PLUG POWER INC. The following discussion should be read in conjunction with our accompanying unaudited interim condensed consolidated financial statements and notes thereto included within this report, and our audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K, filed for the fiscal year endedDecember 31, 2019 . In addition to historical information, this Quarterly Report on Form 10-Q and the following discussion contain statements that are not historical facts and are considered forward-looking within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). These forward-looking statements contain projections of our future results of operations or of our financial position or state other forward-looking information. In some cases you can identify these statements by forward-looking words such as "anticipate," "believe," "could," "continue," "estimate," "expect," "intend," "may," "should," "will," "would," "plan," "projected" or the negative of such words or other similar words or phrases. We believe that it is important to communicate our future expectations to our investors. However, there may be events in the future that we are not able to accurately predict or control and that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. Investors are cautioned not to unduly rely on forward-looking statements because they involve risks and uncertainties, and actual results may differ materially from those discussed as a result of various factors, including, but not limited to:
· the risk that we continue to incur losses and might never achieve or maintain
profitability;
· the risk that we will need to raise additional capital to fund our operations
and such capital may not be available to us;
· the risk of dilution to our stockholders and/or stock price should we need to
raise additional capital;
· the risk that our lack of extensive experience in manufacturing and marketing
products may impact our ability to manufacture and market products on a
profitable and large-scale commercial basis;
· the risk that unit orders may not ship, be installed and/or converted to
revenue, in whole or in part;
· the risk that a loss of one or more of our major customers, or if one of our
major customers delays payment of or is unable to pay its receivables, a
material adverse effect could result on our financial condition;
· the risk that a sale of a significant number of shares of stock could depress
the market price of our common stock;
· the risk that our convertible senior notes, if settled in cash, could have a
material effect on our financial results;
· the risk that our convertible note hedges may affect the value of our
convertible senior notes and our common stock;
· the risk that negative publicity related to our business or stock could result
in a negative impact on our stock value and profitability;
· the risk of potential losses related to any product liability claims or
contract disputes;
· the risk of loss related to an inability to maintain an effective system of
internal controls;
· our ability to attract and maintain key personnel;
· the risks related to the use of flammable fuels in our products;
· the risk that pending orders may not convert to purchase orders, in whole or in
part;
· the cost and timing of developing, marketing and selling our products;
· the risks of delays in or not completing our product development goals;
· our ability to obtain financing arrangements to support the sale or leasing of
our products and services to customers;
· our ability to achieve the forecasted gross margin on the sale of our products;
· the cost and availability of fuel and fueling infrastructures for our products;
· the risks, liabilities, and costs related to environmental, health and safety
matters;
· the risk of elimination of government subsidies and economic incentives for
alternative energy products;
· market acceptance of our products and services, including GenDrive, GenSure and
GenKey systems;
· our ability to establish and maintain relationships with third parties with
respect to product development, manufacturing, distribution and servicing, and
the supply of key product components;
· the cost and availability of components and parts for our products;
· the risk that possible new tariffs could have a material adverse effect on our
business;
· our ability to develop commercially viable products;
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· our ability to reduce product and manufacturing costs;
· our ability to successfully market, distribute and service our products and
services internationally;
· our ability to improve system reliability for our products;
· competitive factors, such as price competition and competition from other
traditional and alternative energy companies;
· our ability to protect our intellectual property;
· the risk of dependency on information technology on our operations and the
failure of such technology;
· the cost of complying with current and future federal, state and international
governmental regulations;
· our subjectivity to legal proceedings and legal compliance;
· the risks associated with past and potential future acquisitions; and
· the volatility of our stock price
