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.

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2020

OR

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

FOR THE TRANSITION PERIOD FROM                    TO                   

Commission File Number: 1-34392

PLUG POWER INC.

(Exact name of registrant as specified in its charter)

Delaware

22-3672377

(State or Other Jurisdiction of

(I.R.S. Employer

Incorporation or Organization)

Identification Number)

968 ALBANY SHAKER ROAD, LATHAM, NEW YORK 12110

(Address of Principal Executive Offices, including Zip Code)

(518) 782-7700

(Registrant’s telephone number, including area code)

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

Title of each class

Trading
Symbol(s)

Name of each exchange on
which registered

Common Stock, par value $0.01
per share

PLUG

The Nasdaq Capital Market

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

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

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

Large accelerated filer 

Accelerated filer 

Non-accelerated filer 

Smaller reporting company 

Emerging growth company 

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

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

The number of shares of common stock, par value of $0.01 per share, outstanding as of August 05, 2020 was 365,802,413.

INDEX to FORM 10-Q

Page

PART I. FINANCIAL INFORMATION

Item 1 – Interim Condensed Consolidated Financial Statements (Unaudited)

3

Condensed Consolidated Balance Sheets

3

Condensed Consolidated Statements of Operations

4

Condensed Consolidated Statements of Comprehensive Loss

5

Condensed Consolidated Statements of Stockholders’ (Deficit) Equity

6

Condensed Consolidated Statements of Cash Flows

7

Notes to Interim Condensed Consolidated Financial Statements

8

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

42

Item 3 – Quantitative and Qualitative Disclosures About Market Risk

69

Item 4 – Controls and Procedures

69

PART II. OTHER INFORMATION

Item 1 – Legal Proceedings

69

Item 1A – Risk Factors

70

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

70

Item 3 – Defaults Upon Senior Securities

71

Item 4 – Mine Safety Disclosures

71

Item 5 – Other Information

71

Item 6 – Exhibits

71

Signatures

73

2

PART 1.  FINANCIAL INFORMATION

Item 1 — Interim Financial Statements (Unaudited)

Plug Power Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(In thousands, except share and per share amounts)

(Unaudited)

    

June 30,

    

December 31,

2020

2019

Assets

Current assets:

Cash and cash equivalents

$

152,492

$

139,496

Restricted cash

50,634

54,813

Accounts receivable

 

45,522

 

25,448

Inventory

 

114,571

 

72,391

Prepaid expenses and other current assets

 

31,436

 

21,192

Total current assets

 

394,655

 

313,340

Restricted cash

 

180,127

 

175,191

Property, plant, and equipment, net of accumulated depreciation of $19,203 and $17,417, respectively

60,018

 

14,959

Leased property, net

274,721

 

244,740

Goodwill

70,402

8,842

Intangible assets, net

 

38,574

 

5,539

Other assets

 

11,817

 

8,573

Total assets

$

1,030,314

$

771,184

Liabilities, Redeemable Preferred Stock, and Stockholders’ Equity

Current liabilities:

Accounts payable

$

39,812

$

40,376

Accrued expenses

 

23,320

 

14,213

Deferred revenue

 

14,902

 

11,691

Finance obligations

57,695

49,507

Current portion of long-term debt

50,933

26,461

Other current liabilities

 

21,692

 

8,543

Total current liabilities

 

208,354

 

150,791

Deferred revenue

 

25,038

 

23,369

Finance obligations

 

300,653

 

265,228

Convertible senior notes, net

142,704

110,246

Long-term debt

101,844

85,708

Other liabilities

 

11,756

 

13

Total liabilities

 

790,349

 

635,355

Redeemable preferred stock:

Series C redeemable convertible preferred stock, $0.01 par value per share (aggregate involuntary liquidation preference $16,664); 10,431 shares authorized; Issued and outstanding: zero at June 30, 2020 and 2,620 at December 31, 2019

 

 

709

Series E redeemable preferred stock, $0.01 par value per share; Shares authorized: 35,000 at both June 30, 2020 and December 31, 2019; Issued and outstanding: zero at June 30, 2020 and 500 at December 31, 2019

441

Stockholders’ equity:

Common stock, $0.01 par value per share; 750,000,000 shares authorized; Issued (including shares in treasury): 348,201,792 at June 30, 2020 and 318,637,560 at December 31, 2019

 

3,482

 

3,186

Additional paid-in capital

 

1,658,532

 

1,507,116

Accumulated other comprehensive income

 

1,271

 

1,400

Accumulated deficit

 

(1,391,961)

 

(1,345,807)

Less common stock in treasury: 15,292,591 at June 30, 2020 and 15,259,045 at December 31, 2019

(31,359)

(31,216)

Total stockholders’ equity

 

239,965

 

134,679

Total liabilities, redeemable preferred stock, and stockholders’ equity

$

1,030,314

$

771,184

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

3

Plug Power Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(In thousands, except share and per share amounts)

(Unaudited)

Three Months Ended

Six Months Ended

June 30,

June 30,

    

2020

    

2019

    

2020

    

2019

Net revenue:

Sales of fuel cell systems and related infrastructure

$

47,746

$

38,696

$

68,133

$

41,240

Services performed on fuel cell systems and related infrastructure

6,236

5,341

12,757

11,684

Power Purchase Agreements

 

6,654

 

6,409

 

13,150

 

12,519

Fuel delivered to customers

 

7,372

 

7,089

 

14,705

 

13,671

Other

62

138

Net revenue

68,070

57,535

108,883

79,114

Cost of revenue:

Sales of fuel cell systems and related infrastructure

 

33,676

 

23,129

 

47,420

 

25,450

Services performed on fuel cell systems and related infrastructure

 

6,491

 

6,218

 

14,672

 

12,341

Power Purchase Agreements

 

13,704

 

8,713

 

27,947

 

17,711

Fuel delivered to customers

 

9,060

 

8,854

 

18,095

 

16,775

Other

 

63

 

 

144

 

Total cost of revenue

 

62,994

 

46,914

 

108,278

 

72,277

Gross profit

 

5,076

 

10,621

 

605

 

6,837

Operating expenses:

Research and development

9,757

8,933

20,169

16,306

Selling, general and administrative

21,658

13,627

32,671

22,951

Total operating expenses

31,415

22,560

52,840

39,257

Operating loss

(26,339)

(11,939)

(52,235)

(32,420)

Interest and other expense, net

 

(13,198)

 

(7,861)

 

(24,781)

 

(16,206)

Change in fair value of common stock warrant liability

 

 

1,706

 

 

(420)

Gain on extinguishment of debt

 

13,222

 

 

13,222

 

Loss before income taxes

$

(26,315)

$

(18,094)

$

(63,794)

$

(49,046)

Income tax benefit

 

17,659

 

 

17,659

 

Net loss attributable to the Company

$

(8,656)

$

(18,094)

$

(46,135)

$

(49,046)

Preferred stock dividends declared and accretion of discount

 

(13)

 

(13)

 

(19)

 

(26)

Net loss attributable to common stockholders

$

(8,669)

$

(18,107)

$

(46,154)

$

(49,072)

Net loss per share:

Basic and diluted

$

(0.03)

$

(0.08)

$

(0.15)

$

(0.22)

Weighted average number of common stock outstanding

 

316,645,050

 

231,114,868

 

310,918,626

 

225,899,224

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

4

Plug Power Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Loss

(In thousands)

(Unaudited)

Three months ended

Six months ended

June 30,

June 30,

    

2020

    

2019

 

2020

    

2019

Net loss attributable to the Company

$

(8,656)

$

(18,094)

$

(46,135)

$

(49,046)

Other comprehensive gain (loss) - foreign currency translation adjustment

 

107

 

86

 

(129)

 

(124)

Comprehensive loss

$

(8,549)

