Quarterly Report (10-q)

Date : 11/09/2018 @ 5:31PM
Source : Edgar (US Regulatory)
Stock : Plug Power, Inc. (PLUG)
Quote : 1.84  0.0 (0.00%) @ 2:55PM

Quarterly Report (10-q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

 

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

 

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2018

 

OR

 

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

 

FOR THE TRANSITION PERIOD FROM                    TO                   

 

Commission File Number: 1-34392

 

PLUG POWER INC.

(Exact name of registrant as specified in its charter)

 

 

 

 

Delaware

 

22-3672377

(State or Other Jurisdiction of

 

(I.R.S. Employer

Incorporation or Organization)

 

Identification Number)

 

968 ALBANY SHAKER ROAD, LATHAM, NEW YORK 12110

(Address of Principal Executive Offices, including Zip Code)

 

(518) 782-7700

(Registrant’s telephone number, including area code)

 

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

 

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

 

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

 

 

 

 

 

 

 

Large accelerated filer ☐

Accelerated filer ☒

Non-accelerated filer ☐

 

Smaller reporting company ☐

Emerging growth company ☐

 

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

 

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

 

The number of shares of common stock, par value of $0.01 per share, outstanding as of November 9, 2018 was 233,367,836.

 

 


 

INDEX to FORM 10-Q

 

 

Page

 

 

PART I.   FINANCIAL INFORMATION  

 

 

 

Item 1 – Interim Consolidated Financial Statements (Unaudited)  

3

 

 

Consolidated Balance Sheet  

3

 

 

Consolidated Statements of Operations  

4

 

 

Consolidated Statements of Comprehensive Loss  

5

 

 

Consolidated Statement of Stockholders’ Equity  

6

 

 

Consolidated Statements of Cash Flows  

7

 

 

Notes to Interim Consolidated Financial Statements  

8

 

 

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

36

 

 

Item 3 – Quantitative and Qualitative Disclosures About Market Risk  

55

 

 

Item 4 – Controls and Procedures  

56

 

 

PART II.   OTHER INFORMATION  

 

 

 

Item 1 – Legal Proceedings  

56

 

 

Item 1A – Risk Factors  

56

 

 

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

58

 

 

Item 3 – Defaults Upon Senior Securities  

58

 

 

Item 4 – Mine Safety Disclosures  

58

 

 

Item 5 – Other Information  

58

 

 

Item 6 – Exhibits  

58

 

 

Signatures  

59

 

 

 

 

2

 


 

PART 1.  FINANCIAL INFORMATION

 

Item 1 — Interim Financial Statements (Unaudited)

 

Plug Power Inc. and Subsidiaries

Consolidated Balance Sheet

(In thousands, except share and per share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

    

September 30,

    

December 31,

 

 

 

2018

 

2017

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

13,825

 

$

24,828

 

Restricted cash

 

 

15,803

 

 

13,898

 

Accounts receivable

 

 

24,721

 

 

15,331

 

Inventory

 

 

53,428

 

 

48,776

 

Prepaid expenses and other current assets

 

 

16,050

 

 

16,774

 

Total current assets

 

 

123,827

 

 

119,607

 

 

 

 

 

 

 

 

 

Restricted cash

 

 

32,424

 

 

29,329

 

Property, plant, and equipment, net of accumulated depreciation of $33,401 and $31,588, respectively

 

 

13,155

 

 

10,414

 

Leased property, net of accumulated depreciation of $8,826 and $11,812, respectively

 

 

130,015

 

 

87,065

 

Goodwill

 

 

9,157

 

 

9,445

 

Intangible assets, net of accumulated amortization of $2,203 and $1,735, respectively

 

 

4,058

 

 

3,785

 

Other assets

 

 

6,642

 

 

11,165

 

Total assets

 

$

319,278

 

$

270,810

 

 

 

 

 

 

 

 

 

Liabilities, Redeemable Preferred Stock, and Stockholders’ Equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

37,105

 

$

42,362

 

Accrued expenses

 

 

8,553

 

 

10,595

 

Deferred revenue

 

 

10,996

 

 

8,630

 

Finance obligations

 

 

48,705

 

 

34,506

 

Current portion of long-term debt

 

 

11,489

 

 

18,762

 

Other current liabilities

 

 

247

 

 

866

 

Total current liabilities

 

 

117,095

 

 

115,721

 

Deferred revenue

 

 

28,525

 

 

25,809

 

Common stock warrant liability

 

 

1,083

 

 

4,391

 

Finance obligations

 

 

86,562

 

 

37,069

 

Convertible senior notes, net

 

 

61,509

 

 

 —

 

Long-term debt

 

 

9,372

 

 

13,371

 

Other liabilities

 

 

18

 

 

94

 

Total liabilities

 

 

304,164

 

 

196,455

 

 

 

 

 

 

 

 

 

Redeemable preferred stock:

 

 

 

 

 

 

 