The risks included here are not exhaustive, and additional factors could adversely affect our business and financial performance, including factors and risks discussed in the section titled "Risk Factors" included under Part I, Item 1A, below. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for management to predict all such risk factors, nor can we assess the impact of all such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from these contained in any forward-looking statements. While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. These forward-looking statements speak only as of the date on which the statements were made. Except as may be required by applicable law, we do not undertake or intend to update any forward-looking statements after the date of this Quarterly Report on Form 10-Q. References in this Annual Report on Form 10-K to "Plug Power ," the "Company," "we," "our" or "us" refer toPlug Power Inc. , including as the context requires, its subsidiaries. Overview As a leading provider of comprehensive hydrogen fuel cell turnkey solutions,Plug Power Inc. , or the Company, is seeking to build a green hydrogen economy. The Company is focused on hydrogen and fuel cell systems that are used to power electric motors primarily in the electric mobility and stationary power markets, given the ongoing paradigm shift in the power, energy, and transportation industries to address climate change, energy security, and meet sustainability goals.Plug Power created the first commercially viable market for hydrogen fuel cell, or the HFC technology. As a result, the Company has deployed approximately 32,000 fuel cell systems, and has become the largest buyer of liquid hydrogen, having built and operated a hydrogen network acrossNorth America . We are focused on proton exchange membrane, or PEM, fuel cell and fuel processing technologies, fuel cell/battery hybrid technologies, and associated hydrogen storage and dispensing infrastructure from which multiple products are available. A fuel cell is an electrochemical device that combines hydrogen and oxygen to produce electricity and heat without combustion. Hydrogen is derived from multiple sources. The majority of liquid hydrogen in the US is produced using the steam methane reforming process and utilizing by-product hydrogen from chlor alkali production. By-product hydrogen from a chlor alkali plant is considered to be low carbon hydrogen and in some cases, considered green hydrogen, depending on the source of electricity and geographic location. We source a significant amount of liquid hydrogen based on the chlor alkali process today. In addition, we are looking to increase the mix of our hydrogen usage to be green and zero carbon produced using renewables and electrolyzer with a goal to have over 50% of hydrogen used to be green by 2024. 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. We provide and continue to develop commercially-viable hydrogen and fuel cell solutions for industrial mobility applications (including electric forklifts and electric industrial vehicles) at multishift high volume manufacturing and high throughput distribution sites where we believe our products and services provide a unique combination of productivity, flexibility and environmental benefits. Additionally, we manufacture and sell fuel cell products to replace batteries and 36 diesel generators in stationary backup power applications. These products have proven valuable with telecommunications, transportation and utility customers as robust, reliable and sustainable power solutions.
Our current products and services include:
GenDrive: GenDrive is our hydrogen fueled PEM fuel cell system providing power to material handling electric vehicles, including class 1, 2, 3 and 6 electric forklifts and ground support equipment;
GenFuel: GenFuel is our hydrogen fueling delivery, generation, storage and dispensing system;
GenCare: GenCare is our ongoing 'internet of things'-based maintenance and on-site service program for GenDrive fuel cell systems, GenSure fuel cell systems, GenFuel hydrogen storage and dispensing products and ProGen fuel cell engines;
GenSure: GenSure is our stationary fuel cell solution providing scalable, modular PEM fuel cell power to support the backup and grid-support power requirements of the telecommunications, transportation, and utility sectors;
GenKey: GenKey is our vertically integrated "turn-key" solution combining either GenDrive or GenSure fuel cell power with GenFuel fuel and GenCare aftermarket service, offering complete simplicity to customers transitioning to fuel cell power; and
ProGen: ProGen is our fuel cell stack and engine technology currently used globally in mobility and stationary fuel cell systems, and as engines in electric delivery vans.
We provide our products worldwide through our direct product sales force, and by leveraging relationships with original equipment manufacturers and their dealer networks. We manufacture our commercially-viable products inLatham, NY andSpokane, WA. To promote fuel cell adoption and maintain postsale customer satisfaction, we offer a range of service and support options through extended maintenance contracts. Additionally, customers may waive our service option, and choose to service their systems independently. Substantially all of our fuel cells sold in recent years were bundled with maintenance contracts.