$

(18,008)

$

(46,264)

$

(49,170)

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

5

Plug Power Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ (Deficit) Equity

(In thousands, except share amounts)

(Unaudited)

    

    

    

    

    

    

    

Accumulated

    

    

    

    

    

    

    

Additional

Other

Total

Common Stock

 Paid-in

Comprehensive

Treasury Stock

Accumulated

Stockholders’

    

Shares

    

Amount

    

Capital

    

Income

    

Shares

    

Amount

    

Deficit

    

(Deficit) Equity

December 31, 2019

 

318,637,560

$

3,186

$

1,507,116

$

1,400

 

15,259,045

$

(31,216)

$

(1,345,807)

$

134,679

Net loss attributable to the Company

 

 

 

 

 

 

(46,135)

 

(46,135)

Other comprehensive loss

 

 

 

(129)

 

 

 

 

(129)

Stock-based compensation

586,558

 

6

 

6,325

 

 

33,371

 

(143)

 

 

6,188

Stock dividend

5,156

 

 

19

 

 

 

 

(19)

 

Public offerings, common stock, net

(269)

(269)

Stock option exercises

6,905,936

 

69

 

15,729

 

 

175

 

 

 

15,798

Equity component of $200 million convertible senior notes issued, net of issuance costs and income tax expense

115,884

115,884

Purchase of capped calls

(16,253)

(16,253)

Termination of capped calls

24,158

24,158

Provision for common stock warrants

7,983

7,983

Accretion of discount, preferred stock

(29)

(29)

Conversion of preferred stock

2,998,526

 

30

 

1,148

 

 

 

 

 

1,178

Repurchase of $100 million convertible senior notes, net of income tax benefit

9,409,591

94

(52,855)

(52,761)

Shares issued for acquisitions

9,658,465

97

49,576

49,673

June 30, 2020

348,201,792

$

3,482

$

1,658,532

$

1,271

 

15,292,591

$

(31,359)

$

(1,391,961)

$

239,965

December 31, 2018

 

234,160,661

$

2,342

$

1,289,714

$

1,584

 

15,002,663

$

(30,637)

$

(1,260,290)

$

2,713

Net loss attributable to the Company

 

 

 

 

 

 

 

(49,046)

 

(49,046)

Other comprehensive loss

 

 

 

 

(124)

 

 

 

 

(124)

Stock-based compensation

 

780,985

 

8

 

5,115

 

 

 

 

 

5,123

Stock dividend

 

10,147

 

 

26

 

 

 

 

(26)

 

Issuance of common stock, net

11,881,637

119

28,146

28,265

Stock option exercises

 

141,743

 

1

 

248

 

 

17,774

 

(44)

 

 

205

Provision for common stock warrants

5,662

5,662

June 30, 2019

 

246,975,173

$

2,470

$

1,328,911

$

1,460

 

15,020,437

$

(30,681)

$

(1,309,362)

$

(7,202)

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

6

Plug Power Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

Six months ended

June 30,

 

2020

    

2019

Operating Activities

Net loss attributable to the Company

$

(46,135)

$

(49,046)

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

Depreciation of property, plant and equipment, and leased property

 

5,783

 

5,496

Amortization of intangible assets

 

398

 

338

Stock-based compensation

 

6,188

 

5,123

Gain on extinguishment of debt

(13,222)

Provision for bad debts and other assets

 

 

907

Amortization of debt issuance costs and discount on convertible senior notes

6,528

4,340

Provision for common stock warrants

7,983

2,209

Loss on disposal of leased assets

212

Change in fair value of common stock warrant liability

 

 

420

Income tax benefit

(17,659)

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

Accounts receivable

 

(18,393)

 

9,848

Inventory

 

(37,983)

 

(25,280)

Prepaid expenses, and other assets

 

(11,817)

 

(460)

Accounts payable, accrued expenses, and other liabilities

 

4,699

 

1,232

Deferred revenue

 

2,383

 

(3,827)

Net cash used in operating activities

 

(111,247)

 

(48,488)

Investing Activities

Purchases of property, plant and equipment

 

(5,009)

 

(2,844)

Purchase of intangible assets

(1,860)

Purchases for construction of leased property

(6,256)

(1,987)

Net cash paid for acquisitions

 

(45,286)

 

Proceeds from sale of leased assets

 

 

375

Net cash used in investing activities

 

(56,551)

 

(6,316)

Financing Activities

Proceeds from issuance of preferred stock, net of transaction costs

 

 

(8)

Proceeds from public offerings, net of transaction costs

 

(269)

 

28,265

Proceeds from exercise of stock options

 

15,798

 

205

Proceeds from issuance of convertible senior notes, net

205,100

Repurchase of convertible senior notes

(90,238)

Purchase of capped calls

(16,253)

Proceeds from termination of capped calls

24,158

Principal payments on long-term debt

(21,626)

(17,521)

Proceeds from long-term debt, net

49,000

99,546

Repayments of finance obligations

(11,783)

(56,070)

Proceeds from finance obligations

 

27,678

 

25,609

Net cash provided by financing activities

 

181,565

 

80,026

Effect of exchange rate changes on cash

 

(14)

 

(48)

Decrease in cash, cash equivalents and restricted cash

 

13,753

 

25,174

Cash, cash equivalents, and restricted cash beginning of period

 

369,500

 

110,153

Cash, cash equivalents, and restricted cash end of period

$

383,253

$

135,327

Supplemental disclosure of cash flow information

Cash paid for interest

$

9,466

$

8,673

Summary of non-cash investing and financing activity

Recognition of right of use asset

$

26,922

$

34,530

Conversion of preferred stock to common stock

441

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

7

Notes to Interim Condensed Consolidated Financial Statements

(unaudited)

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

1. Nature of Operations

Description of Business

As a leading provider of comprehensive hydrogen fuel cell turnkey solutions, Plug Power Inc., or the Company, is seeking to build a green hydrogen economy.  The Company is focused on hydrogen and fuel cell systems that are used to power electric motors primarily in the electric mobility and stationary power markets, given the ongoing paradigm shift in the power, energy, and transportation industries to address climate change, energy security, and meet sustainability goals.  Plug Power created the first commercially viable market for hydrogen fuel cell, or the HFC technology. As a result, the Company has deployed over 34,000 fuel cell systems, and has become the largest buyer of liquid hydrogen, having built and operated a hydrogen network across North America.

We are focused on proton exchange membrane, or PEM, fuel cell and fuel processing technologies, fuel cell/battery hybrid technologies, and associated hydrogen storage and dispensing infrastructure from which multiple products are available. A fuel cell is an electrochemical device that combines hydrogen and oxygen to produce electricity and heat without combustion. Hydrogen is derived from multiple sources. The majority of liquid hydrogen in the United States is produced using the steam methane reforming process and utilizing by-product hydrogen from chlor alkali production. By-product hydrogen from a chlor alkali plant is considered to be low carbon hydrogen and in some cases, considered green hydrogen, depending on the source of electricity and geographic location. We source a significant amount of liquid hydrogen based on the chlor alkali process today. 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 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. In June of 2020, Plug Power completed the acquisitions of United Hydrogen Group Inc. and Giner ELX, Inc. in line with the Company’s hydrogen vertical integration strategy, with plans to have more than 50% of the hydrogen used  by the Company to be green by 2024. These acquisitions further enhance Plug Power’s position in the hydrogen industry with capabilities in generation, liquefaction and distribution of hydrogen fuel complementing its industry-leading position in the design, construction, and operation of customer-facing hydrogen fueling stations. These acquisitions establish a pathway for Plug Power to transition from low-carbon to zero-carbon hydrogen 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;

8

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. This includes the Plug Power MEA (membrane electrode assembly), a critical component of the fuel cell stack used in zero-emission fuel cell electric vehicle engines,  in which Plug Power is the largest producer in North America.

