fiscal year 2017 was included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 starting on page 21 under Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which was filed with the SEC on March 12, 2019.  Such information is hereby incorporated by reference into this “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

In 2017, in separate transactions, the Company issued to each of Amazon and Walmart warrants to purchase shares of the Company’s common stock. The Company recorded a portion of the estimated fair value of the warrants as a reduction of revenue based upon the projected number of shares of common stock expected to vest under the warrants, the proportion of purchases by Amazon, Walmart and their affiliates within the period relative to the aggregate purchase levels required for vesting of the respective warrants, and the then-current fair value of the warrants. During the fourth quarter of 2019, the Company adopted ASU 2019-08, with retrospective adoption as of January 1, 2019.  As a result, the amount recorded as a reduction of revenue was measured based on the grant-date fair value of the warrants. Previously, this amount was measured based on vesting date fair value with estimates of fair value determined at each financial reporting date for unvested warrant shares considered to be probable of vesting. Except for the third tranche,  all existing unvested warrants are using a measurement date January 1, 2019, the adoption date, in accordance ASU 2019-08. For the third tranche, the exercise price will be determined once the second tranche vests. The measurement date will be determined at that time.

 

The amount of provision for common stock warrants recorded as a reduction of revenue during the years ended December 31, 2019 and 2018, respectively, is shown in the table below (in thousands):

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

 

2019

 

2018

 

Sales of fuel cell systems and related infrastructure

 

$

(2,037)

 

$

(4,877)

 

Services performed on fuel cell systems and related infrastructure

 

 

(814)

 

 

(1,951)

 

Power Purchase Agreements

 

 

(1,465)

 

 

(262)

 

Fuel delivered to customers

 

 

(2,197)

 

 

(3,100)

 

Total

 

$

(6,513)

 

$

(10,190)

 

 

Revenue, cost of revenue, gross profit/(loss) and gross margin for the years ended December 31, 2019 and 2018, were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended

 

Year Ended

 

 

December 31, 2019

 

December 31, 2018

 

 

Net

 

Cost of

    

Gross

    

Gross

 

Net

 

Cost of

    

Gross

    

Gross

 

 

Revenue

 

Revenue

 

Profit/(Loss)

 

Margin

 

Revenue

 

Revenue

 

Profit/(Loss)

 

Margin

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales of fuel cell systems and related infrastructure

 

$

149,884

 

$

96,859

 

$

53,025

 

35.4

%

 

$

107,292

 

$

84,439

 

$

22,853

 

21.3

%

Services performed on fuel cell systems and related infrastructure

 

 

25,217

 

 

28,801

 

 

(3,584)

 

(14.2)

%

 

 

22,002

 

 

23,698

 

 

(1,696)

 

(7.7)

%

Power Purchase Agreements

 

 

25,853

 

 

40,056

 

 

(14,203)

 

(54.9)

%

 

 

22,869

 

 

36,161

 

 

(13,292)

 

(58.1)

%

Fuel delivered to customers

 

 

29,099

 

 

36,357

 

 

(7,258)

 

(24.9)

%

 

 

22,469

 

 

27,712

 

 

(5,243)

 

(23.3)

%

Other

 

 

186

 

 

200

 

 

(14)

 

(7.5)

%

 

 

 —

 

 

 —

 

 

 —

 

 —

 

Total

 

$

230,239

 

$

202,273

 

$

27,966

 

12.1

%

 

$

174,632

 

$

172,010

 

$

2,622

 

1.5

%

28

Net Revenue

 

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

 

Revenue from sales of fuel cell systems and related infrastructure for the year ended December 31, 2019 increased $42.6 million, or 39.7%, to $149.9 million from $107.3 million for the year ended December 31, 2018. Included within revenue was provision for common stock warrants of $2.0 million and $4.9 million for the years ended December 31, 2019 and 2018, respectively. The main drivers for the increase in revenue were the increase in GenDrive units recognized as revenue, change in product mix and variations in customer programs, as well as a decrease in the aforementioned provision for common stock warrants. There were 6,058 GenDrive units recognized as revenue during the year ended December 31, 2019, compared to 4,426 for the year ended December 31, 2018. The increase in GenDrive revenue was partially offset by a  decrease in hydrogen fueling infrastructure installations. There were 12 sites associated with hydrogen fueling infrastructure  revenue during the year ended December 31, 2019,  compared to 17 during the year ended December 31, 2018.

 

Revenue – services performed on fuel cell systems and related infrastructure.  Revenue from services performed on fuel cell systems and related infrastructure represents revenue earned on our service and maintenance contracts and sales of spare parts. 

