Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

 

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

 

FOR THE QUARTERLY PERIOD ENDED March  31, 2019

 

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:

 

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 ☒

 

 

 

 

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

Series A Junior Participating
Cumulative Preferred Stock, par
value $.01 per share

 

The Nasdaq Capital Market

 

The number of shares of common stock, par value of $0.01 per share, outstanding as of May 8, 2019 was 245,414,688.

 

 


 

Table of Contents

INDEX to FORM 10-Q

 

 

Page

 

 

PART I.   FINANCIAL INFORMATION  

 

 

 

Item 1 – Interim Consolidated Financial Statements (Unaudited)  

3

 

 

Consolidated Balance Sheets  

3

 

 

Consolidated Statements of Operations  

4

 

 

Consolidated Statements of Comprehensive Loss  

5

 

 

Consolidated Statements of Stockholders’ (Deficit) Equity  

6

 

 

Consolidated Statements of Cash Flows  

7

 

 

Notes to Interim Consolidated Financial Statements  

8

 

 

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

34

 

 

Item 3 – Quantitative and Qualitative Disclosures About Market Risk  

50

 

 

Item 4 – Controls and Procedures  

50

 

 

PART II.   OTHER INFORMATION  

 

 

 

Item 1 – Legal Proceedings  

51

 

 

Item 1A – Risk Factors  

51

 

 

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

51

 

 

Item 3 – Defaults Upon Senior Securities  

51

 

 

Item 4 – Mine Safety Disclosures  

52

 

 

Item 5 – Other Information  

52

 

 

Item 6 – Exhibits  

52

 

 

Signatures  

53

 

 

 

 

2

 


 

Table of Contents

PART 1.  FINANCIAL INFORMATION

 

Item 1 — Interim Financial Statements (Unaudited)

 

Plug Power Inc. and Subsidiaries

Consolidated Balance Sheet s

(In thousands, except share and per share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

    

March 31,

    

December 31,

 

 

2019

 

2018

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

39,336

 

$

38,602

Restricted cash

 

 

19,297

 

 

17,399

Accounts receivable

 

 

32,062

 

 

37,347

Inventory

 

 

65,474

 

 

47,910

Prepaid expenses and other current assets

 

 

10,296

 

 

14,357

Total current assets

 

 

166,465

 

 

155,615

 

 

 

 

 

 

 

Restricted cash

 

 

50,598

 

 

54,152

Property, plant, and equipment, net of accumulated depreciation of $15,125 and $14,403, respectively

 

 

13,615

 

 

12,869

Leased property, net

 

 

141,889

 

 

146,751

Goodwill

 

 

8,886

 

 

9,023

Intangible assets, net

 

 

3,677

 

 

3,890

Other assets

 

 

11,069

 

 

8,026

Total assets

 

$

396,199

 

$

390,326

 

 

 

 

 

 

 

Liabilities, Redeemable Preferred Stock, and Stockholders’ (Deficit) Equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

31,688

 

$

34,824

Accrued expenses

 

 

6,509

 

 

7,864

Deferred revenue

 

 

11,736

 

 

12,055

Finance obligations

 

 

23,997

 

 

74,264

Current portion of long-term debt

 

 

12,559

 

 

16,803

Other current liabilities

 

 

2,271

 

 

560

Total current liabilities

 

 

88,760

 

 

146,370

Deferred revenue

 

 

25,835

 

 

28,021

Common stock warrant liability

 

 

2,231

 

 

105

Finance obligations

 

 

111,195

 

 

118,076

Convertible senior notes, net

 

 

65,025

 

 

63,247

Long-term debt

 

 

72,676

 

 

133

Other liabilities

 

 

17

 

 

18

Total liabilities

 

 

365,739

 

 

355,970

 

 

 

 

 

 

 

Redeemable preferred stock:

 

 

 

 

 

 

Series C redeemable convertible preferred stock, $0.01 par value per share (aggregate involuntary liquidation preference $16,664); 10,431 shares authorized; Issued and outstanding: 2,620 at both March 31, 2019 and December 31, 2018

 

 

709

 

 

709

Series E redeemable convertible preferred stock, $0.01 par value per share (aggregate involuntary liquidation preference $35,000 at both March 31, 2019 and December 31, 2018); Shares authorized: 35,000 at both March 31, 2019 and December 31, 2018; Issued and outstanding: 35,000 at March 31, 2019 and December 31, 2018

 

 

30,931

 

 

30,934

Stockholders’ (deficit) equity:

 

 

 

 

 

 

Common stock, $0.01 par value per share; 750,000,000 shares authorized; Issued (including shares in treasury): 244,537,235 at March 31, 2019 and 234,160,661 at December 31, 2018

 

 

2,445

 

 

2,342

Additional paid-in capital

 

 

1,319,879

 

 

1,289,714

Accumulated other comprehensive income

 

 

1,374

 

 

1,584

Accumulated deficit

 

 

(1,294,241)

 

 

(1,260,290)

Less common stock in treasury: 15,002,663 at March 31, 2019 and December 31, 2018

 

 

(30,637)

 

 

(30,637)

Total stockholders’ (deficit) equity

 

 

(1,180)

 

 

2,713

Total liabilities, redeemable preferred stock, and stockholders’ (deficit) equity

 

$

396,199

 

$

390,326

 

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

 

3

 


 

Table of Contents

Plug Power Inc. and Subsidiaries

Consolidated Statements of Operations

(In thousands, except share and per share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31,

 

    

2019

    

2018

Net revenue:

 

 

 

 

 

 

Sales of fuel cell systems and related infrastructure

 

$

2,220

 

$

10,613

Services performed on fuel cell systems and related infrastructure

 

 

6,213

 

 

5,483

Power Purchase Agreements

 

 

4,707

 

 

5,372

Fuel delivered to customers

 

 

5,453

 

 

4,950

Net revenue

 

 

18,593

 

 

26,418

Cost of revenue:

 

 

 

 

 

 

Sales of fuel cell systems and related infrastructure

 

 

2,321

 

 

10,122

Services performed on fuel cell systems and related infrastructure

 

 

6,123

 

 

5,734

Power Purchase Agreements

 

 

8,998

 

 

8,650

Fuel delivered to customers

 

 

7,921

 

 

5,896

Total cost of revenue

 

 

25,363

 

 

30,402

 

 

 

 

 

 

 

Gross loss

 

 

(6,770)

 

 

(3,984)

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

Research and development

 

 

7,373

 

 

8,648

Selling, general and administrative

 

 

9,324

 

 

8,309

Total operating expenses

 

 

16,697

 