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, Rochester, NY and Spokane, WA and support liquid hydrogen generation  and logistics in Charleston, TN.

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 production and 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 $46.2 million and $49.1 million for the six months ended June 30, 2020 and 2019, respectively, and had an accumulated deficit of $1.4 billion at June 30, 2020.

We have historically funded our operations primarily through public and private offerings of equity and debt, as well as short-term borrowings, long-term debt and project financings. The Company believes that its current working capital and cash anticipated to be generated from future operations, as well as borrowings from lending and project financing sources and proceeds from equity and debt offerings, including our at-the-market offering, will provide sufficient liquidity to fund operations for at least one year after the date the financial statements are issued. There is no guarantee that future funding will be available if and when required or at terms acceptable to the Company.  This projection is based on our current expectations regarding new project financing and product sales and service, cost structure, cash burn rate and other operating assumptions.

During the six months ended June 30, 2020, net cash used in operating activities was $111.2 million, consisting primarily of a net loss attributable to the Company of $46.1 million, and net outflows from fluctuations in working capital and other assets and liabilities of $61.1 million. The changes in working capital primarily were related to increases in various current asset and liability accounts. As of June 30, 2020, we had cash and cash equivalents of $152.5 million and net working capital of $186.3 million. By comparison, at December 31, 2019, we had cash and cash equivalents of $139.5 million and net working capital of $162.5 million. 

9

Net cash used in investing activities for the six months ended June 30, 2020 totaled $56.6 million and included net cash paid for acquisitions, purchases of property, plant and equipment, and outflows associated with materials, labor, and overhead necessary to construct new leased property. Cash outflows related to equipment that we lease directly to customers are included in net cash used in investing activities.

Net cash provided by financing activities for the six months ended June 30, 2020 totaled $181.6 million and primarily resulted from the issuance of convertible senior notes, and proceeds from borrowing on long-term debt, offset by the repurchase of convertible senior notes and related capped calls.

Public and Private Offerings of Equity and Debt

Common Stock Issuances

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

In the second quarter of 2019, the Company issued 2.1 million shares of common stock pursuant to an ATM entered into with FBR, as sales agent, on April 3, 2017, resulting in net proceeds of $5.5 million. There were no sales under the ATM in the first quarter of 2019.

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

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

Convertible Senior Notes

In May 2020, the Company issued $212.8 million in aggregate principal amount of 3.75% convertible senior notes due  2025, which we refer to herein as the 3.75% Convertible Senior Notes. The total net proceeds from this offering, after deducting costs of the issuance, were $205.1 million. The Company used $90.2 million of the net proceeds from the offering of the 3.75% Convertible Senior Notes to repurchase $66.3 million of the $100 million in aggregate principal amount of 5.5% Convertible Senior Notes due 2023, which we refer to herein as the 5.5% Convertible Senior Notes. In addition, the Company used approximately $15.3 million of the net proceeds from the offering of the 3.75% Convertible Senior Notes to enter into privately negotiated capped called transactions. 

In September 2019, the Company issued a $40.0 million in aggregate principal amount of 7.5% convertible senior note due 2023, which we refer to herein as the 7.5% Convertible Senior Note. The Company’s total obligation, net of interest accretion, due to the holder was $48.0 million. The total net proceeds from this offering, after deducting costs of the issuance, were $39.1 million. As of June 30, 2020, the outstanding balance of the note, net of related discount and issuance costs, was $41.0 million. On July 1, 2020, the note automatically converted fully into 16.0 million shares of common stock.

Operating and Finance Leases

The Company enters into sale/leaseback agreements with various financial institutions to facilitate the Company’s commercial transactions with key customers. The Company sells certain fuel cell systems and hydrogen infrastructure to the financial institutions and leases the equipment back to support certain customer locations and to fulfill its varied Power Purchase Agreements (PPAs).  Transactions completed under the sale/leaseback arrangements are generally accounted for as operating leases and therefore the sales of the fuel cell systems and hydrogen infrastructure are recognized as revenue.  In connection with certain sale/leaseback transactions, the financial institutions require the Company to maintain cash balances in restricted accounts securing the Company’s finance obligations. Cash received from customers under the PPAs

10

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 June 30, 2020 was $293.7 million, $233.8 million of which were secured with restricted cash, security deposits backing letters of credit, and pledged service escrows.

The Company has varied master lease agreements with Wells Fargo Equipment Finance, Inc., or Wells Fargo, to finance the Company’s commercial transactions with various customers. The Wells Fargo lease agreements were entered into during 2017, 2018, and 2019. No sale/leaseback transactions were entered with Wells Fargo during the six months ended June 30, 2020.  Pursuant to the lease agreements, the Company sells fuel cell systems and hydrogen infrastructure to Wells Fargo and then leases them back and operates them at Walmart sites.  The Company has a customer guarantee for a large portion of the transactions entered into in connection with such lease agreements. The Wells Fargo lease agreements required letters of credit for the unguaranteed portion totaling $50.6 million as of June 30, 2020. The total remaining lease liabilities owed to Wells Fargo were $103.2 million at June 30, 2020.

Over recent years, including in 2019, the Company has entered into master lease agreements with multiple institutions such as Key Equipment Finance (KeyBank), SunTrust Equipment Finance & Lease Corp. (now known as Truist Bank), and First American Bancorp, Inc. (First American). In the first half of 2020, the Company entered into  additional lease agreements with KeyBank, First American and Truist Bank. Similar to the Wells Fargo lease agreements, the primary purpose of these agreements is to finance commercial transactions with varied customers. Most of the transactions with these financial institutions required cash collateral for the unguaranteed portions totaling $172.3 million as of June 30, 2020. Similar to the Wells Fargo lease agreements, in many cases the Company has a customer guarantee for a large portion of the transactions. The total remaining lease liabilities owed to these financial institutions were $190.5 million at June 30, 2020.

Long-Term Debt

In March 2019, the Company entered into a loan and security agreement (Loan Agreement) with Generate Lending, LLC (Generate Capital) pursuant to which the Company borrowed $85.0 million (Term Loan Facility). The initial proceeds of the loan were used to pay in full the Company’s long-term debt and accrued interest of $17.6 million under the loan agreement with NY Green Bank, a Division of the New York State Energy Research & Development Authority, and terminate approximately $50.3 million of certain equipment leases with Generate Plug Power SLB II, LLC as well as repurchase the associated leased equipment. In April 2019 and November 2019, the Company borrowed an additional $15.0 million and $20.0 million, respectively, under the Term Loan Facility with Generate Capital at 12% interest to fund working capital for ongoing deployments and other general corporate purposes. On March 31, 2020, the outstanding balance was $107.5 million. The principal and interest payments are paid primarily by restricted cash.

On May 6, 2020, the Company and Generate amended the Loan Agreement to, among other things, (i) provide an incremental term loan facility in the amount of $50.0 million, which has been fully funded, (ii) provide for additional, incremental term loans in an aggregate amount not to exceed $50.0 million, which are available to the Company in Generate Capital’s sole discretion, (iii) reduce the interest rate on all loans to 9.50% from 12.00% per annum, and (iv) extend the maturity date to October 31, 2025 from October 6, 2022. Based on the amortization schedule as June 30, 2020, the outstanding balance of $141.2 million under the Term Loan Facility will be fully paid by March 31, 2024.

On July 10, 2020 the Company borrowed an additional $25.0 million under the amended Loan Agreement. See Note 8, Long-Term Debt, for additional information.

2.  Summary of Significant Accounting Policies

Principles of Consolidation

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

11

Interim Financial Statements

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

Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with GAAP have been condensed or omitted. These unaudited interim condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K, filed for the fiscal year ended December 31, 2019.