 

Revenue from services performed on fuel cell systems and related infrastructure for the year ended December 31, 2019 increased $3.2 million, or 14.6%, to $25.2 million from $22.0 million for the year ended December 31, 2018. Included within revenue from services was provision for common stock warrants of $0.8 million and $2.0 million for the years ended December 31, 2019 and 2018, respectively, contributing to the increase in revenue. The average number of units under extended maintenance contracts during year ended December 31, 2019 was 11,485, compared to 11,035 during the year ended December 31, 2018. This increase in the average number of units serviced in 2019 coupled with favorable changes in mix drove the increase in revenue during the period.

 

Revenue – Power Purchase Agreements.  Revenue from PPAs represents payments received from customers for power generated through the provision of equipment and service.  The equipment and service are associated with sale/leaseback transactions in which the Company sells fuel cell systems and related infrastructure to a third party, leases them back and operates them at customers’ locations who are parties to PPAs with the Company.  Alternatively, the Company can retain the equipment as leased property and provide it to customers under PPAs. 

 

Revenue from PPAs for the year ended December 31, 2019 increased $3.0 million, or 13.0%, to $25.9 million from $22.9 million for the year ended December 31, 2018. Included within revenue was provision for common stock warrants of $1.5 million and $0.3 million for the years ended December 31, 2019 and 2018, respectively. The increase in revenue from PPAs for the year ended December 31, 2019 as compared to the year ended December 31, 2018 was attributable to the increase in the number of units under PPA arrangements, partially offset by the increase in provision for common stock warrants. The remaining increase was due to the increased number of sites the Company had deployed under PPA arrangements. The average number of sites under PPA arrangements was 39 in 2019, as compared to 33 in 2018. The 18.2% increase in the average number of sites under PPA arrangements for the year December 31, 2019 compared to the year ended December 31, 2018 was relatively consistent with the increase in revenue during the same period, partially offset by the increase in provision for common stock warrants.

 

Revenue – fuel delivered to customers.  Revenue associated with fuel delivered to customers represents the sale of hydrogen to customers that has been purchased by the Company from a third party.  As part of the GenKey solution, the Company contracts with fuel suppliers to purchase liquid hydrogen, which is then sold to its customers.  At December 31, 2019, there were 76  sites associated with fuel contracts, as compared to 72  at December 31, 2018.  The sites generally are the same as those which had purchased hydrogen installations within the GenKey solution.

 

Revenue associated with fuel delivered to customers for the year ended December 31, 2019 increased $6.6 million, or 29.5%, to $29.1 million from $22.5 million for the year ended December 31, 2018. Included within revenue was provision for common stock warrants of $2.2 million and $3.1 million for the years ended December 31, 2019 and 2018, respectively, contributing to the increase in revenue. The remaining increase in revenue was primarily due to an increase in sites taking fuel deliveries in 2019, compared to 2018, as well as an increase in the price of fuel. The average

29

number of sites receiving fuel deliveries was 74 for the year ended December 31, 2019, as compared to 68 for the year ended December 31, 2018.

 

Cost of Revenue

 

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

 

Cost of revenue from sales of fuel cell systems and related infrastructure for the year ended December 31, 2019 increased $12.4 million, or 14.7%, to $96.9 million, compared to $84.4 million for the year ended December 31, 2018. This increase was primarily driven by an increase in the number of GenDrive units recognized as revenue, partially offset by the decrease in hydrogen infrastructure installations recognized as revenue. There were 6,058 GenDrive units recognized as revenue during the year ended December 31, 2019, compared to 4,426 for the year ended December 31, 2018. There were 12 sites associated with hydrogen fueling infrastructure revenue for the year ended December 31, 2019 compared to 17 for the year ended December 31, 2018. Gross margin generated from sales of fuel cell systems and related infrastructure was 35.4% for the year ended December 31, 2019, up from 21.3% for the year ended December 31, 2018, primarily due to an increase in GenDrive units recognized as revenue and decrease in the number of hydrogen infrastructure sites deployed, as well as a reduction of provision for common stock warrants. The provision for common stock warrants from sales of fuel cells and related infrastructure for the years ended December 31, 2019 and 2018 had a 1.3% and 4.4% negative impact on revenue, respectively.

Cost of revenue – services performed on fuel cell systems and related infrastructure. Cost of revenue from services performed on fuel cell systems and related infrastructure includes the labor, material costs and allocated overhead costs incurred for our product service and hydrogen site maintenance contracts and spare parts.

 

Cost of revenue from services performed on fuel cell systems and related infrastructure for the year ended December 31, 2019 increased $5.1 million, or 21.5%, compared to $23.7 million for the year ended December 31, 2018.  Gross margin declined to (14.2%) for the year ended December 31, 2019 compared to (7.7%) for the year ended December 31, 2018 primarily due to program investments targeting performance improvement and variation in maintenance cycles.