Series C redeemable convertible preferred stock, $0.01 par value per share (aggregate involuntary liquidation preference $16,664); 10,431 shares authorized; Issued and outstanding: 2,620 at September 30, 2018 and December 31, 2017

 

 

709

 

 

709

 

Stockholders’ equity:

 

 

 

 

 

 

 

Common stock, $0.01 par value per share; 750,000,000 shares authorized; Issued (including shares in treasury): 232,511,393 at September 30, 2018 and 229,073,517 at December 31, 2017

 

 

2,326

 

 

2,291

 

Additional paid-in capital

 

 

1,284,384

 

 

1,250,899

 

Accumulated other comprehensive income

 

 

1,762

 

 

2,194

 

Accumulated deficit

 

 

(1,243,430)

 

 

(1,178,636)

 

Less common stock in treasury:  15,002,663 at September 30, 2018 and 587,151 at December 31, 2017

 

 

(30,637)

 

 

(3,102)

 

Total stockholders’ equity

 

 

14,405

 

 

73,646

 

Total liabilities, redeemable preferred stock, and stockholders’ equity

 

$

319,278

 

$

270,810

 

 

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

 

3

 


 

Plug Power Inc. and Subsidiaries

Consolidated Statements of Operations

(In thousands, except share and per share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine months ended

 

 

September 30,

 

September 30,

 

    

2018

    

2017

    

2018

    

2017

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

Sales of fuel cell systems and related infrastructure

 

$

36,668

 

$

38,060

 

$

66,101

 

$

47,907

Services performed on fuel cell systems and related infrastructure

 

 

5,156

 

 

2,217

 

 

16,330

 

 

10,496

Power Purchase Agreements

 

 

5,555

 

 

(1,663)

 

 

16,365

 

 

7,593

Fuel delivered to customers

 

 

5,786

 

 

(4,149)

 

 

16,016

 

 

2,782

Other

 

 

 —

 

 

128

 

 

 —

 

 

279

Net revenue

 

 

53,165

 

 

34,593

 

 

114,812

 

 

69,057

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

Sales of fuel cell systems and related infrastructure

 

 

27,428

 

 

35,671

 

 

52,927

 

 

44,398

Services performed on fuel cell systems and related infrastructure

 

 

5,302

 

 

4,531

 

 

17,139

 

 

14,684

Power Purchase Agreements

 

 

8,767

 

 

7,853

 

 

27,055

 

 

21,844

Fuel delivered to customers

 

 

7,259

 

 

5,810

 

 

19,576

 

 

15,262

Other

 

 

 —

 

 

138

 

 

 —

 

 

301

Total cost of revenue

 

 

48,756

 

 

54,003

 

 

116,697

 

 

96,489

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit (loss)

 

 

4,409

 

 

(19,410)

 

 

(1,885)

 

 

(27,432)

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

8,402

 

 

7,436

 

 

25,477

 

 

20,059

Selling, general and administrative

 

 

8,652

 

 

9,535

 

 

29,202

 

 

36,584

Total operating expenses

 

 

17,054

 

 

16,971

 

 

54,679

 

 

56,643

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating loss

 

 

(12,645)

 

 

(36,381)

 

 

(56,564)

 

 

(84,075)

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and other expense, net

 

 

(6,352)

 

 

(2,724)

 

 

(15,593)

 

 

(7,112)

Change in fair value of common stock warrant liability

 

 

1,716

 

 

(1,878)

 

 

3,308

 

 

(16,454)

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss before income taxes

 

$

(17,281)

 

$

(40,983)

 

$

(68,849)

 

$

(107,641)

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax benefit

 

 

1,716

 

 

 —

 

 

7,581

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to the Company

 

$

(15,565)

 

$

(40,983)

 

$

(61,268)

 

$

(107,641)

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stock dividends declared and accretion of discount

 

 

(13)

 

 

(25)

 

 

(39)

 

 

(3,086)

Net loss attributable to common shareholders

 

$

(15,578)

 

$

(41,008)

 

$

(61,307)

 

$

(110,727)

Net loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

$

(0.07)

 

$

(0.18)

 

$

(0.28)

 

$

(0.52)

Weighted average number of common shares outstanding

 

 

218,953,106

 

 

225,762,535

 

 

218,930,891

 

 

212,419,634

 

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

4

 


 

Plug Power Inc. and Subsidiaries

Consolidated Statements of Comprehensive Loss

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended 

 

Nine months ended

 

 

 

September 30,

 

September 30,

 

 

    

2018

    

2017

    

2018

    

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to the Company

 

$

(15,565)

 

$

(40,983)

 

$

(61,268)

 

$

(107,641)

 

Other comprehensive (loss) income - foreign currency translation adjustment

 

 

(82)

 

 

555

 

 

(432)

 

 

1,711

 

Comprehensive loss

 

$

(15,647)

 

$

(40,428)

 

$

(61,700)

 

$

(105,930)

 

 

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

 

5

 


 

Plug Power Inc. and Subsidiaries

Consolidated Statement of Stockholders’ Equity

(In thousands, except share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

    