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

Leases

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

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

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

ASC Topic 842 requires a lessee to discount its unpaid lease payments using the interest rate implicit in the lease or, if that rate cannot be readily determined, its incremental borrowing rate. Generally, the Company cannot determine the interest rate implicit in the lease because it does not have access to the lessor’s estimated residual value or the amount of the lessor’s deferred initial direct costs. Therefore, the Company generally uses its incremental borrowing rate as the discount rate for the lease. The Company’s incremental borrowing rate for a lease is the rate of interest it would have to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms.

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

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

The ROU asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for lease payments made at or before the lease commencement date, plus any initial direct costs incurred less any lease

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incentives received.  For operating leases, the ROU asset is subsequently measured throughout the lease term at the carrying amount of the lease liability, plus initial direct costs, plus (minus) any prepaid (accrued) lease payments, less the unamortized balance of lease incentives received. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

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

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

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

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

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

Revenue Recognition

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

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

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

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

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

In 2017, in separate transactions, the Company issued to each of Amazon and Walmart warrants to purchase shares of the Company’s common stock. The Company presents the provision for common stock warrants within each revenue-related line item on the unaudited interim consolidated statements of operations. This presentation reflects a discount that those common stock warrants represent, and therefore revenue is net of these non-cash charges.  The provision of common stock warrants is allocated to the relevant revenue-related line items based upon the expected mix of the revenue for each respective contract. See Note 12, Warrant Transaction Agreements, for more details.

Nature of goods and services

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

(i) Sales of Fuel Cell Systems and Related Infrastructure

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

The Company considers comparable list prices, as well as historical average pricing approaches to determine standalone selling prices for GenDrive fuel cells. The Company uses observable evidence from similar products in the market to determine standalone selling prices for GenSure stationary backup power units and hydrogen fueling infrastructure. The determination of standalone selling prices of the Company’s performance obligations requires significant judgment, including continual assessment of pricing approaches and available observable evidence in the market.  Once relative standalone selling prices are determined, the Company proportionately allocates the transaction price to each performance obligation within the customer arrangement. The allocated transaction price related to fuel cell systems and spare parts is recognized as revenue at a point in time which usually occurs at shipment (and occasionally upon delivery). Revenue on hydrogen infrastructure installations is generally recognized at the point at which transfer of control passes to the customer, which usually occurs upon customer acceptance of the hydrogen infrastructure. In certain instances, control of hydrogen infrastructure installations transfers to the customer over time, and the related revenue is recognized over time as the performance obligation is satisfied. The Company uses an input method to determine the amount of revenue to recognize during each reporting period based on the Company’s efforts to satisfy the performance obligation.  

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

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

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

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

(iii)Power Purchase Agreements

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

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

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

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

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

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

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

ASC Topic 842 requires a lessee to discount its unpaid lease payments using the interest rate implicit in the lease or, if that rate cannot be readily determined, its incremental borrowing rate. Generally, the Company cannot determine the interest rate implicit in its leases because it does not have access to the lessor’s estimated residual value or the amount of the lessor’s deferred initial direct costs. Therefore, the Company generally uses its incremental borrowing rate to estimate the discount rate for each lease.

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

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(iv)Fuel Delivered to Customers

Revenue associated with fuel delivered to customers represents the sale of hydrogen to customers that has been purchased by the Company from a third party or generated on site. Fuel is delivered to customers under stand-ready arrangement, with no long-term commitment.

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

Contract costs

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

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

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

Cash Equivalents

For purposes of the unaudited interim condensed consolidated statements of cash flows, the Company considers all highly-liquid debt instruments with original maturities of three months or less to be cash equivalents. At June 30, 2020, cash equivalents consisted of money market accounts. The Company’s cash and cash equivalents are deposited with financial institutions located in the United States and may at times exceed insured limits.

Equity Instruments – Common Stock Warrants

Common stock warrants that meet certain applicable requirements of ASC Subtopic 815-40, Derivatives and Hedging – Contracts in Entity’s Own Equity, and other related guidance, including the ability of the Company to settle the warrants without the issuance of registered shares or the absence of rights of the grantee to require cash settlement, are accounted for as equity instruments. The Company classifies these equity instruments within additional paid-in capital on the  unaudited interim condensed consolidated balance sheets.

Common stock warrants accounted for as equity instruments represent the warrants issued to Amazon and Walmart as discussed in Note 12, Warrant Transaction Agreements. The Company adopted Financial Accounting Standards Board (FASB) Accounting Standards Update 2019-08, Compensation – Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic 606) (ASU 2019-08), which requires entities to measure and classify share-based payment awards granted to a customer by applying the guidance under Topic 718, as of January 1, 2019. As a result, the amount recorded as a reduction of revenue is measured based on the grant-date fair value of the warrants. Except for the third tranche, the fair value of all warrants was measured at January 1, 2019, the adoption date of ASU 2019-08. For the third tranche, the fair value will be determined when the second tranche vests. At that time, the fair value will also be determined for that tranche.

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

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Use of Estimates

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

Reclassifications

Reclassifications are made, whenever necessary, to prior period financial statements to conform to the current period presentation. As of June 30, 2020, there have been no such reclassifications.

Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

In June 2016, Accounting Standards Update (ASU) 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, was issued. Also, In April 2019, Accounting Standards Update (ASU) 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, was issued to make improvements to updates 2016-01, Financial Instruments – Overall (Subtopic 825-10), 2016-13, Financial Instruments – Credit Losses (Topic 326) and 2017-12, Derivatives and Hedging (Topic 815). ASU 2016-13 significantly changes how entities account for credit losses for financial assets and certain other instruments, including trade receivables and contract assets, that are not measured at fair value through net income. The ASU requires a number of changes to the assessment of credit losses, including the utilization of an expected credit loss model, which requires consideration of a broader range of information to estimate expected credit losses over the entire lifetime of the asset, including losses where probability is considered remote. Additionally, the standard requires the estimation of lifetime expected losses for trade receivables and contract assets that are classified as current. The Company adopted these standards effective January 1, 2020 and determined the impact of the standards to be immaterial to the consolidated financial statements.

In April 2019, Accounting Standards Update (ASU) 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, was issued to make improvements to updates 2016-01, Financial Instruments – Overall (Subtopic 825-10), 2016-13, Financial Instruments – Credit Losses (Topic 326) and 2017-12, Derivatives and Hedging (Topic 815). The Company adopted this standard effective January 1, 2020 and determined the impact of this standard to be immaterial to the consolidated financial statements.

In January 2017, Accounting Standards Update (ASU) 2017-04, Intangibles – Goodwill and Other (Topic 350), was issued to simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test.  Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. The Company adopted this standard effective January 1, 2020.

In August 2016, Accounting Standards Update (ASU) 2016-15, Statement of Cash Flows (Topic 230)s: Classification of Certain Cash Receipts and Cash Payments, was issued to reduce the existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The Company adopted this standard in 2019 and determined the impact of this standard to be immaterial to the consolidated financial statements.

Recently Issued and Not Yet Adopted Accounting Pronouncements

In August 2020, Accounting Standards Update (ASU) 2020-06, Debt – Debt With Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, was issued to address issues identified as a result of the complexity associated with applying GAAP for certain financial instruments with characteristics of liabilities and equity.

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This update is effective after December 15, 2021. The Company is evaluating the adoption method as well as the impact this update will have on the consolidated financial statements.

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

In March 2020, Accounting Standards Update (ASU) 2020-03, Codification Improvements to Financial Instruments, was issued to make various codification improvements to financial instruments to make the standards easier to understand and apply by eliminating inconsistencies and providing clarifications. This update will be effective at various dates as described in this ASU. The Company is evaluating the adoption method as well as the impact this update will have on the consolidated financial statements.