 

16,957

 

 

 

 

 

 

 

Operating loss

 

 

(23,467)

 

 

(20,941)

 

 

 

 

 

 

 

Interest and other expense, net

 

 

(8,345)

 

 

(3,105)

Change in fair value of common stock warrant liability

 

 

(2,126)

 

 

1,258

 

 

 

 

 

 

 

Loss before income taxes

 

$

(33,938)

 

$

(22,788)

 

 

 

 

 

 

 

Income tax benefit

 

 

 —

 

 

2,953

 

 

 

 

 

 

 

Net loss attributable to the Company

 

$

(33,938)

 

$

(19,835)

 

 

 

 

 

 

 

Preferred stock dividends declared and accretion of discount

 

 

(52)

 

 

(13)

Net loss attributable to common shareholders

 

$

(33,990)

 

$

(19,848)

Net loss per share:

 

 

 

 

 

 

Basic and diluted

 

$

(0.15)

 

$

(0.09)

Weighted average number of common shares outstanding

 

 

220,605,068

 

 

226,985,762

 

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

 

4

 


 

Table of Contents

Plug Power Inc. and Subsidiaries

Consolidated Statements of Comprehensive Loss

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

Three months ended 

 

March 31,

 

2019

    

2018

 

 

 

 

 

 

Net loss attributable to the Company

$

(33,938)

 

$

(19,835)

Other comprehensive (loss) income - foreign currency translation adjustment

 

(210)

 

 

412

Comprehensive loss

$

(34,148)

 

$

(19,423)

 

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

 

5

 


 

Table of Contents

Plug Power Inc. and Subsidiaries

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, 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

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(33,938)

 

 

(33,938)

Other comprehensive loss

 

 —

 

 

 —

 

 

 —

 

 

(210)

 

 —

 

 

 —

 

 

 —

 

 

(210)

Stock-based compensation

 

324,073

 

 

 3

 

 

2,494

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

2,497

Stock dividend

 

5,034

 

 

 —

 

 

13

 

 

 —

 

 —

 

 

 —

 

 

(13)

 

 

 —

Issuance of common stock, net

 

10,000,000

 

 

100

 

 

23,398

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

23,498

Stock option exercises

 

47,467

 

 

 —

 

 

81

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

81

Provision for common stock warrants

 

 —

 

 

 —

 

 

4,179

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

4,179

March 31, 2019

 

244,537,235

 

$

2,445

 

$

1,319,879

 

$

1,374

 

15,002,663

 

$

(30,637)

 

$

(1,294,241)

 

$

(1,180)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

229,073,517

 

$

2,291

 

$

1,250,899

 

$

2,194

 

587,151

 

$

(3,102)

 

$

(1,178,636)

 

$

73,646

Net loss attributable to the Company

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(19,835)

 

 

(19,835)

Other comprehensive income

 

 —

 

 

 —

 

 

 —

 

 

412

 

 —

 

 

 —

 

 

 —

 

 

412

Stock-based compensation

 

21,292

 

 

 —

 

 

2,005

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

2,005

Stock dividend

 

6,721

 

 

 —

 

 

13

 

 

 —

 

 —

 

 

 —

 

 

(13)

 

 

 —

Stock option exercises

 

91,001

 

 

 1

 

 

49

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

50

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

 

 —

 

 

 —

 

 

34,829

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

34,829

Purchase of capped call

 

 —

 

 

 —

 

 

(16,000)

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(16,000)

Purchase of common stock forward

 

 —

 

 

 —

 

 

 —

 

 

 —

 

14,397,906

 

 

(27,500)

 

 

 —

 

 

(27,500)

Exercise of warrants

 

100

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

Provision for common stock warrants

 

 —

 

 

 —

 

 

1,885

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

1,885

March 31, 2018

 

229,192,631

 

$

2,292

 

$

1,273,680

 

$

2,606

 

14,985,057

 

$

(30,602)

 

$

(1,198,484)

 

$

49,492

 

 

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

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Table of Contents

Plug Power Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

Three months ended

 

 

March 31,

 

 

2019

    

2018

Operating Activities

 

 

 

 

 

 

Net loss attributable to the Company

 

$

(33,938)

 

$

(19,835)

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

 

 

 

 

 

 

Depreciation of property, plant and equipment, and leased property

 

 

2,776

 

 

2,780

Amortization of intangible assets

 

 

175

 

 

158

Stock-based compensation

 

 

2,497

 

 

2,005

Provision for bad debts and other assets

 

 

307

 

 

 —

Amortization of debt issuance costs and discount on convertible senior notes

 

 

2,469

 

 

379

Provision for common stock warrants

 

 

4,179

 

 

1,885

Change in fair value of common stock warrant liability

 

 

2,126

 

 

(1,258)

Income tax benefit

 

 

 —

 

 

(2,953)

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

 

 

 

 

 

 

Accounts receivable

 

 

4,978

 

 

(7,655)

Inventory

 

 

(17,564)

 

 

1,428

Prepaid expenses, and other assets

 

 

1,018

 

 

1,376

Accounts payable, accrued expenses, and other liabilities

 

 

(2,781)

 

 

(2,066)

Deferred revenue

 

 

(2,505)

 

 

(272)

Net cash used in operating activities

 

 

(36,263)

 

 

(24,028)

Investing Activities

 

 

 

 

 

 

Purchases of property, plant and equipment

 

 

(1,468)

 

 

(1,026)

Purchases for construction of leased property

 

 

(806)

 

 

(3,277)

Net cash used in investing activities

 

 

(2,274)

 

 

(4,303)

Financing Activities

 

 

 

 

 

 

Proceeds from exercise of warrants, net of transaction costs

 

 

 —

 

 

50

Proceeds from issuance of preferred stock, net of transaction costs

 

 

(3)

 

 

 —

Proceeds from public offerings, net of transaction costs

 

 

23,498

 

 

 —

Proceeds from exercise of stock options

 

 

81

 

 

 —

Proceeds from issuance of convertible senior notes, net

 

 

 —

 

 

96,057

Purchase of capped call and common stock forward

 

 

 —

 

 

(43,500)

Principal payments on long-term debt

 

 

(17,153)

 

 

(4,649)

Proceeds from long-term debt

 

 

84,761

 

 

 —

Repayments of finance obligations

 

 

(53,534)

 

 

 —

Increase in finance obligations

 

 

 —

 

 

1,241

Net cash provided by financing activities

 

 

37,650

 

 

49,199

Effect of exchange rate changes on cash

 

 

(35)

 

 

46

(Decrease) increase in cash, cash equivalents and restricted cash

 