Recent Developments
As a result of the COVID-19 pandemic, state governments-including those inNew York andWashington , where our manufacturing facilities are located-have issued orders requiring businesses that do not conduct essential services to temporarily close their physical workplaces to employees and customers. We are currently deemed an essential business and, as a result, are exempt from these state orders, in their current form. InMarch 2020 , we put in place a number of protective measures in response to the COVID-19 outbreak. These measures include the canceling of all commercial air travel and all other non-critical travel, requesting that employees limit non-essential personal travel, eliminating all but essential third-party access to our facilities, enhancing our facilities' janitorial and sanitary procedures, encouraging employees to work from home to the extent their job function enables them to do so, encouraging the use of virtual employee meetings, and providing staggered shifts and social distancing measures for those employees associated with manufacturing and service operations. 37 We cannot predict at this time the full extent to which COVID-19 will impact our business, results and financial condition, which will depend on many factors. We are staying in close communication with our manufacturing facilities, employees, customers, suppliers and partners, and acting to mitigate the impact of this dynamic and evolving situation, but there is no guarantee that we will be able to do so. Although as of the date hereof, we have not observed any material impacts to our supply of components, the situation is fluid. Many of the parts for our products are sourced from suppliers inChina and the manufacturing situation inChina remains variable. Supply chain disruptions could reduce the availability of key components, increase prices or both. Some of our customers, such as certain automotive manufacturers, have suspended operations at their facilities due to COVID-19. Accordingly, while those customers continue to pay for the leasing and servicing of our products, they are not purchasing hydrogen fuel. Other customers are essential businesses and remain in operation. Certain of these customers, such as Walmart, significantly increased their use of units and hydrogen fuel consumption as a result of COVID-19. In the quarter endedMarch 31, 2020 , our services and power purchase agreement margins were negatively impacted by incremental service costs associated with increased usage of units at some of our primary customer sites. In addition, future changes in applicable government orders or regulations, or changes in the interpretation of existing orders or regulations, could result in further disruptions to our business that may materially and adversely affect our financial condition and results of operations. OnMay 6, 2020 , the Company amended its Loan Agreement withGenerate Capital in order to, among other things, (i) provide an incremental term loan facility in the amount of$50.0 million , which has been fully funded, (ii) provide for additional, incremental term loans in an aggregate amount not to exceed$50.0 million , which are available to the Company inGenerate Capital's sole discretion, (iii) reduce the interest rate on all loans to 9.50% from 12.00% per annum, and (iv) extend the maturity date toOctober 31, 2025 fromOctober 6, 2022 . Based on the current amortization schedule, the outstanding balance of$157.5 million under the Term Loan Facility will be fully paid byMarch 31, 2024 . OnApril 6, 2020 , the Company purchased a convertible note ofUnited Hydrogen Group (UHG), a supplier of hydrogen fuel to the Company, fromAPV Ventures Fund I GP, LLP for$8.0 million . The note is payable in the form of hydrogen fuel delivered, cash payments, conversion to equity in UHG, or a combination thereof. The interest rate on the note is 7.0%. The purchase price was comprised of$1.0 million in cash and 1.8 million shares of the Company's common stock. Results of Operations Our primary sources of revenue are from sales of fuel cell systems and related infrastructure, services performed on fuel cell systems and related infrastructure, Power Purchase Agreements (PPAs), and fuel delivered to customers. Revenue from sales of fuel cell systems and related infrastructure represents sales of our GenDrive units, GenSure stationary backup power units, as well as hydrogen fueling infrastructure. Revenue from services performed on fuel cell systems and related infrastructure represents revenue earned on our service and maintenance contracts and sales of spare parts. Revenue from PPAs primarily represents payments received from customers who make monthly payments to access the Company's GenKey solution. Revenue associated with fuel delivered to customers represents the sale of hydrogen to customers that has been purchased by the Company from a third party or generated on site. In 2017, in separate transactions, the Company issued to each of Amazon and Walmart warrants to purchase shares of the Company's common stock. The Company recorded a portion of the estimated fair value of the warrants as a reduction of revenue based upon the projected number of shares of common stock expected to vest under the warrants, the proportion of purchases by Amazon, Walmart and their affiliates within the period relative