Cost of revenue – Power Purchase Agreements.  Cost of revenue from PPAs includes payments made to financial institutions for leased equipment, depreciation of leased property, and related service costs.  Leased units are primarily associated with sale/leaseback transactions in which the Company sells fuel cell systems and related infrastructure to a third party, leases them back, and operates them at customers’ locations that are parties to PPAs with the Company.  In some instances, the Company will hold the equipment and finance it under other arrangements, such as finance leases. For those situations, the Company recognizes the depreciation and service cost of the assets as cost of revenue from PPAs.

 

Cost of revenue from PPAs for the year ended December 31, 2019 increased $3.9 million, or 10.8%, to $40.1 million from $36.2 million for the year ended December 31, 2018. The increase was a result of an increase in the number of customer sites party to these agreements. Gross margin improved to (54.9%) for the year ended December 31, 2019 compared to (58.1%) for the year ended December 31, 2018, primarily due to an increase in leased units subject to sale/leaseback agreements with third party financial institutions and associated service cost improvements as we add units, which results in improved service cost per unit.

Cost of revenue – fuel delivered to customers.  Cost of revenue from fuel delivered to customers represents the purchase of hydrogen from suppliers that ultimately is sold to customers.  As part of the GenKey solution, the Company contracts with fuel suppliers to purchase liquid hydrogen and separately sells it to its customers when delivered or dispensed. At December 31, 2019, there were 76 sites associated with fuel contracts, as compared to 72 at December 31, 2018. The sites generally are the same as those which had purchased hydrogen installations within the GenKey solution.

 

Cost of revenue from fuel delivered to customers for the year ended December 31, 2019 increased $8.6 million, or 31.2%, to $36.4 million from $27.7 million for the year ended December 31, 2018.  The increase was due primarily to higher volume of liquid hydrogen delivered to customer sites as a result of an increase in the number of hydrogen installations completed under GenKey agreements and higher fuel costs.  Gross margin declined to (24.9%) during the year ended December 31, 2019 compared to (23.3%) during the year ended December 31, 2018 primarily due to an increase

30

in fuel costs and depreciation on tanks and related fuel equipment due to investments made to improve fuel system efficiency, partially offset by a decrease in provision for common stock warrants. The provision for common stock warrants from fuel delivered to customers for the year ended December 31, 2019 and 2018 had a 7.0% and 12.1% negative impact on revenue, respectively.

Expenses

 

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

 

Research and development expense for the year ended December 31, 2019 was relatively unchanged, as it decreased $232 thousand, or 0.7%, to $33.7 million from $33.9 million for the year ended December 31, 2018. 

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

 

Selling, general and administrative expenses for the year ended December 31, 2019 increased $6.1 million, or 16.1%, to $44.3 million from $38.2 million for the year ended December 31, 2018.  This increase was primarily related to an increase in performance and stock-based compensation during the year ended December 31, 2019, and by a  decrease in the legal accrual during the year ended December 31, 2018.

Interest and other expense, net. Interest and other expense, net consists of interest and other expenses related to our long-term debt, convertible senior notes, obligations under finance leases and our finance obligations, as well as foreign currency exchange losses, offset by interest and other income consisting primarily of interest earned on our cash and cash equivalents, restricted cash, foreign currency exchange gains and other income. The Company entered into a series of finance leases with Generate Lending LLC during 2018. Approximately $50.0 million of these finance leases were terminated and replaced with long-term debt with Generate Lending LLC in March 2019. Additionally, in September of 2019 and March of 2018, the Company issued convertible senior notes in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act.

 

Net interest and other expense for the year ended December 31, 2019, increased $13.4 million or 60.4%, as compared to the year ended December 31, 2018.  This increase was attributed to the increase in finance leases/long-term debt during 2019 and the issuance of convertible senior notes in September 2019 and March of 2018, as mentioned above. 

 

Common Stock Warrant Liability

 

Change in fair value of common stock warrant liability. The Company accounts for common stock warrants as common stock warrant liability with changes in the fair value reflected in the consolidated statement of operations as change in the fair value of common stock warrant liability.

 

The change in fair value of common stock warrant liability for the year ended December 31, 2019 resulted in a decrease in the associated warrant liability of $79 thousand as compared to a decrease of $4.3 million for the year ended December 31, 2018. These variances were primarily due to changes in the average remaining term of the warrants,  an increase in Company’s common stock price, and changes in volatility of our common stock, which are significant inputs to the Black-Scholes valuation model used to calculate the fair value of these warrants at each financial reporting date. All of these warrants were exercised on October 15, 2019 for net proceeds of $14.1 million.

 

Income Tax

 

Income taxes.  The deferred tax asset generated from our net operating loss has been offset by a full valuation allowance because it is more likely than not that the tax benefits of the net operating loss carry forward will not be realized.