 

(922)

 

 

20,914

Cash, cash equivalents, and restricted cash beginning of period

 

 

110,153

 

 

68,055

Cash, cash equivalents, and restricted cash end of period

 

$

109,231

 

$

88,969

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

Cash paid for interest

 

$

4,858

 

$

2,554

 

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

 

7

 


 

Table of Contents

1.  Nature of Operations

 

Description of Business

 

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

 

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

 

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

 

Our current products and services include:

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

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

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

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

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

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

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

 

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

 

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

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Liquidity

 

Our cash requirements relate primarily to working capital needed to operate and grow our business, including funding operating expenses, growth in inventory to support both shipments of new units and servicing the installed base, growth in equipment leased to customers under long-term arrangements, funding the growth in our GenKey “turn-key” solution, which includes the installation of our customers’ hydrogen infrastructure as well as delivery of the hydrogen fuel,  continued development and expansion of our products, payment of lease/financing obligations under sale/leaseback financings, and the repayment or refinancing of our long-term debt. Our ability to achieve profitability and meet future liquidity needs and capital requirements will depend upon numerous factors, including the timing and quantity of product orders and shipments; attaining and expanding positive gross margins across all product lines; the timing and amount of our operating expenses; the timing and costs of working capital needs; the timing and costs of 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 shareholders of $34.0 million for the three months ended March 31, 2019 and $78.2 million, $130.2 million and $57.6 million for the years ended December 31, 2018, 2017, and 2016, respectively,  and had an accumulated deficit of $1.3 billion at March 31, 2019.

 

During the three months ended March  31, 2019, cash used in operating activities was $36.3 million, consisting of a net loss attributable to the Company of $33.9 million, net outflows from fluctuations in working capital and other assets and liabilities of $16.9 million, and offset by the impact of non-cash charges/gains of $14.5 million. The changes in working capital were related to an increase in inventory, and decreases in deferred revenue, accounts payable, accrued expenses and other liabilities offset by decreases in accounts receivable and prepaid expenses, and other assets. As of March  31, 2019, we had cash and cash equivalents of $39.3 million and net working capital of $77.7 million. By comparison, at December 31, 2018, we had cash and cash equivalents of $38.6 million and net working capital of $9.2 million.

 

Net cash used in investing activities for the three months ended March  31, 2019, totaled $2.3 million and included purchases of property, plant and equipment and outflows associated with materials, labor, and overhead necessary to construct new leased property. Cash outflows related to equipment that we sell and equipment we lease directly to customers are included in net cash used in operating activities and net cash used in investing activities, respectively. Net cash provided by financing activities for the three months ended March  31, 2019 totaled $37.7 million and primarily resulted from net proceeds of  $23.5 million from the sale of our common stock, as well as  $85.0 million from a new debt facility some of which was used to pay approximately $50.3 million of  finance obligations and $17.6 million of previously outstanding long-term debt, including accrued interest.

 

   In March 2018, we issued $100.0 million in aggregate principal amount of 5.5% Convertible Senior Notes due in 2023 (Convertible Senior Notes). The total net proceeds from this offering, after considering costs of the issuance, were approximately $95.9 million. Approximately $43.5 million of the proceeds were used for the cost of a capped call and a common stock forward, both of which are hedges related to the Convertible Senior Notes. See Note 8, Convertible Senior notes for more details.

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

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require the Company to maintain cash balances in restricted accounts securing the Company’s finance obligations. Cash received from customers under the PPAs is used to make payments against our 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 March 31, 2019 is $77.5 million, which have been secured with restricted cash, security deposits and pledged service escrows of $78.2 million.

 

The Company has a master lease agreement with Wells Fargo (Wells Fargo MLA) to finance the Company’s commercial transactions with Walmart.  The Wells Fargo MLA was entered into in 2017 and amended in 2018. Pursuant to the Wells Fargo MLA, the Company sells fuel cell systems and hydrogen infrastructure to Wells Fargo and then leases them back and operates them at Walmart sites under lease agreements with Walmart. The total remaining lease payments to Wells Fargo was $64.9 million at March 31, 2019. Transactions completed under the Wells Fargo MLA in 2018 were accounted for as operating leases and therefore the sales of the fuel cell systems and hydrogen infrastructure were recognized as revenue for the year ended December 31, 2018. Transactions completed under the Wells Fargo MLA in 2017 were accounted for as capital leases. The difference in lease classification is due to changes in financing terms and their bearing on lease assessment criteria. Also included in the remaining lease payments to Wells Fargo is a sale/leaseback transaction in 2015 that was accounted for as an operating lease.  In connection with the Wells Fargo MLA, the Company has a customer guarantee for a majority of the transactions. The Wells Fargo transactions in 2018 required a letter of credit for the unguaranteed portion totaling $20.1 million. No sale/leaseback transactions under the Wells Fargo MLA were entered into during the three months ended March 31, 2019.

 

In November 2018, the Company completed a private placement of an aggregate of 35,000 shares of the Company’s Series E Convertible Preferred Stock, par value $0.01 per share (Series E Preferred Stock) resulting in net proceeds of approximately $30.9 million. See Note 10, Redeemable Preferred Stock for additional information.

 

In March 2019 the Company entered into a loan and security agreement with Generate Lending, LLC (Generate Capital) borrowing $85.0 million. The initial proceeds of the loan were used to pay in full the Company’s long-term debt and accrued interest of $17.6 million, under the loan agreement with NY Green Bank, a Division of the New York State Energy Research & Development Authority (NY Green Bank) and terminate approximately $50.3 million of certain equipment leases with Generate Plug Power SLB II, LLC as well as repurchase of the associated leased equipment. During April 2019, the Company borrowed an additional $15.0 million under this debt facility. See Note 7, Long-Term Debt for additional information.

 

In March 2019 the Company sold 10 million shares of common stock for an issue price of $2.35 per share resulting in net proceeds of $23.5 million.

 

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

 

2.  Summary of Significant Accounting Policies

 

Principles of Consolidation

 

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

 

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Interim Financial Statements

 

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

 

Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with GAAP have been condensed or omitted. These unaudited interim consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K, filed for the fiscal year ended December 31, 2018.

 

The information presented in the accompanying unaudited interim consolidated balance sheet as of December 31, 2018, has been derived from the Company’s December 31, 2018 audited consolidated financial statements. All other information has been derived from the unaudited interim consolidated financial statements of the Company.

 

 

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 ASC Topic 842, Leases  (ASC Topic 842). 