to the aggregate purchase levels required for vesting of the respective warrants, and the then-current fair value of the warrants. During the fourth quarter of 2019, the Company adopted ASU 2019-08, with retrospective adoption as ofJanuary 1, 2019 . As a result, the amount recorded as a reduction of revenue was measured based on the grant-date fair value of the warrants. Previously, this amount was measured based on vesting date fair value with estimates of fair value determined at each financial reporting date for unvested warrant shares considered to be probable of vesting. Except for the third tranche, all existing unvested warrants are using a measurement date ofJanuary 1, 2019 , the adoption date, in accordance ASU 2019-08. For the third tranche, the exercise price will be determined once the second tranche vests. The fair value will be determined at that time. 38 The amount of provision for common stock warrants recorded as a reduction of revenue during the three months endedMarch 31, 2020 and 2019, respectively, is shown in the table below (in thousands): Three months ended March 31, 2020 2019 Sales of fuel cell systems and related infrastructure$ (644) $
(274)
Services performed on fuel cell systems and related infrastructure (258) (109) Power Purchase Agreements (551) (388) Fuel delivered to customers (754) (422) Total$ (2,207) $ (1,193)
Revenue, cost of revenue, gross profit (loss) and gross margin for the three
months ended
Cost of Gross Gross
Net Revenue Revenue Profit/(Loss) Margin
For the three months ended March 31,
2020 :
Sales of fuel cell systems and related
infrastructure $ 20,387 $ 13,744 $ 6,643 32.6 %
Services performed on fuel cell systems
and related infrastructure 6,521 8,181 (1,660) (25.5) %
Power Purchase Agreements 6,496 14,243 (7,747) (119.3) %
Fuel delivered to customers 7,333 9,035 (1,702) (23.2) %
Other 76 81 (5) (6.6) %
Total $ 40,813 $ 45,284 $ (4,471) (11.0) %
For the three months ended March 31,
2019 :
Sales of fuel cell systems and related
infrastructure $ 2,544 $ 2,321 $ 223 8.8 %
Services performed on fuel cell systems
and related infrastructure 6,343 6,123 220 3.5 %
Power Purchase Agreements 6,110 8,998 (2,888) (47.3) %
Fuel delivered to customers 6,582 7,921 (1,339) (20.3) %
Other - - - - %
Total $ 21,579 $ 25,363 $ (3,784) (17.5) %
Net Revenue
Revenue - sales of fuel cell systems and related infrastructure. Revenue from
sales of fuel cell systems and related infrastructure represents revenue from
the sale of our fuel cells, such as GenDrive units and GenSure stationary backup
power units, as well as hydrogen fueling infrastructure referred to at the site
level as hydrogen installations.
Revenue from sales of fuel cell systems and related infrastructure for the three
months ended March 31, 2020 increased $17.8 million , or 701.4%, to $20.4 million
from $2.5 million for the three months ended March 31, 2019 . Included within
revenue was provision for common stock warrants of $0.6 million and $0.3 million
for the three months ended March 31, 2020 and 2019, respectively. The main
drivers for the increase in revenue were the increase in GenDrive units
recognized as revenue, change in product mix, variations in customer programs,
and an increase in hydrogen installations, offset partially by the increase in
the provision for common stock warrants. There were 825 units recognized as
revenue during the three months ended March 31, 2020 , compared to 94 for the
three months ended March 31, 2019 . There was hydrogen infrastructure revenue
associated with four hydrogen sites during the three months ended March 31,
2020 , compared to zero during the three months ended March 31, 2019 .
Revenue - services performed on fuel cell systems and related infrastructure.
Revenue from services performed on fuel cell systems and related infrastructure
represents revenue earned on our service and maintenance contracts and sales of
spare parts. Revenue from services performed on fuel cell systems and related
infrastructure for the three months ended March 31, 2020 increased $0.2 million ,
or 2.8%, to $6.5 million as compared to $6.3 million for the three months ended
March 31, 2019 . Included within revenue was provision for common stock warrants
of $0.3 million and $0.1 million
39
for the three months ended
Revenue - Power Purchase Agreements. Revenue from PPAs represents payments received from customers for power generated through the provision of equipment and service. . Revenue from PPAs for the three months endedMarch 31, 2020 increased$0.4 million , or 6.3%, to$6.5 million from$6.1 million for the three months endedMarch 31, 2019 . Included within revenue was provision for common stock warrants of$0.6 million and$0.4 million for the three months endedMarch 31, 2020 and 2019, respectively. The increase in revenue from PPAs for the three months endedMarch 31, 2020 as compared to the three months endedMarch 31, 2019 was primarily attributable to the increase in units associated with the PPAs, offset in part by increased provision for common stock warrants. Revenue - fuel delivered to customers. Revenue associated with fuel delivered to customers represents the sale of hydrogen to customers that has been purchased by the Company from a third party or generated on site. Revenue associated with fuel delivered to customers for the three months endedMarch 31, 2020 increased$0.8 