 

31

The Company recognized an income tax benefit for the years ended December 31, 2019 and 2018 of zero and $9.2 million, respectively. The 2018 income tax benefit resulted from the intraperiod tax allocation rules under ASC Topic 740-20, Intraperiod Tax Allocation, under which the Company recognized a benefit for current losses as a result of an entry to additional paid-in capital related to the issuance of the $100 million Convertible Senior Notes discussed in Note 10, Convertible Senior Notes.. The Company has not changed its overall conclusion with respect to the need for a valuation allowance against its net deferred tax assets, which remain fully reserved.

 

Liquidity and Capital Resources

 

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 $85.5 million, $78.2 million and $130.2 million for the years ended December 31, 2019, 2018, and 2017, respectively, and had an accumulated deficit of $1.3 billion at December 31, 2019.

 

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 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 year ended December 31, 2019, net cash used in operating activities was $51.5 million, consisting primarily of a net loss attributable to the Company of $85.5 million, and net outflows from fluctuations in working capital and other assets and liabilities of $7.1 million, offset by the impact of noncash charges of $41.0 million,. The changes in working capital primarily were related to decreases in accounts receivable and deferred revenue, offset by increases in inventory, prepaid expenses, other current assets, accounts payable, accrued expenses, and other liabilities. Cash outflows related to equipment that we sell are included in net cash used on operating activities.  As of December 31, 2019, we had cash and cash equivalents of $139.5 million and net working capital of $162.5 million. By comparison, at December 31, 2018, we had cash and cash equivalents of $38.6 million and net working capital of $9.2 million. 

 

Net cash used in investing activities for the year ended December 31, 2019, totaled $14.2 million and included purchases of property, plant and equipment and intangible assets 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 year ended December 31, 2019 totaled $325.1 million and primarily resulted from the net proceeds from the issuance of preferred

32

stock and warrants of $14.1 million, net proceeds from public offerings of our equity of $158.4 million, proceeds from the exercise of stock options of $1.2 million, net proceeds of $39.1 million from the issuance of the $40 million Convertible Senior Note, proceeds from the issuance of long-term debt of $119.2 million and increase in finance obligations of $83.7 million, offset by payments for redemption of preferred stock of $4.0 million and repayments of long-term debt of $24.8 million and finance obligations of $61.7 million.

 

Public and Private Offerings of Equity and Debt

 

Common Stock Issuance

 

On April 3, 2017, the Company entered into an At Market Issuance Sales Agreement, or the Sales Agreement, with FBR Capital Markets & Co. (now B. Riley FBR, Inc.), or FBR, as sales agent, pursuant to which the Company may offer and sell, from time to time through FBR, shares of common stock par value $0.01 per share having an aggregate offering price of up to $75.0 million.  During the year ended December 31, 2019, the Company issued 6.3 million shares of common stock through its Sales Agreement resulting in net proceeds of $14.5 million.  As of December 2, 2019, the Company had raised a total of $46.8 million during the term of the Sales Agreement. On  December 2, 2019, the Sale Agreement expired.

 

In December 2019, the Company sold 46 million shares of common stock at a public price of $2.75 per share for net proceeds of approximately $120.4 million.

 

In March 2019, the Company sold 10 million shares of common stock at a purchase price of $2.35 per share for net proceeds of $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 common stock. In January 2020, the Company converted the remainder of the 500 shares of Series E Preferred Stock into 216 thousand shares of common stock. See Note 12, Redeemable Convertible Preferred Stock, for additional information.

 

Debt

 

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 December 31, 2019, the outstanding balance of the note, net of related discount and issuance costs, was $39.6 million. See Note 10, 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, both of which are hedges related to the $100 million Convertible Senior Notes. As of December 31, 2019, the outstanding balance of the notes, net of related accretion and issuance costs, was $70.6 million. See Note 10, Convertible Senior Notes, for more details.

 

On  April 12, 2017, the Company issued to Tech Opportunities LLC (Tech Opps) warrants to acquire up to 5,250,750 shares of common stock at an exercise price of $2.69 per share.  All of these warrants were exercised on October 15, 2019 for net proceeds of $14.1 million. See Note 11, Stockholders’ Equity, for additional information.

 

Operating or 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

33

Purchase Agreements (PPAs).  In connection with certain operating leases, the financial institutions require the Company to maintain cash balances in restricted accounts securing the Company’s finance obligations. Cash received from customers under the PPAs is used to make payments against 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 financial institutions under these agreements at December 31, 2019 was $227.2 million, $234.5 million  of which were secured with restricted cash, security deposits and pledged service escrows.