In December 2019, Accounting Standards Update (ASU) 2019-12, Simplifying the Accounting for Income Taxes, was issued to identify, evaluate, and improve areas of GAAP for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to users of financial statements. This update will be effective beginning after December 15, 2020. The Company is evaluating the adoption method as well as the impact this update will have on the consolidated financial statements.

3. Acquisitions

Giner ELX, Inc. Acquisition

 

On June 22, 2020, the Company acquired 100% of the outstanding shares of Giner ELX, Inc. (Giner ELX). Giner ELX is developer of electrolysis hydrogen generators which is used for on-site refueling of hydrogen fuel cells.

The fair value of consideration paid by the Company in connection with the Giner ELX acquisition was as follows (in thousands):

Cash

$

25,820

Plug Power Stock

19,263

Contingent consideration

7,140

Total consideration

52,223

The contingent consideration represents the estimated, preliminary fair value associated with earn-out payments of $16.0 million that the sellers are eligible to receive. Of the total earnout consideration, $8.0 million is related to the achievement of the Allagash earn-out, $2.0 million is associated with the receipt of certain customer opportunities (purchase orders or other contracts) by December 31, 2021, and $6.0 million is associated with the achievement of certain revenue targets for years 2021 through 2023. The Allagash earn-out is achieved when the Company has produced at least two PEM electrolyzer stacks of one megawatt each, utilizing the dry build process and meets certain technical specifications as more fully described in the merger agreement. To be fully paid, the Allagash earn-out needs to be satisfied by July 31, 2023 and is reduced by approximately 8.33% each month beyond this date. In addition to the above, should the earn-out revenue exceed 150% of the 2023 target, the sellers will receive warrants with a value of $5.0 million and if the earn-out revenue exceeds 200% of the 2023 revenue target, the sellers will receive warrants with a value of $10.0 million. The warrants are exercisable within two years of issuance.

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The following table summarizes the preliminary allocation of the purchase price to the estimated fair value of the net assets acquired, excluding goodwill (in thousands):

Accounts receivable

$

1,237

Inventory

 

4,108

Prepaid expenses and other assets

(4,707)

Property, plant and equipment

596

Identifiable intangibles

29,930

Accounts payable, accrued expenses and other liabilities

(1,887)

Deferred revenue

(2,347)

Total net assets acquired, excluding goodwill

26,930

The preliminary fair value of acquired identified intangible assets were calculated with the assistance of an independent valuator and were determined through a variety of valuation techniques.

Identifiable intangibles consisted of developed technology, non-compete agreements, estimated in-process research and development (IPR&D), and customer relationships.

The fair value of acquired developed technology and non-complete agreements was nominal.

The fair value of the acquired IPR&D totaling $29.0 million has been calculated using the multi-period excess earnings method (MPEEM) approach which is a variant of the income approach. The basic principle of the MPEEM approach is that a single asset, in isolation, is not capable of generating cash flow for an enterprise. Several assets are brought together and exploited to generate cash flow. Therefore, to determine cash flow from the exploitation of IPR&D, one must deduct the related expenses incurred for the exploitation of other assets used for the generation of overall cash flow and revenues. The fair value of IPR&D was estimated by discounting the net cash flow derived from the expected revenues attributable to the acquired IPR&D. The fair value of the acquired customer relationships totaling 0.3 million has been calculated using a distributor method approach, which is a variant of the MPEEM under the income approach.

In addition to identifiable intangible asset, the fair value of the deferred revenue was determined using a cost build-up approach. The direct cost of fulfilling the obligation plus a normal profit margin was used to determine the value of the assumed deferred revenue liability.

Included in the purchase consideration are three contingent earn-out payments (as described above): the Allagash earn-out, the customer opportunities, and the revenue targets. Due to the nature of the Allagash and customer opportunities, as outlined in the purchase agreement, a scenario based method (SBM) was used to value these contingent payments as the payments are milestone based in nature. The revenue targets are achieved when certain revenue thresholds are met, and the catch-up provision creates path-dependency. As such, the revenue targets were valued using Monte Carlo Simulation.

Included in Giner ELX’s net assets acquired are net deferred tax liabilities of $6.1 million. In connection of the acquisition of these net deferred tax liabilities, the Company reduced its valuation allowance by $5.2 million and recognized a tax benefit $5.2 million during the three- and six- months ended June 30, 2020.

Goodwill associated with the Giner ELX acquisition was calculated as follows (in thousands):

Consideration paid

$

52,223

Less: net assets acquired

(26,930)

Total goodwill recognized

25,293

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The goodwill consists of the Company’s increased capabilities in green hydrogen supply through the production of electrolyzers. The synergies with the Company’s production of hydrogen storage and dispensing equipment is important to the Company as the demand for green hydrogen increases.

United Hydrogen Group Inc. Acquisition

 

On June 18, 2020, the Company acquired 100% of the outstanding shares of United Hydrogen Group Inc. (UHG). UHG produces and sells liquid hydrogen.

The fair value of consideration paid by the Company in connection with the Giner ELX acquisition was as follows (in thousands):

Cash

$

19,466

Plug Power Stock

30,410

Contingent consideration

1,110

Total consideration

50,986

 

Included in cash and common stock in the above table is $1.3 million of cash and $6.5 million of common stock that was paid in April 2020 to purchase a convertible note in UHG. This convertible note included terms that allowed for reduction of the purchase price if the Company was to complete the acquisitions. As such, this note was cancelled in conjunction with the closing of this acquisition.  

A portion of the purchase price of UHG was in the form of contingent consideration.  The contingent consideration is contingent on future performance related to the expansion of the liquefication capacity of the Charleston, Tennessee liquid hydrogen plant (the Charleston Plant).  The Company’s liability for this contingent consideration was measured at fair value based on the Company’s expectations of achieving the expansion milestone.  The expected performance was assessed by management which was discounted to present value in order to derive a fair value of the contingent consideration.

In accordance with the merger agreement, the Company is obligated to pay $1.5 million by June 30, 2021 once the liquefication capacity of the Charleston Plant is complete to the UHG’s stockholders.  Due to the level of progress made as of the reporting date, it is estimated that a payout will be made.  As a result, the Company has recorded $1.1 million as the fair value of the contingent consideration.

The Company’s liability for contingent consideration was preliminarily measured and estimated at fair value based on unobservable inputs, and was considered a level 3 financial instrument.  The fair value of the liability determined was primarily driven by the Company’s expectations of reaching the performance milestone.  The expected milestone of expansion of the liquefication capacity of the Charleston Plant was discounted to present value in order to derive a fair value of the contingent consideration. The primary inputs of the calculation were the probabilities of achieving the milestone and a discount rate.  At June 30, 2020 the Company has recorded $1.1 million as the fair value of contingent consideration.

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The following table summarizes the preliminary allocation of the purchase price to the estimated fair value of the net assets acquired, excluding goodwill (in thousands):

Accounts receivable

 

444

Inventory

 

89

Prepaid expenses and other assets

1,152

Property, plant and equipment

 

41,244

Leased property

796

Identifiable intangibles

 

2,338

Long-term debt

(13,080)

Other liabilities

(13,820)

Accounts payable, accrued expenses, deferred revenue and finance obligations

(4,560)

Total net assets acquired, excluding goodwill

14,603

The preliminary fair value of acquired identified intangible assets were calculated with the assistance of an independent valuator and were determined through a variety of valuation techniques.

Identifiable intangibles consisted of developed technology, as described above.  The fair value of the developed technology totaling $2.3 million has been calculated using the relief from royalty approach which is a variant of the income approach. The application of the relief from royalty approach involves estimating the value of an intangible asset by quantifying the present value of the stream of market derived royalty payments that the owner of the intangible asset is exempted or ‘relieved’ from paying.