million , or 11.4%, to$7.3 million from$6.6 million for the three months endedMarch 31, 2019 . Included within revenue was provision for common stock warrants of$0.8 million and$0.4 million for the three months endedMarch 31, 2020 and 2019, respectively. The increase in revenue was due to an increase in the number of sites with fuel contracts in 2020, compared to 2019, partially offset by the increase in the provision for common stock warrants. Cost of Revenue Cost of revenue - sales of fuel cell systems and related infrastructure. Cost of revenue from sales of fuel cell systems and related infrastructure includes direct materials, labor costs, and allocated overhead costs related to the manufacture of our fuel cells such as GenDrive units and GenSure stationary backup power units, as well as hydrogen fueling infrastructure referred to at the site level as hydrogen installations. Cost of revenue from sales of fuel cell systems and related infrastructure for the three months endedMarch 31, 2020 increased 492.2%, or$11.4 million , to$13.7 million , compared to$2.3 million for the three months endedMarch 31, 2019 . This increase was driven by the increase in GenDrive deployment volume and increase in hydrogen installations. There were 825 units recognized as revenue during the three months endedMarch 31, 2020 , compared to 94 for the three months endedMarch 31, 2019 . Revenue associated with four hydrogen installations was recognized during the three months endedMarch 31, 2020 , compared to zero during the three months endedMarch 31, 2019 . Gross margin generated from sales of fuel cell systems and related infrastructure increased to 32.6% for the three months endedMarch 31, 2020 , compared to 8.8% for the three months endedMarch 31, 2019 , primarily due to favorable changes in product mix and customer profile mix. Additionally, the increase in margin was due to better operating leverage as a result of the aforementioned increase in revenue. Cost of revenue - services performed on fuel cell systems and related infrastructure. Cost of revenue from services performed on fuel cell systems and related infrastructure includes the labor, material costs and allocated overhead costs incurred for our product service and hydrogen site maintenance contracts and spare parts. Cost of revenue from services performed on fuel cell systems and related infrastructure for the three months endedMarch 31, 2020 increased 33.6%, or$2.1 million , to$8.2 million , compared to$6.1 million for the three months endedMarch 31, 2019 . Gross margin declined to (25.5)% for the three months endedMarch 31, 2020 , compared to 3.5% for the three months endedMarch 31, 2019 primarily due to program investments targeting performance improvements, as well as incremental service costs during the quarter associated with increased usage of units at some of our primary customer sites caused
by the COVID-19 crisis. Cost of revenue - Power Purchase Agreements. Cost of revenue from PPAs includes depreciation of assets utilized and service costs to fulfill PPA obligations and interest costs associated with certain financial institutions for leased equipment. Cost of revenue from PPAs for the three months endedMarch 31, 2020 increased$5.2 million , or 58.3%, to$14.2 million from$9.0 million for the three months endedMarch 31, 2019 . Gross margin declined to (119.3)% for the three months endedMarch 31, 2020 , as compared to (47.3)% for the three months endedMarch 31, 2019 primarily due to program investments targeting performance improvements, as well as incremental service costs during the quarter associated with increased usage of units at some of our primary customer sites caused
by
the COVID-19 crisis.
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Cost of revenue - fuel delivered to customers. Cost of revenue from fuel
delivered to customers represents the purchase of hydrogen from suppliers that
ultimately is sold to customers and costs for onsite generation. Cost of
revenue from fuel delivered to customers for the three months ended March 31,
2020 increased $1.1 million , or 14.1%, to $9.0 million from $7.9 million for the
three months ended March 31, 2019 . The increase was due primarily to higher
volume of hydrogen delivered to customer sites as a result of an increase in the
number of hydrogen installations completed under GenKey agreements and higher
fuel costs. Gross margin declined to (23.2)% during the three months ended March
31, 2020 , compared to (20.3)% during the three months ended March 31, 2019
primarily due to the increase in the amount of provision for common stock
warrants. The provision for common stock warrants from fuel delivered to
customers for the three months ended March 31, 2020 and 2019 had a 9.3% and 6.0%
negative impact on revenue, respectively, and was partly offset by improved
efficiencies on existing hydrogen sites.
Expenses
Research and development expense. Research and development expense includes:
materials to build development and prototype units, cash and non-cash
compensation and benefits for the engineering and related staff, expenses for
contract engineers, fees paid to consultants for services provided, materials
and supplies consumed, facility related costs such as computer and network
services, and other general overhead costs associated with our research and
development activities.