 

The Company has a master lease agreement with Wells Fargo Equipment Finance, Inc. (Wells Fargo MLA) to finance the Company’s commercial transactions with Wal-Mart Stores, Inc. (Walmart). The Wells Fargo MLA was entered into in 2017 and amended in 2018.  Pursuant to the Wells Fargo MLA, the Company sells fuel cell systems and hydrogen infrastructure to Wells Fargo and then leases them back and operates them at Walmart sites under lease agreements with Walmart. The total remaining lease payments to Wells Fargo were $112.8 million at December 31, 2019. Transactions completed under the Wells Fargo MLA in 2019 and 2018 were accounted for as operating leases and therefore the sales of the fuel cell systems and hydrogen infrastructure were recognized as revenue for the year ended December 31, 2019 and 2018. Transactions completed under the Wells Fargo MLA in 2017 were accounted for as finance leases. The difference in lease classification is due to changes in financing terms and their bearing on lease assessment criteria. Also included in the remaining lease payments to Wells Fargo was a sale/leaseback transaction in 2015 that was accounted for as an operating lease.  In connection with the Wells Fargo MLA, the Company has a customer guarantee for a majority of the transactions. The aforementioned Wells Fargo MLA transactions required a letter of credit for the unguaranteed portion totaling $30.7 million.

 

Additionally, during the third quarter of 2019, the Company entered into master lease agreements with both Key Equipment Finance (KeyBank) and SunTrust Equipment Finance & Lease Corp. (SunTrust), to finance commercial transactions with Walmart. The transactions with KeyBank and SunTrust required cash collateral for the unguaranteed portions totaling $15.9 million. Similar to the aforementioned Wells Fargo MLA, the Company has a customer guarantee for the majority of the transactions.

 

During the year ended December 31, 2019, the Company entered into additional, similar master lease agreements with Wells Fargo, Crestmark Equipment Finance (Crestmark), First American Bancorp, Inc. (First American), 36th Street Capital Partners, LLC (36th Street) and Fifth Third Bank, National Association (Fifth Third) to finance subscription programs with other customers. The total remaining lease payments to these financial institutions were $93.2 million at December 31, 2019. The majority of the lease payments are secured by cash collateral and letters of credit backed by restricted cash. 

 

Secured Debt

 

In March 2019, the Company entered into a loan and security agreement with Generate Lending, LLC (Generate Capital) pursuant to which the Company borrowed $85.0 million. The initial proceeds of the loan were used to pay in full the Company’s long-term debt and accrued interest of $17.6 million under the loan agreement with NY Green Bank, a Division of the New York State Energy Research & Development Authority (NY Green Bank) and terminate approximately $50.3 million of certain equipment leases with Generate Plug Power SLB II, LLC as well as repurchase 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 December 31, 2019 the outstanding balance was $112.7 million. See Note 9, Long-Term Debt for additional information.

 

Advances under the Term Loan Facility bear interest at 12.0% per annum. The Loan Agreement includes covenants, limitations, and events of default customary for similar facilities. The term of the loan is three years, with a maturity date of October 6, 2022. Principal payments will be funded in part by releases of restricted cash, as described in Note 18, Commitments and Contingencies.

 

Interest and a portion of the principal amount is payable on a quarterly basis and the entire then outstanding principal balance of the Term Loan Facility, together with all accrued and unpaid interest, is due and payable on the maturity date of October 6, 2022.  The Company may also be required to pay Generate Capital additional fees of up to $1.5 million if the Company is unable to provide $50.0 million of structured project financing arrangements with Generate Capital prior to December 31, 2021. 

34

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.

 

 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 December 31, 2019, the Company is 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.

 

The Term Loan Facility requires the principal balance at the end of each of the following years may not exceed the following (in thousands):

 

 

 

 

December 31, 2020

$

86,159

December 31, 2021

 

59,373

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

 

 

 

 

 

 

 

 

 

 

 

 

 

    

2019

    

2018

    

2017

 

Cash and cash equivalents at end of period

 

$

139,496

 

$

38,602

 

$

24,828

 

Restricted cash at end of period

 

 

230,004

 

 

71,551

 

 

43,227

 

Working capital at end of period

 

 

162,549

 

 

9,245

 

 

3,886

 

Net loss attributable to common stockholders

 

 

85,517

 

 

78,167

 

 

130,178

 

Net cash used in operating activities

 

 

(51,522)

 

 

(57,617)

 

 

(60,182)

 

Net cash used in investing activities

 

 

(14,244)

 

 

(19,572)

 

 

(44,363)

 

Net cash provided by financing activities

 

 

325,060

 

 

119,344

 

 

83,011

 

 

$40 Million Convertible Senior Note

In September 2019, the Company issued a $40.0 million in 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.  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

35

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.