 

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

 

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

 

·

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

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

 

·

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

 

·

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

 

The ROU asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for lease payments made at or before the lease commencement date, plus any initial direct costs incurred less any lease incentives received.  For operating leases, the ROU asset is subsequently measured throughout the lease term at the carrying amount of the lease liability, plus initial direct costs, plus (minus) any prepaid (accrued) lease payments, less the

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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 one of its leases. When a reassessment results in the remeasurement of a lease liability, a corresponding adjustment is made to the carrying amount of the corresponding ROU asset.

 

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

 

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

 

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 Power Purchase Agreement (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.  Only a limited number of fuel cell units are under standard warranty.

 

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 control over a product or service to a customer.

 

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

 

The Company presents the provision for common stock warrants within each revenue-related line item on the consolidated statements of operations. This presentation reflects a discount that those common stock warrants represent, and therefore revenue is net of these non-cash charges.  The provision of common stock warrants is allocated to the relevant revenue-related line items based upon the expected mix of the revenue for each respective contract.

 

Nature of goods and services

 

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

 

(i) Sales of Fuel Cell Systems and Related Infrastructure

 

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

 

The Company considers comparable list prices, as well as historical average pricing approaches to determine standalone selling prices 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. 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, spare parts and hydrogen infrastructure is recognized as revenue at a point in time which usually occurs at shipment (and occasionally upon delivery) for fuel cells and spare parts and upon customer acceptance for hydrogen infrastructure, depending on the terms of the arrangement, the point  at which transfer of control passes to the customer and the performance obligation has been satisfied. 

 

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

 

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

 

(iii) Power Purchase Agreements

 

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

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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 financing leases.  As a result, no upfront revenue was recognized at the closing of these transactions and a finance obligation for each lease was established.  The fuel cell systems and related infrastructure that are provided to customers through these PPAs are considered leased property on the accompanying consolidated balance sheet.  Costs to service the leased property, depreciation of the leased property, and other related costs are considered cost of PPA revenue on the accompanying consolidated statements of operations.  Interest cost associated with finance leases is presented within interest and other expense, net on the accompanying consolidated statement of operations.

 

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

 

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

 

(iv) Fuel Delivered to Customers

 

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

 

The Company purchases hydrogen fuel from suppliers 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 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 over which the transfer of goods or services to which the assets relate occur, typically ranging from 5 to 10 years. Amortization of the capitalized commission fees is included in selling, general, and administrative expenses.

 

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

 

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

 

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Common Stock Warrant Accounting

 

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

 

Derivative Liabilities

 

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

 

Equity Instruments

 

Common stock warrants that meet certain applicable requirements of ASC 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 accompanying unaudited interim consolidated balance sheet. Common stock warrants accounted for as equity instruments represent the warrants issued to Amazon and Walmart as discussed in Note 11, Warrant Transaction Agreements.  These warrants are remeasured at each financial reporting date prior to vesting, using the Monte Carlo pricing model.  Once these warrants vest, they are no longer remeasured.  This pricing model, which is based, in part, upon unobservable inputs for which there is little or no market data, requires the Company to develop its own assumptions. Changes in fair value resulting from remeasurement of common stock warrants issued in connection with the Amazon Transaction Agreement and the Walmart Transaction Agreement, as described in Note 11, Warrant Transaction Agreements, and are recorded as cumulative catch up adjustments as a reduction of revenue.

 

Convertible Senior Notes

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

 

Use of Estimates

 

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

 

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Reclassifications and Correction of Immaterial Errors

 

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

 

In the third quarter of 2018, it was determined that the presentation in our consolidated statements of operations of certain service arrangements and the amortization of the associated finance obligations had not been appropriately accounted for resulting in an overstatement of our revenue and cost of revenue.  This previous presentation resulted in a gross up of these line items and had no impact on our gross profit (loss) or net loss.  The Company corrected prior period unaudited interim consolidated financial statements to be consistent with the current period presentation and will correct comparable financial information in future filings.  The amount reclassified from revenue on service performed on fuel cell systems and related infrastructure to cost of revenue on PPAs for the three months ended March  31,  2018 was  $0.8 million.  The amount reclassified from cost of revenue on service performed on fuel cell systems and related infrastructure to cost of revenue on PPAs for the three months ended March 31,  2018 was $1.1 million. The Company does not consider the impact of the prior period correction to be material to the prior period consolidated financial statements.

 

Recent Accounting Pronouncements 

 

Recently Adopted Accounting Pronouncements

 

In June 2018, an accounting update was issued to simplify the accounting for nonemployee share-based payment transactions  resulting from expanding the scope of ASC Topic 718, Compensation-Stock Compensation , to include share-based payment transactions for acquiring goods and services from nonemployees. An entity should apply the requirements of ASC Topic 718 to nonemployee awards except for specific guidance on inputs to an option pricing model and the attribution of cost (that is, the period of time over which share-based payment awards vest and the pattern of cost recognition over that period). The amendments specify that ASC Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The amendments also clarify that ASC Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under ASC Topic 606, Revenue from Contracts with Customers . The amendments in this accounting update are effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. Early adoption is permitted, but no earlier than an entity’s adoption date of ASC Topic 606. The Company adopted this update on January 1, 2019 and it did not have a material effect on the consolidated financial statements.

 

Recently Issued and Not Yet Adopted Accounting Pronouncements

 

In November 2018, an accounting update was issued to clarify the interaction between ASC Topic 808, Collaborative Arrangements, and Topic 606. Adoption of this update is effective for all reporting periods beginning after December 15, 2019. The Company is evaluating the impact this update will have on the consolidated financial statements.

 

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

 

In January 2017, an accounting update was issued to simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test.  Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. This accounting update is effective for years beginning after December 15, 2019.  Early adoption is permitted for interim or annual goodwill

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impairment tests performed on testing dates after January 1, 2017. The Company is evaluating the impact this update will have on the consolidated financial statements.

 

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

 

 

 

 

3.  Earnings Per Share

 

Basic earnings per common share are computed by dividing net loss attributable to common shareholders by the weighted average number of common shares outstanding during the reporting period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock (such as stock options, unvested restricted stock, common stock warrants, 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 share 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 shares outstanding during the reporting period. Since the Company is in a net loss position, all common stock equivalents would be considered to be anti-dilutive and are, therefore, not included in the determination of diluted earnings per share. Accordingly, basic and diluted loss per share are the same.