Research and development expense for the three months ended March 31,
2020 increased $3.0 million , or 41.2%, to $10.4 million , from $7.4 million for
the three months ended March 31, 2019 . The increase was primarily due to
additional R&D program investments such as programs associated with improvement
of fuel efficiency, GenDrive unit performance and new product development such
as on-road delivery trucks as well as drone applications.
Selling, general and administrative expenses. Selling, general and
administrative expenses includes cash and non-cash compensation, benefits,
amortization of intangible assets and related costs in support of our general
corporate functions, including general management, finance and accounting, human
resources, selling and marketing, information technology and legal services.
Selling, general and administrative expenses for the three months ended March
31, 2020 , increased $1.7 million , or 18.1%, to $11.0 million from $9.3 million
for the three months ended March 31, 2019 . This increase was primarily related
to increases in salaries and stock-based compensation.
Interest and other expense, net. Interest and other expense, net consists of
interest and other expenses related to our long-term debt, convertible senior
notes, obligations under finance leases and our finance obligations, as well as
foreign currency exchange losses, offset by interest and other income consisting
primarily of interest earned on our cash and cash equivalents, restricted cash,
foreign currency exchange gains and other income. Since March 31, 2019 , the
Company assumed approximately $50.0 million of additional long-term debt at 12%
interest, issued a $40 million convertible senior note at 5.5% interest and
entered into additional sale/leaseback finance obligation arrangements.
Net interest and other expense for the three months ended
long-term debt and the issuance of the convertible senior note, as mentioned above.
Common Stock Warrant Liability
Change in fair value of common stock warrant liability. The Company accounts for common stock warrants as common stock warrant liability with changes in the fair value reflected in the unaudited interim condensed consolidated statement of operations as change in the fair value of common stock warrant liability. As ofMarch 31, 2020 , the Company no longer carries these types of warrants. 41
All remaining common stock warrants were fully exercised in the fourth quarter
of 2019. As such there was no change in fair value as of
Income Tax
Income taxes. The Company did not record any income tax expense or benefit for the three months endedMarch 31, 2020 and 2019. The Company has not changed its overall conclusion with respect to the need for a valuation allowance against its net deferred tax assets, which remain fully reserved.
Liquidity and Capital Resources
Liquidity
Our cash requirements relate primarily to working capital needed to operate and grow our business, including funding operating expenses, growth in inventory to support both shipments of new units and servicing the installed base, growth in equipment leased to customers under long-term arrangements, funding the growth in our GenKey "turn-key" solution, which includes the installation of our customers' hydrogen infrastructure as well as delivery of the hydrogen fuel, continued development and expansion of our products, payment of lease/financing obligations under sale/leaseback financings, and the repayment or refinancing of our long-term debt. Our ability to achieve profitability and meet future liquidity needs and capital requirements will depend upon numerous factors, including the timing and quantity of product orders and shipments; attaining and expanding positive gross margins across all product lines; the timing and amount of our operating expenses; the timing and costs of working capital needs; the timing and costs of developing marketing and distribution channels; the ability of our customers to obtain financing to support commercial transactions; our ability to obtain financing arrangements to support the sale or leasing of our products and services to customers and to repay or refinance our long-term debt, and the terms of such agreements that may require us to pledge or restrict substantial amounts of our cash to support these financing arrangements; the timing and costs of developing marketing and distribution channels; the timing and costs of product service requirements; the timing and costs of hiring and training product staff; the timing and costs of product development and introductions; the extent of our ongoing and new research and development programs; and changes in our strategy or our planned activities. If we are unable to fund our operations with positive cash flows and cannot obtain external financing, we may not be able to sustain future operations. As a result, we may be required to delay, reduce and/or cease our operations and/or seek bankruptcy protection.