    

    

 

    

    

 

    

Accumulated

    

 

    

    

    

 

    

    

 

    

 

 

 

 

 

 

 

 

 

Additional

 

Other

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

Common Stock

 

 Paid-in

 

Comprehensive

 

Treasury Stock

 

Accumulated

 

Stockholders’

 

 

    

Shares

    

Amount

    

Capital

    

Income

    

Shares

    

Amount

    

Deficit

    

Equity

 

December 31, 2017

 

229,073,517

 

$

2,291

 

$

1,250,899

 

$

2,194

 

 

587,151

 

$

(3,102)

 

$

(1,178,636)

 

$

73,646

 

Net loss attributable to the Company

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(61,268)

 

 

(61,268)

 

Cumulative effect from adoption of accounting standard

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(3,487)

 

 

(3,487)

 

Other comprehensive loss

 

 —

 

 

 —

 

 

 —

 

 

(432)

 

 

 —

 

 

 —

 

 

 —

 

 

(432)

 

Stock-based compensation

 

450,270

 

 

 5

 

 

6,384

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

6,389

 

Stock dividend

 

20,245

 

 

 —

 

 

39

 

 

 —

 

 

 —

 

 

 —

 

 

(39)

 

 

 —

 

Public offerings, common stock, net

 

2,560,849

 

 

26

 

 

4,886

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

4,912

 

Stock option exercises

 

406,412

 

 

 4

 

 

123

 

 

 —

 

 

17,606

 

 

(35)

 

 

 —

 

 

92

 

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

 

 —

 

 

 —

 

 

30,121

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

30,121

 

Purchase of capped call

 

 —

 

 

 —

 

 

(16,000)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(16,000)

 

Purchase of common stock forward

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

14,397,906

 

 

(27,500)

 

 

 —

 

 

(27,500)

 

Exercise of warrants

 

100

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Provision for common stock warrants

 

 —

 

 

 —

 

 

7,932

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

7,932

 

September 30, 2018

 

232,511,393

 

$

2,326

 

$

1,284,384

 

$

1,762

 

 

15,002,663

 

$

(30,637)

 

$

(1,243,430)

 

$

14,405

 

 

 

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

6

 


 

Plug Power Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Nine months ended

 

 

 

September 30,

 

 

    

2018

    

2017

 

Cash Flows From Operating Activities:

 

 

 

 

 

 

 

Net loss attributable to the Company

 

$

(61,268)

 

$

(107,641)

 

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

 

 

 

 

 

 

 

Depreciation of property, plant and equipment, and leased property

 

 

8,592

 

 

6,596

 

Amortization of intangible assets

 

 

511

 

 

443

 

Stock-based compensation

 

 

6,389

 

 

7,288

 

Provision for bad debts and other assets

 

 

746

 

 

 —

 

Amortization of debt issuance costs and discount on convertible senior notes

 

 

4,436

 

 

496

 

Provision for common stock warrants

 

 

7,932

 

 

34,570

 

Change in fair value of common stock warrant liability

 

 

(3,308)

 

 

16,454

 

Income tax benefit

 

 

(7,581)

 

 

 —

 

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

 

 

 

 

 

 

 

Accounts receivable

 

 

(9,390)

 

 

(40,946)

 

Inventory

 

 

12,554

 

 

(14,747)

 

Prepaid expenses and other assets

 

 

1,272

 

 

(590)

 

Accounts payable, accrued expenses, and other liabilities

 

 

(7,609)

 

 

6,524

 

Accrual for loss contracts related to service

 

 

 —

 

 

(752)

 

Deferred revenue

 

 

5,082

 

 

11,011

 

Net cash used in operating activities

 

 

(41,642)

 

 

(81,294)

 

Cash Flows From Investing Activities:

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

 

(3,268)

 

 

(1,820)

 

Purchase of intangible asset

 

 

(879)

 

 

 —

 

Purchases for construction of leased property

 

 

(13,381)

 

 

(26,471)

 

Net cash used in investing activities

 

 

(17,528)

 

 

(28,291)

 

Cash Flows From Financing Activities:

 

 

 

 

 

 

 

Proceeds from exercise of warrants, net of transaction costs

 

 

 —

 

 

17,636

 

Proceeds from exercise of stock options

 

 

92

 

 

40

 

Payments for redemption of preferred stock

 

 

 —

 

 

(3,700)

 

Proceeds from public offerings, net of transaction costs

 

 

4,912

 

 

20,664

 

Proceeds from issuance of convertible senior notes, net

 

 

95,856

 

 

 —

 

Purchase of capped call and common stock forward

 

 

(43,500)

 

 

 —

 

Proceeds from borrowing of long-term debt, net of transaction costs

 

 

 —

 

 

20,147

 

Principal payments on long-term debt

 

 

(11,944)

 

 

(4,261)

 

Proceeds from sale/leaseback transactions accounted for as finance obligations

 

 

32,938

 