 

The dilutive potential common shares are summarized as follows:

 

 

 

 

 

 

 

 

At March 31,

 

    

2019

    

2018

Stock options outstanding (1)

 

21,109,998

 

19,733,986

Restricted stock outstanding  (2)

 

2,372,347

 

234,744

Common stock warrants (3)

 

115,824,142

 

115,824,142

Preferred stock (4)

 

17,933,591

 

2,782,075

Convertible Senior Notes (5)

 

43,630,020

 

43,630,020

Number of dilutive potential common shares

 

200,870,098

 

182,204,967

 

(1)

During the three months ended March 31, 2019 and 2018, the Company granted 25,000, and zero stock options, respectively.

 

(2)

During the three months ended March 31, 2019 and 2018, the Company granted 25,000 and zero shares of restricted stock, respectively.

 

(3)

In April 2017, the Company issued 5,250,750 warrants with an exercise price of $2.69 per warrant, as described in Note 9, Stockholders’ Equity.  Of these warrants issued in April 2017, none have been exercised as of March 31, 2019.

 

In April 2017, the Company issued warrants to acquire up to 55,286,696 of the Company’s common stock as part of a transaction agreement, subject to certain vesting events, as described in Note 11, Warrant Transaction Agreements.  Of these warrants issued, none have been exercised as of March 31, 2019.

 

In July 2017, the Company issued warrants to acquire up to 55,286,696 of the Company’s common stock as part of a transaction agreement, subject to certain vesting events, as described in Note 11, Warrant Transaction Agreements. Of these warrants issued, none have been exercised as of March 31, 2019.

 

(4)

The preferred stock amount represents the dilutive potential common shares of the Series C and E redeemable convertible preferred stock, based on the conversion price of the preferred stock as of March 31, 2019 and 2018, respectively.  Of the 10,431 Series C redeemable preferred stock issued on May 16, 2013, 7,811 had been

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converted to common stock through March 31, 2019 and 2018, with the remainder still outstanding.  On November 1, 2018, the Company issued 35,000 shares of Series E redeemable convertible preferred stock.  As of March 31, 2019, all Series E redeemable convertible preferred stock are outstanding.

 

(5)

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

 

4.  Inventory

 

             Inventory as of March 31, 2019 and December 31, 2018 consists of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

    

March 31,

    

December 31,

 

 

 

2019

 

2018

 

Raw materials and supplies - production locations

 

$

39,834

 

$

32,941

 

Raw materials and supplies - customer locations

 

 

7,401

 

 

6,755

 

Work-in-process

 

 

11,992

 

 

5,589

 

Finished goods

 

 

6,247

 

 

2,625

 

Inventory

 

$

65,474

 

$

47,910

 

 

 

 

5. Leased Property

 

Leased property at March  31, 2019 and December 31, 2018 consists of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

    

March 31,

    

December 31,

 

 

 

2019

 

2018

 

Right of use assets - operating

 

$

76,647

 

$

76,747

 

Right of use assets - finance

 

 

35,950

 

 

39,905

 

Capitalized costs of lessor assets

 

 

45,594

 

 

41,040

 

Less: accumulated depreciation

 

 

(16,302)

 

 

(10,941)

 

Leased property, net

 

$

141,889

 

$

146,751

 

 

 

6. Intangible Assets

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted Average

 

Gross Carrying

 

Accumulated

 

 

 

 

 

 

Amortization Period

 

Amount

 

Amortization

 

Total

 

Acquired technology

 

9  years 

 

$

5,861

 

$

(2,314)

 

$

3,547

 

Customer relationships

 

10  years 

 

 

260

 

 

(130)

 

 

130

 

Trademark

 

5  years 

 

 

60

 

 

(60)

 

 

 —

 

 

 

 

 

$

6,181

 

$

(2,504)

 

$

3,677

 

 

The gross carrying amount and accumulated amortization of the Company’s acquired identifiable intangible assets as of December 31, 2018 are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted Average

 

Gross Carrying

 

Accumulated

 

 

 

 

 

 

Amortization Period

 

Amount

 

Amortization

 

Total

 

Acquired technology

 

9  years 

 

$

5,926

 

$

(2,176)

 

$

3,750

 

Customer relationships

 

10  years 

 

 

260

 

 

(123)

 

 

137

 

Trademark

 

5  years 

 

 

60

 

 

(57)

 

 

 3

 

 

 

 

 

$

6,246

 

$

(2,356)

 

$

3,890

 

 

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The change in the gross carrying amount and accumulated amortization of the acquired technology from December 31, 2018 to March 31, 2019 is due to changes attributed to foreign currency translation. 

 

As part of the agreement to acquire the intellectual property from American Fuel Cell, the Company shall pay American Fuel Cell LLC milestone payments not to exceed $2.9 million in total, if certain milestones associated with the production of components related to the acquired technology are met before April 2021. As of March 31, 2019 these milestones have not yet been reached.

 

Amortization expense for acquired identifiable intangible assets was $0.2 million for both the three months ended March 31, 2019 and 2018. Estimated amortization expense for subsequent years is as follows (in thousands):

 

 

 

 

 

Remainder of 2019

    

$

410

2020

 

 

546

2021

 

 

546

2022

 

 

546

2023

 

 

546

2024 and thereafter

 

 

1,083

Total

 

$

3,677

 

 

7.  Long-Term Debt

 

In March 2019 the Company, and its subsidiaries Emerging Power Inc. and Emergent Power Inc., entered in to a loan and security agreement, as amended (the “Loan Agreement”) with Generate Lending, LLC (“Generate Capital”), providing for a secured term loan facility in the amount of $100.0 million (the “Term Loan Facility”).  The Company borrowed $85.0 million under the Loan Agreement on the date of closing and borrowed an additional $15.0 million in April 2019.  A portion of the initial proceeds of the loan were used to pay in full the Company’s long-term debt, including accrued interest of $17.6 million under the loan and security agreement, dated as of July 21, 2017, by and among the Company, Emerging, Emergent and NY Green Bank, a Division of the New York State Energy Research & Development Authority (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. This loss was recorded in interest and other expenses, net in the Company’s unaudited interim consolidated statement of operations.  Additionally,  $1.7 million was paid to an escrow account related to additional fees for the Green Bank Loan if the Company does not meet certain New York State employment and fuel cell deployment targets by March 2021. This amount paid to an escrow account is recorded in long-term other assets on the Company’s unaudited interim consolidated balance sheet as of March 31, 2019.  On March 31, 2019, the outstanding principal balance under the Term Loan Facility was $85.0 million. The collective balance of $32.1 million in loan proceeds will be used to fund working capital for ongoing deployments and other general corporate purposes of the Company.