We have experienced and continue to experience negative cash flows from
operations and net losses. The Company incurred net losses attributable to
common stockholders of
We have historically funded our operations primarily through public and private offerings of equity and debt, as well as short-term borrowings, long-term debt and project financings. The Company believes that its current working capital and cash anticipated to be generated from future operations, as well as borrowings from lending and project financing sources and proceeds from equity and debt offerings, including our at-the-market offering, will provide sufficient liquidity to fund operations for at least one year after the date the financial statements are issued. There is no guarantee that future funding will be available if and when required or at terms acceptable to the Company. This projection is based on our current expectations regarding new project financing and product sales and service, cost structure, cash burn rate and other operating assumptions. During the three months endedMarch 31, 2020 , net cash used in operating activities was$60.0 million , consisting primarily of a net loss attributable to the Company of$37.5 million , and net outflows from fluctuations in working capital and other assets and liabilities of$33.9 million , offset by the impact of noncash charges of$11.4 million . The changes in working capital primarily were related to decreases in accounts receivable and accounts payable, accrued expenses, and other liabilities offset by increases in deferred revenue, inventory, prepaid expenses and, other current assets. As ofMarch 31, 2020 , we had cash and cash equivalents of$74.3 million and net working capital of$125.4 million . By comparison, atDecember 31, 2019 , we had cash and cash equivalents of$139.5 million and net working capital of$162.5 million . 42
Net cash used in investing activities for the three months endedMarch 31, 2020 , totaled$5.1 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 lease directly to customers are included in net cash used in investing activities. Net cash provided by financing activities for the three months endedMarch 31, 2020 totaled$4.1 million and primarily resulted from proceeds from the exercise of stock options of$6.1 million , increase in finance obligations of$9.0 million , offset by repayments of long-term debt of$5.3 million and finance obligations of$5.7 million .
Public and Private Offerings of Equity and Debt
Common Stock Issuance OnApril 13, 2020 , the Company entered into an At Market Issuance Sales Agreement, or the Sales Agreement, withB. Riley FBR, Inc. , as sales agent, or FBR, pursuant to which the Company may offer and sell, from time to time through FBR, shares of Company common stock having an aggregate offering price of up to$75.0 million . As of the date of this filing, the Company did not issue any shares of common stock pursuant to the Sales Agreement. InDecember 2019 , the Company issued and sold in a registered public offering an aggregate of 46 million shares of its common stock at a purchase price of$2.75 per share for net proceeds of approximately$120.4 million . InMarch 2019 , the Company issued and sold in a registered direct offering an aggregate of 10 million shares of its common stock at a purchase price of$2.35 per share for net proceeds of approximately$23.5 million . Preferred Stock Issuance
InNovember 2018 , the Company completed a private placement of an aggregate of 35,000 shares of the Company's Series E Redeemable Convertible Preferred Stock, par value$0.01 per share, or the Series E Preferred Stock, for net proceeds of approximately$30.9 million . In the third quarter of 2019, the Company redeemed 4,038 shares of Series E Preferred Stock totaling$4.0 million . In the fourth quarter of 2019, the Company converted 30,962 shares of Series E Preferred Stock into 13.8 million shares of its common stock. InJanuary 2020 , the Company converted the remainder of the 500 shares of Series E Preferred Stock into 216,000 shares of its common stock. Convertible Senior Notes InSeptember 2019 , the Company issued a$40.0 million in aggregate principal amount of 7.5% convertible senior note due in 2023, which we refer to herein as the$40 million Convertible Senior Note. The Company's total obligation, net of interest accretion, due to the holder is$48.0 million . The total net proceeds from this offering, after deducting costs of the issuance were$39.1 million . As ofMarch 31, 2020 , the outstanding balance of the note, net of related discount and issuance costs, was$40.4 million . See "$40 Million Convertible Senior
Note" below for more details. InMarch 2018 , the Company issued$100.0 million in aggregate principal amount of 5.5% convertible senior notes due in 2023, which we refer to herein as the$100 million Convertible Senior Notes. The total net proceeds from this offering, after deducting costs of the issuance, were approximately$95.9 million . Approximately$43.5 million of the proceeds were used for the cost of the Capped Call and the Common Stock Forward (as defined below), both of which are hedges related to the$100 million Convertible Senior Notes. As ofMarch 31, 2020 , the outstanding balance of the notes, net of related accretion and issuance costs, was$72.6 million . See "$100 Million Convertible Senior Notes" below, for more details. Operating and Finance Leases The Company enters into sale/leaseback agreements with various financial institutions to facilitate the Company's commercial transactions with key customers. The