Additionally the Company estimated the fair value of an unfavorable customer contract. The fair value of the acquired unfavorable customer contract was calculated using a with and with-out analysis which is a variant of the income approach.  Cash flows were calculated using pricing per terms of the existing contract and then compared to cash flows using expected market pricing. The difference between the two cash flows was used to determine the fair value of the contract.

UHG will be eligible to receive earn-out payments, contingent on the company achieving certain milestones (successful completion of construction and achieving a defined capacity/production level). Due to the milestone nature of the payments, a scenario based method (SBM) was used to value these contingent payments.

Goodwill associated with the UHG acquisition was calculated as follows (in thousands):

Consideration paid

$

50,986

Less: net assets acquired

(14,603)

Total goodwill recognized

36,383

Goodwill consists of the Company’s ability to expand liquid hydrogen manufacturing capability with an established management team. The Company now has capabilities in liquid hydrogen generation, liquefaction and distribution logistics, which is important in a growing hydrogen market.

The above estimates are preliminary in nature and subject to adjustments. Any necessary adjustments will be finalized within one year from the date of acquisition. Substantially all the receivables acquired are expected to be collectible. We have not identified any material unrecorded pre-acquisition contingencies where the related asset or

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liability, or an impairment is probable and the amount can be reasonably estimated. Purchased goodwill is not expected to be deductible for tax purposes.  

The results of the Giner ELX and UHG are included in the Company’s results for the three and six months ended June 30, 2020 and are considered immaterial.

4. Earnings Per Share

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

The potentially dilutive securities are summarized as follows:

At June 30,

    

2020

    

2019

Stock options outstanding (1)

16,273,120

 

21,258,304

Restricted stock outstanding (2)

4,455,484

 

2,504,392

Common stock warrants (3)

110,573,392

115,824,142

Preferred stock (4)

 

17,933,591

Convertible Senior Notes (5)

72,872,730

 

43,630,020

Number of dilutive potential shares of common stock

204,174,726

 

201,150,449

(1)During the three months ended June 30, 2020 and 2019, the Company granted 174,649 and 339,392 stock options, respectively. During the six months ended June 30, 2020 and 2019, the Company granted 174,649 and 364,392 stock options, respectively.

(2)During the three months ended June 30, 2020 and 2019, the Company granted 96,649 and 339,392 shares of restricted stock, respectively. During the six months ended June 30, 2020 and 2019, the Company granted 94,649 and 364,392 shares of restricted stock, respectively.

(3)In April 2017, the Company issued warrants to acquire up to 55,286,696 of the Company’s common stock as part of a transaction agreement with Amazon, subject to certain vesting events, as described in Note 12, Warrant Transaction Agreements. Of these warrants issued, none have been exercised as of June 30, 2020.

In July 2017, the Company issued warrants to acquire up to 55,286,696 of the Company’s common stock as part of a transaction agreement with Walmart, subject to certain vesting events, as described in Note 12, Warrant Transaction Agreements. Of these warrants issued, none have been exercised as of June 30, 2020.

(4)The preferred stock amount represents the dilutive potential on the shares of common stock as a result of the conversion of the Series C Redeemable Convertible Preferred Stock (Series C Preferred Stock) and Series E Redeemable Preferred Stock (Series E Preferred Stock), based on the conversion price of each preferred stock as of June 30, 2020, and 2019, respectively. Of the 10,431 shares of Series C Preferred Stock issued on May 16, 2013, all shares had been converted to common stock as of June 30, 2020.  On November 1, 2018, the Company issued 35,000 shares of Series E Preferred Stock. As of December 31, 2019, 30,462 shares of the Series E Preferred Stock had been

22

converted to common stock and 4,038 shares were redeemed for cash. The remaining 500 shares of Series E Preferred Stock were converted to common stock in January 2020.

(5)In March 2018, the Company issued the 5.5% Convertible Senior Notes. In September 2019, the Company issued the $7.5% Convertible Senior Note. In May 2020, the Company issued the 3.5 % Convertible Senior Notes and repurchased $66.3 million of the 5.5% Convertible Senior Notes. See Note 9, Convertible Senior Notes.

5. Inventory

Inventory as of June 30, 2020 and December 31, 2019 consisted of the following (in thousands):

    

June 30,

    

December 31,

 

2020

2019

Raw materials and supplies – production locations

$

72,222

$

48,011

Raw materials and supplies – customer locations

10,291

9,241

Work-in-process

 

27,289

 

12,529

Finished goods

 

4,769

 

2,610

Inventory

$

114,571

$

72,391

6. Leased Property

Leased property at June 30, 2020 and December 31, 2019 consisted of the following (in thousands):

    

June 30,

    

December 31,

 

2020

2019

 

Right of use assets – operating

$

237,467

$

198,068

Right of use assets – finance

42,161

41,475

Capitalized costs of lessor assets

46,034

41,465

Less: accumulated depreciation

 

(50,941)

 

(36,268)

Leased property, net

$

274,721

$

244,740

7. Intangible Assets

The gross carrying amount and accumulated amortization of the Company’s acquired identifiable intangible assets as of June 30, 2020 were as follows (in thousands):

Weighted Average

Gross Carrying

Accumulated

Amortization Period

Amount

Amortization

Total

 

Acquired technology

 

10 years

 

$

12,112

$

(3,205)

$

8,907

Customer relationships, Backlog & Trademark

8 years 

 

890

(223)

667

In process R&D

 

Indefinite

29,000

29,000

$

42,002

$

(3,428)

$

38,574

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

Weighted Average

Gross Carrying

Accumulated

Amortization Period

Amount

Amortization

Total

 

Acquired technology

 

9 years 

$

8,244

$

(2,815)

$

5,429

Customer relationships & Trademark

 

9 years 

 

320

(210)

 

110

$

8,564

$

(3,025)

$

5,539

23

The change in the gross carrying amount of the acquired technology from December 31, 2019 to June 30, 2020 was due to changes in foreign currency translation, acquisitions of UHG and Giner ELX, and accrual for American Fuel Cell (AFC) milestone payment payments, as discussed below.

In the second quarter of 2020, the Company’s in-process research and development was related to the development of the dry build process associated with electrolyzer stacks, as part of acquisition of Giner ELX. The related intangible asset is not currently amortized, as research and development is ongoing. Upon completion of the dry build process, amortization will commence based upon the estimated useful life of the underlying asset. See Note 3 – Acquisitions, for more details.

Also, in the second quarter of 2020, the Company acquired technology as part of the acquisition of UHG.  The technology relates to the chemical process of manufacturing liquid hydrogen from chlor-alkali waste stream. See Note 3 – Acquisitions, for more details.

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

As part of the agreement to acquire the intellectual property from AFC, the Company shall pay AFC milestone payments not to exceed $2.9 million in total, if certain milestones associated with the production of components related to the acquired technology are met before April 2021. As of June 30, 2020, the Company paid $0.4 million and accrued $1.7 million in relation to the aforementioned milestones.

Amortization expense for acquired identifiable intangible assets was $0.2 million for the three months ended June 30, 2020 and $0.4 million for the six months ended June 30, 2020. Amortization expense for the acquired identifiable assets was $0.3 million for the three months ended June 30, 2019 and $0.3 million for the six months ended June 30, 2019.