 

26,280

 

Repayments of finance obligations

 

 

(25,138)

 

 

(11,616)

 

Net cash provided by financing activities

 

 

53,216

 

 

65,190

 

Effect of exchange rate changes on cash

 

 

(49)

 

 

286

 

Decrease in cash, cash equivalents and restricted cash

 

 

(6,003)

 

 

(44,109)

 

Cash, cash equivalents, and restricted cash beginning of period

 

 

68,055

 

 

100,636

 

Cash, cash equivalents, and restricted cash end of period

 

$

62,052

 

$

56,527

 

Other Supplemental Cash Flow Information:

 

 

 

 

 

 

 

Cash paid for interest

 

$

10,338

 

$

6,205

 

 

 

 

 

 

 

 

 

Summary of non-cash investing and financing activity:

 

 

 

 

 

 

 

Recognition of right of use asset

 

$

58,577

 

$

 —

 

Net transfers between inventory, leased assets and property, plant and equipment

 

 

17,206

 

 

 —

 

Increase in property, plant and equipment financed as long-term debt or financing leases

 

 

408

 

 

 —

 

Conversion of preferred stock to common stock

 

 

 —

 

 

8,222

 

 

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

7

 


 

1.  Nature of Operations

 

Description of Business

 

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

 

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

 

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

 

Our current products and services include:

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

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

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

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

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

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

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

 

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

 

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

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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 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 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 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 have experienced and continue to experience negative cash flows from operations and net losses.  The Company incurred net losses attributable to common shareholders of $61.3 million for the nine months ended September 30, 2018 and $130.2 million, $57.6 million, and $55.8 million for the years ended December 31, 2017, 2016, and 2015, respectively, and had an accumulated deficit of $1.2 billion at September 30, 2018.

 

During the nine months ended September 30, 2018, cash used in operating activities was $41.6 million, consisting of a net loss attributable to the Company of $61.3 million, offset by net inflows from fluctuations in working capital and other assets and liabilities of $1.9 million, and by the impact of non-cash charges/gains of $17.7 million. The changes in working capital were related to decreases in inventory, prepaid expenses and other current assets and an increase in deferred revenue offset by an increase in accounts receivable and a decrease in accounts payable, accrued expenses and other liabilities. As of September 30, 2018, we had cash and cash equivalents of $13.8 million and net working capital of $6.7 million. By comparison, at December 31, 2017, we had cash and cash equivalents of $24.8 million and net working capital of $3.9 million.

 

Net cash used in investing activities for the nine months ended September 30, 2018, totaled $17.5 million and included purchases of property, plant and equipment and outflows associated with materials, labor, and overhead necessary to construct new leased property. Cash outflows related to equipment that we sell and equipment we lease directly to customers are included in net cash used in operating activities and net cash used in investing activities, respectively. Net cash provided by financing activities for the nine months ended September 30, 2018 totaled $53.2 million and primarily resulted from net proceeds of $52.4 million from the issuance of Convertible Senior Notes, net of purchases of a capped call and a common stock forward, and a $7.8 million increase in finance obligations, offset by $11.9 million of principal payments on long-term debt.

In March 2018, we issued $100.0 million in aggregate principal amount of 5.5% Convertible Senior Notes due in 2023 (Convertible Senior Notes). The total net proceeds from this offering, after considering costs of the issuance, were approximately $96.1 million. Approximately $43.5 million of the proceeds were used for the cost of a capped call and a common stock forward, both of which are hedges related to the Convertible Senior Notes. The remaining net proceeds from the Convertible Senior Notes will be used for general corporate purposes, including working capital.

 

The Company enters into sale/leaseback agreements with various financial institutions to facilitate the Company’s commercial transactions with key customers. The Company sells certain fuel cell systems and hydrogen infrastructure to the financial institutions, and leases the equipment back to support certain customer locations and to fulfill its varied Power Purchase Agreements (PPAs).  In connection with certain operating leases, the financial institutions required the Company

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to maintain cash balances in restricted accounts securing the Company’s lease obligations. Cash received from customers under the PPAs is used to make lease payments. 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 was $53.5 million, which have been partially secured with restricted cash and pledged service escrows.

 

Commencing in the third quarter of 2018, the Company has an amended and restated master lease agreement with Wells Fargo (Wells Fargo MLA) to finance the Company’s commercial transactions with Wal-Mart Stores, Inc. (Walmart).  Pursuant to the Wells Fargo MLA, the Company sells fuel cell systems and hydrogen infrastructure to Wells Fargo and then leases them back and operates them at Walmart sites under lease agreements with Walmart. The total remaining lease payments to Wells Fargo was $51.9 million at September 30, 2018. Transactions completed in the three months ended September 30, 2018 were accounted for as operating leases and therefore recognized as revenue. In connection with the Wells Fargo MLA, the Company has a customer guarantee for a majority of the transaction. The Wells Fargo MLA requires a letter of credit for the unguaranteed portion.