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 comprised of (1) the discount of $8.0 million attributed to the fact that upon maturity, the Company is required to repay 120% of $40.0 million, or $48.0 million and (2) debt issuance costs of $1.0 million. The debt discount was recorded as debt issuance cost (presented as contra debt in the consolidated balance sheet) and is being amortized to interest expense over the term of the note using the effective interest rate method. As of December 31, 2019, the remaining life of the note was approximately 37 months.

 

Based on the closing price of the Company’s common stock of $3.16 on December 31, 2019, the if-converted value of the notes was greater than the principal amount. At December 31, 2019, the  fair value of the note was approximately $53.5 million. The Company utilized a Monte Carlo simulation model to estimate the fair value of the convertible debt as of December 31, 2019. 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.

 

$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 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.

36

Each $1,000 principal amount of the notes will initially be convertible into 436.3002 shares of the Company’s common stock, which is equivalent to an initial conversion price of approximately $2.29 per share, subject to adjustment upon the occurrence of specified events.  Holders of these 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.

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 consolidated balance sheet and is not remeasured as long as it continues to meet the conditions for equity classification.

 

37

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 consolidated balance sheet) 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. As of December 31, 2019, the remaining life of the notes was approximately 39 months.

 

Based on the closing price of the Company’s common stock of $3.16 on December 31, 2019, the if-converted value of the notes was greater than the principal amount. At December 31, 2019, the estimated fair value of the notes was approximately $135.3 million. The Company utilized data from market activity for this instrument near December 31, 2019, to determine the fair value of this instrument. This is considered a Level 2 fair value measurement.

 

Capped Call

 

In conjunction with the issuance of the $100 million Convertible Senior Notes, the Company entered into capped call options, or Capped Call, on the Company’s common stock with certain counterparties at a price of $16.0 million. The net cost incurred in connection with the Capped Call has been recorded as a reduction to additional paid-in capital in the consolidated balance sheet.

The Capped Call is generally expected to reduce or offset the potential dilution to the Company’s common stock upon any conversion of the $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 will initially be $3.82 per share, which represents a premium of 100% over the last reported sale price of the Company’s common stock of $1.91 per share on the date of the transaction, and is subject to certain adjustments under the terms of the Capped Call. The Capped Call becomes exercisable if the conversion option is exercised.

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

 

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

 

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

 

Amazon Transaction Agreement

 

On April 4, 2017, the Company and Amazon entered into a Transaction Agreement (the Amazon Transaction Agreement), pursuant to which the Company agreed to issue to Amazon.com NV Investment Holdings LLC, a wholly owned subsidiary of Amazon, warrants to acquire up to 55,286,696 shares of the Company’s common stock (the Amazon Warrant Shares), subject to certain vesting events described below. The Company and Amazon entered into the Amazon Transaction Agreement in connection with existing commercial agreements between the Company and Amazon with respect to the deployment of the Company’s GenKey fuel cell technology at Amazon distribution centers. The existing

38

commercial agreements contemplate, but do not guarantee, future purchase orders for the Company’s fuel cell technology. The vesting of the Amazon Warrant Shares is linked to payments made by Amazon or its affiliates (directly or indirectly through third parties) pursuant to the existing commercial agreements.

 

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

 

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

 

As of January 1, 2019, the Company’s adoption of ASU 2019-08 requires these share-based payment awards granted to a customer to be measured and classified by applying the guidance of ASC Topic 718.

 

As a result, the amount recorded as a reduction in revenue is measured based on the grant-date fair value of the Amazon Warrant Shares, as opposed to the vesting date. The transition guidance of ASU 2019-08 specifies that equity instruments that are unvested and subject to its guidance as of the adoption date are to be measured at the adoption date fair value. See Equity Instruments in Note 2, Summary of Significant Accounting Policies for further information regarding the impact of adoption of ASU 2019-08.

 

At both December 31, 2019 and 2018, 20,368,782 of the Amazon Warrant Shares had vested. The amount of provision for common stock warrants recorded as a reduction of revenue for the Amazon Warrant during the years ended December 31, 2019 and 2018 was $4.1 million and $9.8 million, respectively.

 

Walmart Transaction Agreement

 

On July 20, 2017, the Company and Walmart entered into a Transaction Agreement (the Walmart Transaction Agreement), pursuant to which the Company agreed to issue to Walmart a warrant to acquire up to 55,286,696 shares of the Company’s common stock, subject to certain vesting events (the Walmart Warrant Shares). The Company and Walmart entered into the Walmart Transaction Agreement in connection with existing commercial agreements between the Company and Walmart with respect to the deployment of the Company’s GenKey fuel cell technology across various Walmart distribution centers. The existing commercial agreements contemplate, but do not guarantee, future purchase orders for the Company’s fuel cell technology. The vesting of the warrant shares is linked to payments made by Walmart or its affiliates (directly or indirectly through third parties) pursuant to transactions entered into after January 1, 2017 under existing commercial agreements.