Estimated amortization expense for subsequent years was as follows (in thousands):

Remainder of 2020

    

$

667

2021

1,334

2022

1,334

2023

1,334

2024 and thereafter

4,905

Total

$

9,574

8. Long-Term Debt

In March 2019, the Company, and its subsidiaries Emerging Power Inc. and Emergent Power Inc., entered into a loan and security agreement, as amended (the Loan Agreement), with Generate Lending, LLC (Generate Capital), providing for a secured term loan facility in the amount of $100.0 million (the Term Loan Facility). The Company borrowed $85.0 million under the Loan Agreement on the date of closing and borrowed an additional $15.0 million in April 2019 and $20 million in November 2019. A portion of the initial proceeds of the loan was used to pay in full the Company’s long-term debt with NY Green Bank, a Division of the New York State Energy Research & Development Authority, including accrued interest of $17.6 million (the Green Bank Loan), and terminate approximately $50.3 million of certain equipment leases with Generate Plug Power SLB II, LLC and repurchase the associated leased equipment. In connection with this transaction, the Company recognized a loss on extinguishment of debt of approximately $0.5 million during the six months ended June 30, 2019. This loss was recorded in interest and other expenses, net in the Company’s unaudited interim condensed consolidated statement of operations. Additionally, $1.7 million was paid to an escrow account related to additional fees due in connection with  the Green Bank Loan if the Company does not meet certain New York State employment and fuel cell deployment targets by March 2021. Amount escrowed is recorded in long-term other assets on the Company’s unaudited interim condensed consolidated balance sheets as of June 30, 2020. The Company presently expects to meet the targets as required under the arrangement.

24

Additionally, on May 6, 2020, the Company and its subsidiaries, Emerging Power, Inc. and Emergent Power, Inc., entered into a Fifth Amendment (the Amendment) to the Loan Agreement and Security Agreement, dated as of March 29, 2019, as amended (the Loan Agreement) with Generate Lending, LLC (Generate Capital). The Amendment amends the Loan Agreement  to, among other things, (i) provide for an incremental term loan in the amount of $50.0 million, (ii) provide for additional, uncommitted incremental term loans in an aggregate amount not to exceed $50.0 million, which may become available to the Company in Generate Capital’s sole discretion, (iii) reduce the interest rate on all loans to 9.50% from 12.00% per annum, and (iv) extend the maturity date to October 31, 2025 from October 6, 2022. The $50 million incremental term loan has been fully funded. In connection with the restructuring, the Company capitalized $1.0 million of origination fees and expensed $300 thousand in legal fees.

On June 30, 2020, the outstanding balance under the Term Loan Facility was $141.2 million with a 9.5% interest rate. On July 10, 2020 the Company borrowed an additional $25.0 million, under the amended Loan Agreement.

The Loan Agreement includes covenants, limitations, and events of default customary for similar facilities. Interest and a portion of the principal amount is payable on a quarterly basis.  Principal payments will be funded in part by releases of restricted cash, as described in Note 16, Commitments and Contingencies. Based on the amortization schedule as of June 30, 2020, the outstanding balance of $141.2 million under the Term Loan Facility will be fully paid by March 31, 2024. If addition term loans are funded, the entire then-outstanding principal balance of the Term Loan Facility, together with all accrued and unpaid interest, will be due and payable on the maturity date of October 31, 2025. 

 

All obligations under the Loan Agreement are unconditionally guaranteed by Emerging Power Inc. and Emergent Power Inc.  The Term Loan Facility is secured by substantially all of the Company’s and the guarantor subsidiaries’ assets, including, among other assets, all intellectual property, all securities in domestic subsidiaries and 65% of the securities in foreign subsidiaries, subject to certain exceptions and exclusions.

 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 June 30, 2020, the Company was in compliance with all the covenants.

The Loan Agreement provides that if there is an event of default due to the Company’s insolvency or if the Company fails to perform in any material respect the servicing requirements for fuel cell systems under certain customer agreements, which failure would entitle the customer to terminate such customer agreement, replace the Company or withhold the payment of any material amount to the Company under such customer agreement, then Generate Capital has the right to cause Proton Services Inc., a wholly owned subsidiary of the Company, to replace the Company in performing the maintenance services under such customer agreement.

As of June 30, 2020, the Term Loan Facility requires the principal balance at the end of each of the following years amortization not to exceed the following (in thousands):

December 31, 2020

$

125,687

December 31, 2021

89,301

December 31, 2022

51,478

December 31, 2023

16,863

December 31, 2024

As of August 10, 2020, the Term Loan Facility, given the incremental borrowing subsequent to June 30, 2020, as described above, requires the principal balance at the end of each of the following years amortization not to exceed the following (in thousands):

December 31, 2020

$

139,017

December 31, 2021

102,317

25

December 31, 2022

68,321

December 31, 2023

37,920

December 31, 2024

8,692

December 31, 2025

9. Convertible Senior Notes

3.75% Convertible Senior Notes

On May 18, 2020, the Company issued $200.0 million in aggregate principal amount of 3.75% Convertible Senior Notes due June 1, 2025, which is referred to herein as the 3.75% Convertible Senior Notes, in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended, or the Securities Act. On May 29, 2020, the Company issued an additional $12.5 million in aggregate principal amount of 3.75% Convertible Senior Notes.

The 3.75% Convertible Senior Notes bear interest at a  rate of 3.75% per year, payable semi-annually in arrears on June 1 and December 1 of each year, beginning on December 1, 2020.  The notes will mature on June 1, 2025, unless earlier converted, redeemed or repurchased in accordance with their terms.

The 3.75% Convertible Senior Notes are senior, unsecured obligations of the Company and rank senior in right of payment to any of the Company’s indebtedness that is expressly subordinated in right of payment to the notes, equal in right of payment to any of the Company’s existing and future liabilities that are not so subordinated, including the Company’s $100 million in aggregate principal amount of 5.5% Convertible Senior Notes due 2023, which is referred to herein as the 5.5% Convertible Senior Notes, effectively junior in right of payment to any of the Company’s secured indebtedness to the extent of the value of the collateral securing such indebtedness, and structurally subordinated to all indebtedness and other liabilities, including trade payables, of its current or future subsidiaries.  

Holders of the 3.75% Convertible Senior Notes may convert their notes at their option at any time prior to the close of the business day immediately preceding December 1, 2024 in the following circumstances:

1) during any calendar quarter commencing after September 30, 2020, if the last reported sale price of the Company’s common stock exceeds 130% of the conversion price for each of 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;

2) during the five business days after any five consecutive trading day period (such five consecutive trading day period, the measurement period) in which the trading price per $1,000 principal amount of the 3.75% Convertible Senior 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 on each such trading day;

3) if the Company calls any or all of the 3.75% Convertible Senior Notes for redemption, any such notes that have been called for redemption may be converted 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 specified corporate events, as described in the indenture governing the 3.75% Convertible Senior Notes.

On or after December 1, 2024, the holders of the 3.75% Convertible Senior Notes 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.

26

The initial conversion rate for the 3.75% Convertible Senior Notes will be 198.6196 shares of the Company’s common stock per $1,000 principal amount of notes, which is equivalent to an initial conversion price of approximately $5.03 per share of the Company’s common stock, subject to adjustment upon the occurrence of specified events. Upon conversion, the Company will pay or deliver, as applicable, 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. 

In addition, following certain corporate events or following issuance of a notice of redemption, the Company will increase the conversion rate for a holder who elects to convert its notes in connection with such a corporate event or convert its notes called for redemption during the related redemption period in certain circumstances.

The 3.75% Convertible Senior Notes will be redeemable, in whole or in part, at the Company’s option at any time, and from time to time, on or after June 5, 2023 and before the 41st scheduled trading day immediately before the maturity date, at a cash redemption price equal to 100% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest, if any, but only if the last reported sale price per share of the Company’s common stock exceeds 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 the Company sends the related redemption notice, during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which the Company sends such redemption notice.

If the Company undergoes a “fundamental change” (as defined in the Indenture), holders may require the Company to repurchase their notes for cash all or any portion of their notes at a fundamental change repurchase price equal to 100% of the principal amount of the notes to be repurchased, plus accrued and unpaid interest, to, but excluding, the fundamental change repurchase date.