 

In November 2018, the Company completed a private placement of an aggregate of 35,000 shares of the Company’s Series E Convertible Preferred Stock, par value $0.01 per share (Series E Preferred Stock) resulting in net proceeds of approximately $31.0 million (see Note 16).

 

We have historically funded our operations primarily through public and private offerings of common and preferred stock, as well as short-term borrowings, long-term debt and project financing, and recently with Convertible Senior Notes.  The Company believes that its current working capital and cash anticipated to be generated from future operations, as well as borrowings from lending and project financing sources and proceeds from equity offerings, will provide sufficient liquidity to fund operations for at least one year after the date that the financial statements are issued. There is no guarantee that future funding will be available if and when required or at terms acceptable to the Company.  This projection is based on our current expectations regarding new project financing and product sales and service, cost structure, cash burn rate and other operating assumptions. Additionally, the Company has other capital sources available, including the At Market Issuance Sales Agreement (see Note 9).

 

2.  Summary of Significant Accounting Policies

 

Principles of Consolidation

 

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

 

Interim Financial Statements

 

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

 

Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with GAAP have been condensed or omitted. These unaudited interim consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K, filed for the fiscal year ended December 31, 2017.

 

The information presented in the accompanying unaudited interim consolidated balance sheet as of December 31, 2017, has been derived from the Company’s December 31, 2017 audited consolidated financial statements. All other information has been derived from the unaudited interim consolidated financial statements of the Company.

 

 

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Leases

 

The Company is a lessee in several noncancelable (1) operating leases, primarily related to sale/leaseback transactions with financial institutions for deployment of the Company’s products at certain customer sites, and (2) finance leases, also primarily related to sale/leaseback transactions with financial institutions for similar commercial purposes.  The Company accounts for leases in accordance with ASC Topic 842, Leases  (ASC Topic 842),   (see Recently Adopted Accounting Standards, as the Company has early adopted ASC Topic 842 in 2018). 

 

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

 

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

 

·

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

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

 

·

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

 

·

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Adoption of ASC Topic 842 - Transition Approach

 

As discussed in Recent Accounting Pronouncements, effective January 1, 2018, the Company early adopted ASC Topic 842.  Further, ASU 2018-11 was issued in July 2018, which allowed for a modified retrospective basis of accounting for the transition.  The Company selected this transition method and therefore restatement of prior period consolidated financial statements or presentation of comparative disclosures is not necessary. 

 

While determining the impact from the transition, the Company elected the practical expedients allowed under ASC 842.  The Company did not reassess (1) whether any expired or existing contracts are or contain leases, (2) the lease classification for any expired or existing leases, or (3) initial direct costs for any existing leases.  No modifications to leases effective upon January 1, 2018 were noted where hindsight expedients were necessary to apply.

 

Revenue Recognition

 

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

 

The Company does not include a right of return on its products other than rights related to standard warranty provisions that permit repair or replacement of defective goods. The Company accrues for anticipated standard warranty costs at the same time that revenue is recognized for the related product, or when circumstances indicate that warranty costs will be incurred, as applicable.  Only a limited number of fuel cell units are under standard warranty.

 

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

 

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

 

Payment terms for fuel cells, infrastructure and service are invoiced with terms ranging from 30 to 90 days. Service is prepaid upfront in a majority of the arrangements.  The Company does not adjust the transaction price for a significant financing component when the performance obligation is expected to be fulfilled within a year.

 

The Company presents the provision for common stock warrants within each revenue-related line item on the consolidated statements of operations. This presentation reflects a discount that those common stock warrants represent,

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and therefore revenue is net of these non-cash charges.  The provision of common stock warrants is allocated to the relevant revenue-related line items based upon the expected mix of the revenue for each respective contract.

 

Nature of goods and services

 

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

 

(i) Sales of Fuel Cell Systems and Related Infrastructure

 

Revenue from sales of fuel cell systems and related infrastructure represents sales of our GenDrive units, GenSure stationary backup power units, as well as hydrogen fueling infrastructure.

 

The Company considers comparable list prices, as well as historical average pricing approaches to determine standalone selling prices.  Once relative standalone selling prices are determined, the Company proportionately allocates the sale consideration to each performance obligation within the customer arrangement. The allocated sales consideration related to fuel cell systems and infrastructure, spare parts, and hydrogen infrastructure is recognized at a point in time, when the performance obligation has been satisfied, which usually occurs at shipment if title and risk of loss have passed to the customer or upon commissioning.

 

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

 

Revenue from services performed on fuel cell systems and related infrastructure represents revenue earned on our service and maintenance contracts and sales of spare parts. The sales consideration allocated to services as discussed above is generally recognized as revenue over time on a straight-line basis over the expected service period.

 

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

 

When costs are projected to exceed revenues over the life of an extended maintenance contract, an accrual for loss contracts is recorded.  Costs are estimated based upon historical experience and consider the estimated impact of the Company’s cost reduction initiatives.  The actual results may differ from these estimates.