 

Advances under the Term Loan Facility bear interest of 12.00% per annum. The Loan Agreement includes covenants, limitations, and events of default customary for similar facilities. The term of the loan is three years, with a maturity date of December 13, 2022. Principal payments will be funded in part by releases of restricted cash, as described in Note 15, Commitments and Contingencies.

 

Interest and a portion of the principal amount is payable on a quarterly basis and the entire then outstanding principal balance of the Term Loan Facility, together with all accrued and unpaid interest, is due and payable on the maturity date of December 13, 2022. The Company may also be required to pay Generate Capital additional fees of up to $1.5 million if the Company is unable to provide $50.0 million of structured project financing arrangements with Generate Capital prior to December 31, 2021.

 

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,

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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 that is first measured on December 31, 2019 and is based on certain factors that are yet to be determined and on a third party valuation that has yet to be completed. 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.

 

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

 

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

 

 

 

 

December 31, 2019

$

79,638

December 31, 2020

 

58,034

December 31, 2021

 

36,106

December 31, 2022

 

 —

 

 

8. Convertible Senior Notes

In March 2018, the Company issued $100.0 million in aggregate principal amount of 5.5% Convertible Senior Notes due on March 15, 2023, in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended.  There are no required principal payments prior to maturity of the Convertible Senior Notes.

The total net proceeds from the 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 Convertible Senior Notes bear interest at 5.5%, payable semi-annually in cash on March 15 and September 15 of each year.  The Convertible Senior Notes will mature on March 15, 2023, unless earlier converted or repurchased in accordance with their terms. The Convertible Senior Notes are unsecured and do not contain any financial covenants or any restrictions on the payment of dividends, or the issuance or repurchase of common stock by the Company.

Each $1,000 of principal of the Convertible Senior Notes will initially be convertible into 436.3002 shares of the Company’s common stock, which is equivalent to an initial conversion price of approximately $2.29 per share, subject to adjustment upon the occurrence of specified events.  Holders of these Convertible Senior Notes may convert their Convertible Senior Notes at their option at any time prior to the close of the last business day immediately preceding September 15, 2022, only under the following circumstances:

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1)

during any calendar quarter (and only during such calendar quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;

2)

during the five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price (as defined in the indenture governing the Convertible Senior Notes) per $1,000 principal amount of notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate for the notes on each such trading day;

 

3)

if the Company calls any or all of the Convertible Senior Notes for redemption, at any time prior to the close of business on the second scheduled trading day immediately preceding the redemption date; or

 

4)

upon the occurrence of certain specified corporate events, such as a beneficial owner acquiring more than 50% of the total voting power of the Company’s common stock, recapitalization of the Company, dissolution or liquidation of the Company, or the Company’s common stock ceases to be listed on an active market exchange.

On or after September 15, 2022, holders may convert all or any portion of their Convertible Senior Notes at any time prior to the close of business on the second scheduled trading day immediately preceding the maturity date regardless of the foregoing conditions.

 

Upon conversion of the Convertible Senior Notes, the Company will pay or deliver, as the case may be, cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, at the Company’s election. While the Company plans to settle the principal amount of the Convertible Senior Notes in cash subject to available funding at time of settlement, we currently use the if-converted method for calculating any potential dilutive effect of the conversion option on diluted net income per share, subject to meeting the criteria for using the treasury stock method in future periods.

The conversion rate will be subject to adjustment in some events but will not be adjusted for any accrued or unpaid interest. Holders who convert their Convertible Senior Notes in connection with certain corporate events that constitute a “make-whole fundamental change” per the indenture governing the Convertible Senior Notes or in connection with a redemption will be, under certain circumstances, entitled to an increase in the conversion rate. In addition, if the Company undergoes a fundamental change prior to the maturity date, holders may require the Company to repurchase for cash all or a portion of its Convertible Senior Notes at a repurchase price equal to 100% of the principal amount of the repurchased Convertible Senior Notes, plus accrued and unpaid interest.

The Company may not redeem the Convertible Senior Notes prior to March 20, 2021.  The Company may redeem for cash all or any portion of the Convertible Senior Notes, at the Company’s option, on or after March 20, 2021 if the last reported sale price of the Company’s common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive), including at least one of the three trading days immediately preceding the date on which the Company provides notice of redemption, during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption at a redemption price equal to 100% of the principal amount of the Convertible Senior Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.

In accounting for the issuance of the Convertible Senior Notes, the Company separated the Convertible Senior Notes into liability and equity components. The initial carrying amount of the liability component of approximately $58.2 million, net of costs incurred, was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component of approximately $37.7 million, net of costs incurred, representing the conversion option, was determined by deducting the fair value of the liability component from the par value of the Convertible Senior Notes. The difference between the principal amount of the 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 Convertible Senior Notes.  The effective interest rate is approximately 16.0%. The equity component

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of the Convertible Senior Notes is included in additional paid-in capital in the unaudited  interim consolidated balance sheet 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 Convertible Senior Notes of approximately $4.1 million, consisting of initial purchasers' discount of approximately $3.2 million and other issuance costs of $0.9 million. In accounting for the transaction costs, we allocated the total amount incurred to the liability and equity components using the same proportions as the proceeds from the Convertible Senior Notes. Transaction costs attributable to the liability component were approximately $2.4 million, were recorded as debt issuance cost (presented as contra debt in the unaudited interim consolidated balance sheet) and are being amortized to interest expense over the term of the Convertible Senior Notes. The transaction costs attributable to the equity component were approximately $1.7 million and were netted with the equity component in stockholders’ equity.

 

The Convertible Senior Notes consist of the following at March 31, 2019 (in thousands):

 

 

 

 

Principal amounts:

 

 

  Principal

$

100,000

  Unamortized debt discount (1)

 

(33,049)

  Unamortized debt issuance costs (1)

 

(1,926)

  Net carrying amount

$

65,025

  Carrying amount of the equity component (2)

$

37,702

 

1)

Included in the unaudited interim consolidated balance sheet within Convertible Senior Notes, net and amortized over the remaining life of the Convertible senior notes using the effective interest rate method.

 

2)

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

As of March 31, 2019 the remaining life of the Convertible senior notes is approximately 48 months.

Based on the closing price of the Company’s common stock of  $2.40 on March 31, 2019, the if-converted value of the Convertible Senior Notes was approximately $104.7 million.   At March 31, 2019, the carrying value of the Convertible Senior Notes, excluding unamortized debt issue costs, approximates the fair value.