In accounting for the issuance of the 3.75% Convertible Senior Notes, the Company separated the notes into liability and equity components. The initial carrying amount of the liability component of approximately $75.2 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 $130.3 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 3.75% Convertible Senior Notes. The difference between the principal amount of the 3.75% Convertible Senior Notes and the liability component (the debt discount) is amortized to interest expense using the effective interest method over the term of the 3.75% Convertible Senior Notes. The effective interest rate is approximately 29.0%.  The equity component of the 3.75% Convertible Senior Notes is included in additional paid-in capital in the unaudited interim condensed consolidated balance sheets and is not remeasured as long as it continues to meet the conditions for equity classification.

We incurred transaction costs related to the issuance of the 3.75% Convertible Senior Notes of approximately $7.0 million, consisting of initial purchasers’ discount of approximately $6.4 million and other issuance costs of $0.6 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 3.75% Convertible Senior Notes. Transaction costs attributable to the liability component were approximately $2.6 million, were recorded as debt issuance cost (presented as contra debt in the unaudited interim condensed consolidated balance sheets) and are being amortized to interest expense over the term of the 3.75% Convertible Senior Notes. The transaction costs attributable to the equity component were approximately $4.4 million and were netted with the equity component in stockholders’ equity.

The 3.75% Convertible Senior Notes consisted of the following (in thousands):

June 30,

2020

Principal amounts:

Principal

$

212,463

Unamortized debt discount (1)

(133,321)

Unamortized debt issuance costs (1)

(2,517)

Net carrying amount

$

76,625

Carrying amount of the equity component (2)

$

130,249

27

1) Included in the unaudited interim condensed consolidated balance sheets within the 3.75% Convertible Senior Notes, net and amortized over the remaining life of the notes using the effective interest rate method.

2) Included in the unaudited interim condensed consolidated balance sheets within additional paid-in capital, net of $4.4 million in equity issuance costs and associated income tax benefit of $12.4 million.

Based on the closing price of the Company’s common stock of $8.21 on June 30, 2020, the if-converted value of the notes was greater than the principal amount. The estimated fair value of the note at June 30, 2020 was approximately $339.0 million. The Company utilized a Monte Carlo simulation model to estimate the fair value of the convertible debt. The simulation model is designed to capture the potential settlement features of the convertible debt, in conjunction with simulated changes in the Company’s stock price over the term of the note, incorporating a volatility assumption of 75%. This is considered a Level 3 fair value measurement.

Capped Call

In conjunction with the pricing of the 3.75% Convertible Senior Notes, the Company entered into privately negotiated capped call transactions ($200 million Notes Capped Call) with certain counterparties at a price of $16.2 million. The 3.75% Notes Capped Call cover, subject to anti-dilution adjustments, the aggregate number of shares of the Company’s common stock that underlie the initial 3.75% Convertible Senior Notes and is generally expected to reduce potential dilution to the Company’s common stock upon any conversion of the 3.75% 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 3.75% Notes Capped Call is initially $6.7560 per share, which represents a premium of approximately 60% over the last then-reported sale price of the Company’s common stock of $4.11 per share on the date of the transaction and is subject to certain adjustments under the terms of the 3.75% Notes Capped Call. The 3.75% Notes Capped Call becomes exercisable if the conversion option is exercised.

The net cost incurred in connection with the 3.75% Notes Capped Call has been recorded as a reduction to additional paid-in capital in the unaudited interim condensed consolidated balance sheet

7.5% Convertible Senior Note

In September 2019, the Company issued $40.0 million aggregate principal amount of 7.5%  Convertible Senior Note due on January 5, 2023, which is referred to herein as the 7.5% Convertible Senior Note, 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 7.5% Convertible Senior Note. Upon maturity of the 7.5% Convertible Senior Note, the Company is required to repay 120% of $40.0 million, or $48.0 million. The 7.5% Convertible Senior 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 7.5% Convertible Senior 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 7.5% Convertible Senior 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 7.5% Convertible Senior 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 7.5% Convertible Senior 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 7.5% Convertible Senior 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 7.5% Convertible Senior 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 7.5% Convertible Senior Note does not allow cash settlement (entirely or partially) upon conversion. As such, the Company uses the if-converted method for calculating any potential dilutive effect of the conversion option on diluted earnings per share.

28

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 7.5% Convertible Senior 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 7.5% Convertible Senior 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 7.5% Convertible Senior 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 7.5% Convertible Senior 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 7.5% Convertible Senior 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 7.5% Convertible Senior 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 7.5% Convertible Senior Note equaled approximately $8.0 million. This debt discount  was attributed to the fact that upon maturity, the Company is required to repay 120% of $40.0 million, or $48.0 million. In addition, the related debt issuance costs were $1.0 million. The debt discount was recorded as debt issuance cost (presented as contra debt in the unaudited interim condensed consolidated balance sheets) and is being amortized to interest expense over the term of the 7.5% Convertible Senior Note using the effective interest rate method.

The 7.5% Convertible Senior Note consisted of the following (in thousands):

June 30,

December 31,

2020

2019

Principal amounts:

Principal at maturity

$

48,000

$

48,000

Unamortized debt discount

(6,200)

(7,400)

Unamortized debt issuance costs

(812)

(969)

Net carrying amount

$

40,988

$

39,631

Based on the closing price of the Company’s common stock of $8.21 on June 30, 2020, the if-converted value of the 7.5% Convertible Senior Note was greater than the principal amount. The estimated fair value of the 7.5% Convertible Senior Note at June 30, 2020 and December 31, 2019 was approximately $131.4 million and $53.5 million, respectively. The Company utilized a Monte Carlo simulation model to estimate the fair value of the convertible debt. The simulation model is designed to capture the potential settlement features of the convertible debt, in conjunction with simulated changes in the Company’s stock price over the term of the 7.5% Convertible Senior Note, incorporating a volatility assumption of 75%. This is considered a Level 3 fair value measurement.

29

On July 1, 2020, the 7.5% Convertible Senior Note automatically converted into 16.0 million shares of common stock.

5.5% 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, which is referred to herein as the 5.5% Convertible Senior Notes in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act.

In May 2020, the Company used a portion of the net proceeds from the issuance of the 3.75% Convertible Senior Notes to finance the cash portion of the partial repurchase of the 5.5% Convertible Senior Notes, which consisted of a repurchase of approximately $66.3 million in aggregate principal amount of the 5.5% Convertible Senior Notes in privately-negotiated transactions for aggregate consideration of $128.9 million, consisting of approximately $90.2 million in cash and approximately 9.4 million shares of the Company’s common stock. Of the $128.9 million in aggregate consideration, $35.5 million and $93.4 million were allocated to the debt and equity components, respectively, utilizing an effective discount rate of 29.8% to determine the fair value of the liability component. As of the repurchase date, the carrying value of the 5.5% Convertible Senior Notes that were repurchased, net of unamortized debt discount and issuance costs, was $48.7 million. The partial repurchase of the 5.5% Convertible Senior Notes resulted in a $13.2 million gain on early debt extinguishment. As of June 30, 2020, approximately $33.7 million aggregate principal amount of the 5.5% Convertible Senior Notes remained outstanding.

 

At issuance in March 2018, the total net proceeds from the 5.5% Convertible Senior Notes were as follows:

Amount

(in thousands)

Principal amount

$

100,000

Less initial purchasers’ discount

(3,250)

Less cost of related capped call and common stock forward

(43,500)

Less other issuance costs

(894)

Net proceeds

$

52,356

The 5.5% Convertible Senior Notes bear interest at 5.5%, payable semi-annually in cash on March 15 and September 15 of each year.  The 5.5% Convertible Senior Notes will mature on March 15, 2023, unless earlier converted or repurchased in accordance with their terms. The 5.5% Convertible Senior Notes are unsecured and do not contain