 

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

 

(iii) Power Purchase Agreements

 

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

 

When fuel cell systems and related infrastructure are provided to customers through a PPA, revenues associated with these agreements are treated as rental income and recognized on a straight-line basis over the life of the agreements. 

 

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In conjunction with entering into a PPA with a customer, the Company may enter into sale/leaseback transactions with third-party financial institutions, whereby the fuel cells, a majority of the related infrastructure, and, in some cases service are sold to the third-party financial institution and leased back to the Company through either an operating or finance lease.

 

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

 

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

 

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

 

(iv) Fuel Delivered to Customers

 

Revenue associated with fuel delivered to customers represents the sale of hydrogen to customers that has been purchased by the Company from a third party or generated on site.

 

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

 

(v) Other

 

Other revenue primarily represents cost reimbursement research and development contracts associated with the development of PEM fuel cell technology.

 

Contract accounting is used for research and development contract revenue. The Company generally shares in the cost of these programs with cost sharing percentages ranging from 30% to 50% of total project costs. Revenue from time and material contracts is recognized on the basis of hours expended plus other reimbursable contract costs incurred during the period and is included within the “other” revenue line on the unaudited interim consolidated statements of operations. All allowable work performed through the end of each calendar quarter is billed, subject to limitations in the respective contracts.

 

Contract costs

 

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

 

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

 

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

 

During 2017, the Company issued warrants to Amazon.com, Inc. (Amazon) and Walmart. The fair value of warrants associated with each of these transactions are accounted for as revenue incentives as described in Note 11, Warrant Transaction Agreements.

 

Adoption of ASC Topic 606 - Transition Approach

 

As discussed in Recent Accounting Pronouncements, on January 1, 2018, the Company adopted ASC Topic 606, Revenue from Contracts with Customers (ASC Topic 606), which offers two transition approaches: full retrospective and modified retrospective. The Company chose the modified retrospective approach as its transition method and will not experience a significant effect on the timing and amount of revenue recognized or the amount of revenue allocated to the identified performance obligations. There was an insignificant amount of historical contract acquisition costs that were expensed and were not capitalized upon adoption of ASC Topic 606. However, upon adoption, contract acquisition costs of $0.1 million were capitalized and are being amortized as described above.

 

Cash Equivalents

 

Cash equivalents consist of money market accounts with an initial term of less than three months. At September 30, 2018 and December 31, 2017, cash equivalents consist of money market accounts. For purposes of the unaudited interim consolidated statements of cash flows, the Company considers all highly-liquid debt instruments with original maturities of three months or less to be cash equivalents.  The Company’s cash and cash equivalents are deposited with financial institutions located in the U.S. and may at times exceed insured limits.

 

Common Stock Warrant Accounting

 

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

 

Derivative Liabilities

 

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

 

Equity Instruments

 

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

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connection with the Amazon Transaction Agreement and the Walmart Transaction Agreement, as described in Note 11, Warrant Transaction Agreements, and are recorded as cumulative catch up adjustments as a reduction of revenue.

 

Convertible Senior Notes

The Company accounts for the issued Convertible Senior Notes with separate liability and equity components. The carrying amount of the liability component was initially determined by estimating the fair value of a similar debt instrument that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was determined by deducting the estimated fair value of the liability component from the par value of the Convertible Senior Notes as a whole as of the date of issuance. This difference represents a debt discount that is amortized to interest expense, with a corresponding increase to the carrying amount of the liability component, over the term of the Convertible Senior Notes using the effective interest rate method. The equity component is not remeasured as long as it continues to meet the conditions for equity classification. The Company has allocated issuance costs incurred to the liability and equity components. Issuance costs attributable to the liability component are being amortized to expense over the respective term of the Convertible Senior Notes, and issuance costs attributable to the equity components were netted with the respective equity component in additional paid-in capital.

 

Use of Estimates

 

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

 

Reclassifications and Correction of Immaterial Errors

 

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

 

In the third quarter of 2018, it was determined that the presentation in the consolidated statements of operations of certain service arrangements and the amortization of the associated finance obligations had not been appropriately accounted for resulting in an overstatement of our revenue and cost of revenue.  This presentation resulted in a gross up of these line items and had no impact on gross profit (loss) or net loss.  The Company corrected the 2017 unaudited interim consolidated financial statements to be consistent with the current period presentation and will correct comparable financial information in future filings.  The amount reclassified from revenue on service performed on fuel cell systems and related infrastructure to cost of revenue on PPAs for the three and nine months ended September 30, 2017 was $0.8 million and $2.3 million, respectively.  The amount reclassified from cost of revenue on service performed on fuel cell systems and related infrastructure to cost of revenue on PPAs for the three and nine months ended September 30, 2017 was $1.2 million and $2.7 million, respectively. The Company does not consider the impact of the prior period correction to be material to the prior period consolidated financial statements.