 

Capped Call

 

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

The Capped Call is generally expected to reduce or offset the potential dilution to the Company’s common stock upon any conversion of the Convertible Senior Notes and/or offset any cash payments the Company is required to make in excess of the principal amount of converted Convertible Senior Notes, as the case may be, with such reduction and/or offset subject to a cap based on the cap price. The cap price of the Capped Call transactions will initially be $3.82 per share, which represents a premium of 100% over the last reported sale price of the Company’s common stock of $1.91 per share on the date of the transaction, and is subject to certain adjustments under the terms of the Capped Call. The Capped Call becomes exercisable if the conversion option is exercised.

By entering into the Capped Call, the Company expects to reduce the potential dilution to its common stock (or, in the event the conversion is settled in cash, to provide a source of cash to settle a portion of its cash payment obligation) in the event that at the time of conversion its stock price exceeds the conversion price under the Convertible Senior Notes.

 

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Common Stock Forward

 

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

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

 

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

 

 

 

9.  Stockholders’   Equity

 

Preferred Stock

 

The Company has authorized 5.0 million shares of preferred stock, par value $0.01 per share. The Company’s certificate of incorporation provides that shares of preferred stock may be issued from time to time in one or more series. The Company’s Board of Directors is authorized to fix the voting rights, if any, designations, powers, preferences, qualifications, limitations and restrictions thereof, applicable to the shares of each series.

 

The Company has authorized Series A Junior Participating Cumulative Preferred Stock, par value $0.01 per share. As of March 31, 2019 and December 31, 2018, there were no shares of Series A Junior Participating Cumulative Preferred Stock issued and outstanding.  See Note 10, Redeemable Preferred Stock, for a description of the Company’s Series C and E redeemable preferred stock.

 

Common Stock and Warrants

 

The Company has one class of common stock, par value $.01 per share. Each share of the Company’s common stock is entitled to one vote on all matters submitted to stockholders. In March 2019, the Company issued and sold in a registered direct offering an aggregate of 10 million shares of the Company’s common stock at a purchase price of $2.35 per share. The net proceeds to the Company were approximately $23.5 million. There were 229,534,572 and 219,157,998 shares of common stock outstanding as of March 31, 2019 and December 31, 2018, respectively.

 

On December 22, 2016, the Company issued warrants to purchase 10,501,500 shares of common stock in connection with offerings of common stock and Series D Redeemable Preferred Stock at an exercise price of $1.50 per share.  On April 12, 2017, the Company and Tech Opportunities LLC (“Tech Opps”) entered into an agreement, pursuant to which Tech Opps exercised in full its warrants to purchase an aggregate of 10,501,500 shares of common stock.  The net proceeds received by the Company pursuant to the exercise of the existing warrants was $15.1 million and the Company issued to Tech Opps warrants to acquire up to 5,250,750 shares of common stock at an exercise price of $2.69 per share.  The warrants were exercisable as of October 12, 2017 and will expire on October 12, 2019.  The warrants are subject to anti-dilution provisions in the event of issuance of additional shares of common stock and certain other conditions, as further described in the warrant agreement.

 

During 2013, the Company completed a series of underwritten public offerings. One of the underwritten public offerings included accompanying warrants to purchase common stock.  As of December 31, 2017 and 2016, 100 warrants with an exercise price of $0.15 per share, remained outstanding.  During February 2018, the remaining 100 warrants were exercised.

 

During 2017, additional warrants to purchase up to 110,573,392 shares of common stock were issued in connection with transaction agreements with Amazon and Walmart, as discussed in Note 11, Warrant Transaction Agreements.  At March 31, 2019 and 2018, in connection with these agreements, warrants to acquire 18,913,869 shares of

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common stock have vested and are therefore exercisable.  These warrants are measured at fair value and are classified as equity instruments on the unaudited interim consolidated balance sheet.

 

At Market Issuance Sales Agreement

 

On April 3, 2017, the Company entered into an At Market Issuance Sales Agreement (the “Sales Agreement”) with FBR Capital Markets & Co., as sales agent (“FBR”), pursuant to which the Company may offer and sell, from time to time through FBR, shares of common stock par value $0.01 per share having an aggregate offering price of up to $75.0 million.  Under the Sales Agreement, in no event shall the Company issue or sell through FBR such a number of shares that exceeds the number of shares or dollar amount of common stock registered. The Company has raised $30.2 million to date during the term of the Sales Agreement. During the three months ended March 31, 2019 the Company did not issue any shares pursuant to the Sales Agreement.

 

10.  Redeemable Convertible Preferred Stock

 

In November 2018, the Company completed an offering of an aggregate of 35,000 shares of the Company’s Series E Redeemable Preferred Stock, par value $0.01 per share (Series E Stock), resulting in aggregate net proceeds of approximately $30.9 million, after deducting underwriting discounts and commissions and expenses payable by the Company.  The Company is required to redeem the Series E Stock in thirteen monthly installments in the amount of $2.7 million each from May 2019 through May 2020.

 

Each share of Series E Stock was issued with an initial stated value of $1,000 per share. The Company is required to elect, on a monthly basis, whether it will redeem or convert the installment.  Should the Company elect to redeem, the shares are valued at the stated value.  Should the Company elect to convert, the holder of the shares will receive common stock, with a conversion price discounted by 15% from the then current market value.  The holders of the shares may elect to convert all or any whole amount of shares, at any time at a conversion price of $2.31 per share.  Conversion prices are discounted upon a change in control, certain triggering events, or failure to make a redemption payment.  

 

Except for our Series C Redeemable Convertible Preferred Stock (Series C Stock), which shall rank senior to the Series E Stock as to dividends, distributions and payments upon liquidation, dissolution and winding up, all shares of the Company’s capital stock, including common stock, rank junior in rank to the Series E Stock with respect to dividends, distributions and payments upon liquidation, dissolution and winding up.

 

Holders of the Series E Stock are not entitled to receive dividends except in connection with certain purchase rights and other corporate events, as described in the certificate of designations, or in connection with certain distributions of assets, as described in the certificate of designations, or as, when and if declared by the Company’s Board of Directors acting in its sole and absolute discretion.  Holders of the Series E Stock have no voting rights, except on matters required by law or under the certificate of designations to be submitted to a class vote of the Series E Stock.

 

In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company or other deemed liquidation event, the holders of the Series E Stock are entitled to receive, after any amount that is required to be paid to the Series C Stock and before any amount is paid to the holders of any of capital stock ranking junior to the Series E Stock, an amount per share equal to the greater of (i) 125% of the sum of the stated value plus any declared and unpaid dividends and late charges as provided in the certificate of designations, on the date of such payment and (ii) the amount per share such holder would receive if such holder converted such Series E Stock into common stock immediately prior to the date of such payment.