 

The majority of the Walmart Warrant Shares will vest based on Walmart’s payment of up to $600.0 million to the Company in connection with Walmart’s purchase of goods and services from the Company. The first tranche of 5,819,652 Walmart Warrant Shares vested upon the execution of the Walmart Transaction Agreement.  Accordingly, $10.9 million, the fair value of the first tranche of Walmart Warrant Shares, was recorded as a provision for common stock warrants and presented as a reduction to revenue on the consolidated statements of operations during 2017. All future

39

provision for common stock warrants will be recorded in revenue. The second tranche of 29,098,260 Walmart Warrant Shares will vest in four installments of 7,274,565 Walmart Warrant Shares each time Walmart or its affiliates, directly or indirectly through third parties, make an aggregate of $50.0 million in payments for goods and services to the Company, up to payments totaling $200.0 million in the aggregate. The exercise price for the first and second tranches of Walmart Warrant Shares will be $2.1231 per share. After Walmart has made payments to the Company totaling $200.0 million, the third tranche of 20,368,784 Walmart Warrant Shares will vest in eight installments of 2,546,098 Walmart Warrant Shares each time Walmart or its affiliates, directly or indirectly through third parties, make an aggregate of $50.0 million in payments for goods and services to the Company, up to payments totaling $400.0 million in the aggregate. The exercise price of the third tranche of Walmart Warrant Shares will be an amount per share equal to ninety percent (90%) of the 30-day volume weighted average share price of the common stock as of the final vesting date of the second tranche of Walmart Warrant Shares, provided that, with limited exceptions, the exercise price for the third tranche will be no lower than $1.1893. The Walmart Warrant Shares are exercisable through July 20, 2027.

 

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

 

As of January 1, 2019, the Company’s adoption of ASU 2019-08 requires these share-based payment awards granted to a customer to be measured and classified by applying the guidance of ASC Topic 718.

 

As a result, the amount recorded as a reduction in revenue is measured based on the grant-date fair value of the Walmart Warrant Shares, as opposed to the vesting date. The transition guidance of ASU 2019-08 specifies that equity instruments that are unvested and subject to its guidance as of the adoption date are to be measured at the adoption date fair value. See Equity Instruments in Note 2, Summary of Significant Accounting Policies for further information regarding the impact of adoption of ASU 2019-08.

 

At both December 31, 2019 and 2018, 5,819,652 of the Walmart Warrant Shares had vested.  The amount of provision for common stock warrants recorded as a reduction of revenue for the Walmart Warrant during the years ended December 31, 2019 and  2018 was $2.4 million and $0.4 million, respectively. 

 

Lessor Obligations

 

As of December 31, 2019, the Company had noncancelable operating leases (as lessor), primarily associated with assets deployed at customer sites. These leases expire over the next one to seven years. Leases contain termination clauses with associated penalties, the amount of which cause the likelihood of cancellation to be remote.

 

Future minimum lease payments under noncancelable operating leases (with initial or remaining lease terms in excess of one year) as of December 31, 2019 were as follows (in thousands):

 

 

 

 

 

2020

 

$

31,279

2021

 

 

30,316

2022

 

 

22,432

2023

 

 

18,346

2024 and thereafter

 

 

36,095

Total future minimum lease payments

 

$

138,468

 

Lessee Obligations

 

As of December 31, 2019, the Company had operating and finance leases, as lessee, primarily associated with sale/leaseback transactions that are partially secured by restricted cash, security deposits and pledged escrows (see also Note 1, Nature of Operations) as summarized below.  These leases expire over the next one to nine years. Minimum rent payments under operating and finance leases are recognized on a straight‑line basis over the term of the lease.  Leases

40

contain termination clauses with associated penalties, the amount of which cause the likelihood of cancellation to be remote.

 

In prior periods, the Company entered into sale/leaseback transactions that were accounted for as finance leases and reported as part of finance obligations. The outstanding balance of finance obligations related to sale/leaseback transactions at December 31, 2019 and December 31, 2018 was $31.7 million and $81.9 million, respectively. The fair value of the finance obligation approximated the carrying value as of both December 31, 2019 and December 31, 2018.

 

The Company has sold future services to be performed associated with certain sale/leaseback transactions and recorded the balance as a finance obligation.  The outstanding balance of this obligation at December 31, 2019 was $109.4  million, $15.5 million and $93.9 million of which was classified as short-term and long-term, respectively, on the accompanying consolidated balance sheet. The outstanding balance of this obligation at December 31, 2018 was $37.0 million, $5.7 million and $31.3 million of which was classified as short-term and long-term, respectively. The amount is amortized using the effective interest method. The fair value of this finance obligation approximated the carrying value as of December 31, 2019.