 

 

 

 

 

 

 

 

 

 

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Recent Accounting Pronouncements 

 

Recently Adopted Accounting Pronouncements

 

In September 2018, the Company early adopted ASC Topic 842, as amended effective January 1, 2018 and elected the available practical expedients. The adoption of ASU 2016-02 had an insignificant impact on the Company’s unaudited interim consolidated statements of operations. The most significant impact was the recognition of right of use assets and finance obligations for operating leases on the consolidated unaudited interim balance sheet, as well as expanded disclosures. The table below summarizes the impact of this initial adoption to the consolidated balance sheet as of January 1, 2018 (in thousands). In addition, the unaudited interim consolidated statements of operations for the nine months ended September 30, 2018 was impacted by a decrease of depreciation expenses of $0.3 million. See Note 15, Commitments and Contingencies for gross profit recognized on sale/leaseback transactions accounted for under ASC Topic 842.

 

 

 

 

Recognition of right of use asset

$

34,416

Decrease in accrued expenses

 

385

Recognition of finance obligation

 

(34,161)

Decrease in prepaid expenses and other assets

 

(3,229)

Decrease in leased property, net of accumulated depreciation

 

(563)

Increase in accumulated deficit

 

3,487

 

In June 2014, an accounting update was issued that replaces the existing revenue recognition framework regarding contracts with customers. The Company adopted this accounting update as of January 1, 2018. The standard outlines a five-step model whereby revenue is recognized as performance obligations within a contract are satisfied. The standard also requires new, expanded disclosures regarding revenue recognition. The Company did not experience a significant effect on the timing and amount of revenue recognized or the amount of revenue allocated to the identified performance obligations. There is an insignificant amount of historical contract acquisition costs that were expensed under prior guidance and were not capitalized upon adoption of ASC Topic 606. However, in subsequent periods, contract acquisition costs are capitalized in accordance with ASC Topic 606 (see Note 12).

 

In October 2016, an accounting update was issued to simplify how an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs.  Consequently, the amendments in this update eliminate the exception for an intra-entity transfer of an asset other than inventory.  Two common examples of assets included in the scope of this update are intellectual property and property, plant, and equipment.  The Company adopted this update on January 1, 2018 and it did not have any effect on the consolidated financial statements because our net tax position is zero.

 

In November 2016, an accounting update was issued to reduce the existing diversity in the classification and presentation of changes in restricted cash on the statements  of cash flows. This accounting update was adopted retrospectively by the Company on January 1, 2018. The adoption of this update impacts the cash flows from financing activities due to the change in the presentation of restricted cash within the consolidated statements of cash flows. Net cash flows from financing activities and change in cash and cash equivalents, which now includes restricted cash, increased by $5.0 million for the nine months ended September 30, 2018 and decreased by 6.1 million for the nine months ended September 30 2017.

 

Recently Issued and Not Yet Adopted Accounting Pronouncements

 

In August 2018, an accounting update was issued to help entities evaluate the accounting for fees paid by a customer in cloud computing arrangement (hosting arrangement) by providing guidance for determining when the arrangement includes a software license. The amendments in this update are effective for public companies beginning after December 15, 2019. Early adoption of the amendments in this update are permitted. The Company is evaluating the adoption method and impact this update will have on the consolidated financial statements.

 

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

 

In January 2017, an accounting update was issued to simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test.  Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. This accounting update is effective for years beginning after December 15, 2019.  Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is evaluating the impact this update will have on the consolidated financial statements.

 

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

 

 

3.  Earnings Per Share

 

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

 

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. As noted above, the Company is in a net loss position. The conversion option would have a dilutive impact on net loss per share of common stock when the average market price of the Company’s common stock for a given period exceeds the conversion price of the Convertible Senior Notes of $2.29 per share. During the nine months ended September 30, 2018, the Company's weighted average common stock price was below the conversion price of the Convertible Senior Notes. The shares of common stock purchased in connection with issuance of the Convertible Senior Notes are excluded from weighted-average shares outstanding for basic and diluted earnings per share purposes although they remain legally outstanding.  See Note 8, Convertible Senior Notes, for a detailed description of their issuance.

 

 

18

 


 

The dilutive potential common shares are summarized as follows:

 

 

 

 

 

 

 

 

At September 30,

 

    

2018

    

2017

Stock options outstanding (1)

 

22,111,243

 

19,965,599

Restricted stock outstanding (2)

 

2,367,347

 

248,077

Common stock warrants (3)

 

115,824,142

 

115,824,242

Preferred stock (4)

 

2,782,075

 

2,782,075

Convertible Senior Notes

 

43,630,020

 

 —

Number of dilutive potential common shares

 

186,714,827

 

138,819,993

 

(1)

During the three months ended September 30, 2018 and 2017, the Company granted 2,170,000 and 5,030,000 stock options, respectively.  During the nine months ended September 30, 2018 and 2017, the Company granted 2,654,667 and 5,480,863 stock options, respectively.

 

(2)

During the three months ended September 30, 2018 and 2017, the Company granted 2,160,000 and zero shares of restricted stock, respectively.  During the nine months ended September 30, 2018 and 2017, the Company granted 2,367,347 and 234,744 shares of restricted stock, respectively.