 

The Company had 2,620 shares of Series C Stock outstanding at March 31, 2019 and 2018. The holder of the Series C Stock is entitled to receive dividends at a rate of 8% per annum, based on the original issue price per share of $248.794, payable in equal quarterly installments in cash or in shares of common stock, at the Company’s option. During the three months ended March 31, 2019 and 2018, respectively, all dividends have been paid in shares of common stock. Each share of Series C Stock is convertible into shares of common stock with the number of shares of common stock issuable upon conversion determined by dividing the original issue price per share of $248.794 by the conversion price in

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effect at the time the shares are converted. The conversion price of the Series C Stock as of March 31, 2019 and December 31, 2018 was $0.2343. The Series C Stock votes together with the common stock on an as-converted basis on all matters.    

 

In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company, or other deemed liquidation event, the holder of the Series C Stock will be entitled to be paid an amount per share equal to the greater of (i) the original issue price, plus any accrued but unpaid dividends or (ii) the amount per share that would have been payable had all shares of the Series C Stock been converted to shares of common stock immediately prior to such liquidation event. The Series C Stock is redeemable at the election of the holder of the Series C  Stock or the Company.

 

11. Warrant Transaction Agreements

 

Amazon Transaction Agreement

 

On April 4, 2017, the Company and Amazon entered into a Transaction Agreement (the “Amazon Transaction Agreement”), pursuant to which the Company agreed to issue to Amazon.com NV Investment Holdings LLC, a wholly owned subsidiary of Amazon, warrants to acquire up to 55,286,696 shares of the Company’s common stock (the “Amazon Warrant Shares”), subject to certain vesting events described below. The Company and Amazon entered into the Amazon Transaction Agreement in connection with existing commercial agreements between the Company and Amazon with respect to the deployment of the Company’s GenKey fuel cell technology at Amazon distribution centers. The existing commercial agreements contemplate, but do not guarantee, future purchase orders for the Company’s fuel cell technology. Additionally, Amazon and the Company will begin working together on technology collaboration, exploring the expansion of applications for the Company’s line of ProGen fuel cell engines.  The vesting of the Amazon Warrant Shares is linked to payments made by Amazon or its affiliates (directly or indirectly through third parties) pursuant to the existing commercial agreements.

 

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

 

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

 

Because the Amazon Warrant Shares contain performance criteria (i.e. aggregate purchase levels), which Amazon must achieve for the Amazon Warrant Shares to vest, as detailed above, the final measurement date for the Amazon Warrant Shares is the date on which the Amazon Warrant Shares vest. Prior to the final measurement, when achievement of the performance criteria has been deemed probable, the estimated fair value of Amazon Warrant Shares is being recorded as a reduction to revenue and an addition to additional paid-in capital based on the projected number of Amazon Warrant Shares expected to vest, the proportion of purchases by Amazon and its affiliates within the period relative to the aggregate purchase levels required for the Amazon Warrant Shares to vest and the then-current fair value of the related

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Amazon Warrant Shares. To the extent that projections change in the future as to the number of Amazon Warrant Shares that will vest, as well as changes in the fair value of the Amazon Warrant Shares, a cumulative catch-up adjustment will be recorded in the period in which the estimates change.

 

At March 31, 2019 and December 31, 2018, 20,368,782 of the Amazon Warrant Shares had vested.  The amount of provision for common stock warrants recorded as a reduction of revenue for the Amazon Warrant during the three months ended March 31, 2019 and 2018 was $1.2 million and $1.7 million, respectively.

 

Walmart Transaction Agreement

 

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

 

The majority of the Walmart Warrant Shares will vest based on Walmart’s payment of up to $600.0 million to the Company in connection with Walmart’s purchase of goods and services from the Company. The first tranche of 5,819,652 Walmart Warrant Shares vested upon the execution of the Walmart Transaction Agreement.  Accordingly, $10.9 million, the fair value of the first tranche of Walmart Warrant Shares, was recorded as a provision for common stock warrants and presented as a reduction to revenue on the 2017 consolidated statements of operations. The second tranche of 29,098,260 Walmart Warrant Shares will vest in four installments of 7,274,565 Walmart Warrant Shares each time Walmart or its affiliates, directly or indirectly through third parties, make an aggregate of $50.0 million in payments for goods and services to the Company, up to payments totaling $200.0 million in the aggregate. The exercise price for the first and second tranches of Walmart Warrant Shares will be $2.1231 per share. After Walmart has made payments to the Company totaling $200.0 million, the third tranche of 20,368,784 Walmart Warrant Shares will vest in eight installments of 2,546,098 Walmart Warrant Shares each time Walmart or its affiliates, directly or indirectly through third parties, make an aggregate of $50.0 million in payments for goods and services to the Company, up to payments totaling $400.0 million in the aggregate. The exercise price of the third tranche of Walmart Warrant Shares will be an amount per share equal to ninety percent (90%) of the 30-day volume weighted average share price of the common stock as of the final vesting date of the second tranche of Walmart Warrant Shares, provided that, with limited exceptions, the exercise price for the third tranche will be no lower than $1.1893. The Walmart Warrant Shares are exercisable through July 20, 2027.

 

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

 

Because the Walmart Warrant Shares contain performance criteria (i.e. aggregate purchase levels), which Walmart must achieve for the Walmart Warrant Shares to vest, as detailed above, the final measurement date for the Walmart Warrant Shares is the date on which the Walmart Warrant Shares vest. Prior to the final measurement, when achievement of the performance criteria has been deemed probable, the estimated fair value of Walmart Warrant Shares is being recorded as a reduction to revenue and an addition to additional paid-in capital based on the projected number of Walmart Warrant Shares expected to vest, the proportion of purchases by Walmart and its affiliates within the period relative to the aggregate purchase levels required for the Walmart Warrant Shares to vest and the then-current fair value of the related Walmart Warrant Shares. To the extent that projections change in the future as to the number of Walmart Warrant Shares that will vest, as well as changes in the fair value of the Walmart Warrant Shares, a cumulative catch-up adjustment will be recorded in the period in which the estimates change.

 

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At March 31, 2019 and December 31, 2018, 5,819,652 of the Walmart Warrant Shares had vested.  The amount of provision for common stock warrants recorded as a reduction of revenue for the Walmart Warrant during the three months ended March 31, 2019 and 2018 was $3.0 million and $0.2 million, respectively.

 

12. Revenue

 

Disaggregation of revenue

 

 

 

 

 

 

 

 

Major products/services lines

 

 

 

 

 

 

 

 

Three months ended  March 31,

 

 

2019

 

2018

Sales of fuel cell systems

 

$

2,220