 

The Company has a finance lease associated with its property and equipment in Latham, New York.  Liabilities relating to this lease of $2.2 million has been recorded as a finance obligation in the accompanying consolidated balance sheet as of December 31, 2019.  The fair value of this finance obligation approximated the carrying value as of December 31, 2019.

 

Future minimum lease payments under operating and finance leases (with initial or remaining lease terms in excess of one year) as of December 31, 2019 were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

Total

 

 

Operating

 

Finance

 

Leased

 

Finance

 

 

Leases

 

Leases

 

Property

 

Obligations

2020

 

$

44,849

 

$

10,128

 

$

414

 

$

55,391

2021

 

 

44,919

 

 

9,276

 

 

407

 

 

54,602

2022

 

 

40,329

 

 

4,975

 

 

390

 

 

45,694

2023

 

 

35,738

 

 

3,150

 

 

366

 

 

39,254

2024 and thereafter

 

 

70,718

 

 

16,154

 

 

1,547

 

 

88,419

Total future minimum lease payments

 

 

236,553

 

 

43,683

 

 

3,124

 

 

283,360

Less imputed lease interest

 

 

(65,226)

 

 

(11,934)

 

 

(887)

 

 

(78,047)

Sale of future services

 

 

 —

 

 

109,422

 

 

 —

 

 

109,422

Total lease liabilities

 

$

171,327

 

$

141,171

 

$

2,237

 

$

314,735

 

Rental expense for all operating leases was $30.6 million and $15.8 million for the years ended December 31, 2019 and 2018, respectively.  

 

The gross profit on sale/leaseback transactions for all operating leases was $26.2 million and $16.4 million for the years ended December 31, 2019 and 2018, respectively. Right of use assets obtained in exchange for new operating lease liabilities was $121.4 million and $46.3 million for the years ended December 31, 2019 and 2018, respectively.

 

At December 31, 2019 and 2018, security deposits associated with sale/leaseback transactions were $6.0 million and $6.8 million, respectively, and were included in other assets in the consolidated balance sheet.

 

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

 

 

 

 

 

 

 

 

 

Year ended

 

 

Year ended

 

 

December 31, 2019

 

 

December 31, 2018

Cash payments (in thousands)

$

29,317

 

$

14,926

Weighted average remaining lease term (years)

 

5.61

 

 

4.36

Weighted average discount rate

 

12.1%

 

 

12.1%

 

41

Finance lease costs include amortization of the right of use assets (i.e. depreciation expense) and interest on lease liabilities (i.e. interest and other expense, net in the consolidated statement of operations). Finance lease costs were as follows (in thousands):

 

 

 

 

 

 

 

 

Year ended

 

Year ended

 

December 31, 2019

 

December 31, 2018

Amortization of right of use asset

$

3,178

 

$

7,549

Interest on finance obligations

 

4,863

 

 

6,908

Total finance lease cost

$

8,041

 

$

14,457

 

Right of use assets obtained in exchange for new finance lease liabilities were $5.9 million and $2.2 million for the years ended December 31, 2019 and 2018, respectively.

 

Other information related to the finance leases are presented in the following table:

 

 

 

 

 

 

 

 

 

Year ended

 

 

Year ended

 

 

December 31, 2019

 

 

December 31, 2018

Cash payments (in thousands)

$

61,237

 

$

33,715

Weighted average remaining lease term (years)

 

2.99

 

 

3.17

Weighted average discount rate

 

11.1%

 

 

11.8%

 

Restricted Cash

 

In connection with certain of the above noted sale/leaseback agreements, cash of $125.1 million was required to be restricted as security as of December 31, 2019, which restricted cash will be released over the lease term. As of December 31, 2019, the Company also had certain letters of credit backed by security deposits totaling $103.4 million that are security for the above noted sale/leaseback agreements.

 

The Company also had letters of credit in the aggregate amount of $0.5 million at December 31, 2019 associated with a finance obligation from the sale/leaseback of its building. We consider cash collateralizing this letter of credit as restricted cash.

 

Contractual Obligations

 

Contractual obligations as of December 31, 2019, under agreements with non‑cancelable terms are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Total

    

<1 year

    

1 - 3 Years

    

3 - 5 Years

    

> 5 Years

 

Operating lease obligations(A)

 

$

171,327

 

$

25,822

 

 

56,785

 

 

56,285

 

 

32,435

 

Finance lease obligations(B)

 

 

33,986

 

 

8,139

 

 

12,823

 

 

12,014

 

 

1,010

 

Other finance obligations(C)

 

 

109,422