 

(3)

In February 2013, the Company issued 23,637,500 warrants as part of an underwritten public offering with an exercise price of $0.15 per warrant.  Of these warrants issued in February 2013, zero and 100 were unexercised as of September 30, 2018 and 2017.

 

In January 2014, the Company issued 4,000,000 warrants as part of an underwritten public offering with an exercise price of $4.00 per warrant. In December 2016, as a result of additional public offerings, and pursuant to the effect of the anti-dilution provisions of these warrants, the exercise price of the $4.00 warrants was reduced to $0.65. Of these warrants issued in January 2014, all 4,000,000 warrants were exercised during 2017, as described in Note 9, Stockholders’ Equity. 

 

In December 2016, the Company issued 10,501,500 warrants as part of two concurrent underwritten public offerings with an exercise price of $1.50 per warrant.  Of these warrants issued in December 2016, all 10,501,500 warrants were exercised during 2017, as described in Note 9, Stockholders’ Equity.

 

In April 2017, the Company issued 5,250,750 warrants with an exercise price of $2.69 per warrant, as described in Note 9, Stockholders’ Equity.  Of these warrants issued in April 2017, none have been exercised as of September 30, 2018.

 

In April 2017, the Company issued warrants to acquire up to 55,286,696 of the Company’s common stock as part of a transaction agreement, subject to certain vesting events, as described in Note 11, Warrant Transaction Agreements.  Of these warrants issued, none have been exercised as of September 30, 2018.

 

In July 2017, the Company issued warrants to acquire up to 55,286,696 of the Company’s common stock as part of a transaction agreement, subject to certain vesting events, as described in Note 11, Warrant Transaction Agreements. Of these warrants issued, none have been exercised as of September 30, 2018.

 

(4)

The preferred stock amount represents the dilutive potential common shares of the Series C redeemable convertible preferred stock, based on the conversion price of the preferred stock as of September 30, 2018 and 2017, respectively.  Of the 10,431 Series C redeemable preferred stock issued on May 16, 2013, 7,811 and 5,200 had been converted to common stock through September 30, 2018 and 2017, respectively, with the remainder still outstanding.  Of the 18,500 Series D redeemable convertible preferred stock issued on December 22, 2016, 3,700 shares were redeemed during the three months ended March 31, 2017 and the remaining 14,800 were converted to common stock during the nine months ended September 30, 2017.

 

 

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4.  Inventory

 

Inventory as of September 30, 2018 and December 31, 2017 consists of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

    

September 30, 2018

    

December 31, 2017

 

Raw materials and supplies

 

$

40,119

 

$

42,851

 

Work-in-process

 

 

10,088

 

 

3,492

 

Finished goods

 

 

3,221

 

 

2,433

 

 

 

$

53,428

 

$

48,776

 

 

Raw materials and supplies include spare parts inventory held at service locations valued at $5.7  million and $5.5 million as of September 30, 2018 and December 31, 2017, respectively.

 

5. Leased Property

 

Leased property at September 30, 2018 and December 31, 2017 consists of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

    

September 30,

    

December 31,

 

 

 

2018

 

2017

 

Right of use assets - operating

 

$

55,582

 

$

 —

 

Right of use asset - finance

 

 

40,010

 

 

 —

 

Capitalized costs of lessor assets

 

 

43,249

 

 

98,877

 

Less: accumulated depreciation

 

 

(8,826)

 

 

(11,812)

 

Leased property, net

 

$

130,015

 

$

87,065

 

 

Depreciation expense related to leased property was $2.2 million and $1.9 million for the three months ended September 30, 2018 and 2017, respectively.  Depreciation expense related to leased property was $6.8 million and $5.2 million for the nine months ended September 30, 2018 and 2017, respectively. Included in depreciation expense for the three and nine months ended September 30, 2018 was depreciation of the finance right of use asset of $1.6 million and $4.9 million, respectively.

 

6. Intangible Assets

 

The gross carrying amount and accumulated amortization of the Company’s acquired identifiable intangible assets as of September 30, 2018 are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted Average

 

Gross Carrying

 

Accumulated

 

 

 

 

 

 

Amortization Period

 

Amount

 

Amortization

 

Total

 

Acquired technology

 

9  years 

 

$

5,941

 

 

(2,032)

 

 

3,909

 

Customer relationships

 

10  years 

 

 

260

 

 

(117)

 

 

143

 

Trademark

 

5  years 

 

 

60

 

 

(54)

 

 

 6

 

 

 

 

 

$

6,261

 

$

(2,203)

 

$

4,058

 

 

The gross carrying amount and accumulated amortization of the Company’s acquired identifiable intangible assets as of December 31, 2017 are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted Average

 

Gross Carrying

 

Accumulated

 

 

 

 

 

 

Amortization Period

 

Amount

 

Amortization

 

Total

 

Acquired technology