Company sells certain fuel cell systems and hydrogen infrastructure to the financial institutions and leases the equipment back to support certain customer locations and to fulfill its varied Power Purchase Agreements (PPAs). Transactions completed under the sale/leaseback transactions are generally accounted for 43 as operating leases and therefore the sales of the fuel cell systems and hydrogen infrastructure are recognized as revenue. In connection with certain sale/leaseback transactions, the financial institutions require the Company to maintain cash balances in restricted accounts securing the Company's finance obligations. Cash received from customers under the PPAs is used to make payments against the Company's finance obligations. As the Company performs under these agreements, the required restricted cash balances are released, according to a set schedule. The total remaining lease payments to financial institutions under these agreements atMarch 31, 2020 was$268.1 million ,$234.6 million of which were secured with restricted cash, security deposits backing letters of credit, and pledged service escrows. The Company has varied master lease agreements withWells Fargo Equipment Finance, Inc. , or Wells Fargo, to finance the Company's commercial transactions with various customers. The Wells Fargo lease agreements were entered into during 2017, 2018, and 2019. No sale/leaseback transactions were entered with Wells Fargo during the three months endedMarch 31, 2020 . Pursuant to the lease agreements, the Company sells fuel cell systems and hydrogen infrastructure to Wells Fargo and then leases them back and operates them at Walmart sites. The Company has a customer guarantee for a large portion of the transactions entered into in connection with such lease agreements. The Wells Fargo lease agreements required letters of credit for the unguaranteed portion totaling$55.5 million as ofMarch 31, 2020 . The total remaining lease liabilities owed to Wells Fargo were$108.0 million atMarch 31, 2020 . Over recent years, including in 2019, the Company has entered into master lease agreements with multiple institutions such as Key Equipment Finance (KeyBank ),SunTrust Equipment Finance & Lease Corp. (now known asTruist ), andFirst American Bancorp, Inc. (First American). In the first quarter of 2020, the Company entered into additional lease agreements withKeyBank and First American. Similar to the Wells Fargo lease agreements, the primary purpose of these agreements is to finance commercial transactions with varied customers. Most of the transactions with these financial institutions required cash collateral for the unguaranteed portions totaling$179.1 million as ofMarch 31, 2020 . Similar to the Wells Fargo lease agreements, in many cases the Company has a customer guarantee for a large portion of the transactions. The total remaining lease liabilities owed to these financial institutions were$160.1 million atMarch 31, 2020 . Restricted Cash As security for the above sale/leaseback agreements, as ofMarch 31, 2020 ,$129.7 million of our cash is required to be restricted and will be released over the lease terms. In addition, as ofMarch 31, 2020 , the Company had cash security deposits totaling$101.6 million backing letters of credit that secure the sale/leaseback agreements Secured Debt InMarch 2019 , the Company, and its subsidiariesEmerging Power Inc. andEmergent Power Inc. , entered into a loan and security agreement, as amended (the Loan Agreement), withGenerate 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 inApril 2019 . A portion of the initial proceeds of the loan was used to pay in full the Company's long-term debt withNY Green Bank , aDivision of the New York State Energy Research & Development Authority , including accrued interest of$17.6 million (the GreenBank Loan ), and terminate approximately$50.3 million of certain equipment leases withGenerate Plug Power SLB II, LLC and repurchase the associated leased equipment. In connection with this transaction, the Company recognized a loss on extinguishment of debt of approximately$0.5 million during the three months endedMarch 31, 2019 . This loss was recorded in interest and other expenses, net in the Company's unaudited interim condensed consolidated statement of operations. Additionally,$1.7 million was paid to an escrow account related to additional fees due in connection with the GreenBank Loan if the Company does not meet certainNew York State employment and fuel cell deployment targets byMarch 2021 . Amount escrowed is recorded in long-term other assets on the Company's unaudited interim condensed consolidated balance sheets as ofMarch 31, 2020 . The Company presently expects to meet the targets as required under the arrangement. Additionally, inNovember 2019 , the Company borrowed an incremental$20.0 million at 12% interest to fund working capital for ongoing deployments and other general corporate purposes. OnMarch 31, 2020 , the outstanding balance under the Term Loan Facility was$107.5 million with a 12% interest rate. 44 OnMay 6, 2020 , the Company and Generate amended the Loan Agreement to, among other things, (i) provide an incremental term loan facility in the amount of$50.0 million , which has been fully funded, (ii) provide for additional, incremental term loans in an aggregate amount not to exceed$50.0 million , which are available to the Company inGenerate Capital's sole discretion, (iii) reduce the interest rate on all loans to 9.50% from 12.00% per annum, and (iv) extend the maturity date toOctober 31, 2025 fromOctober 6, 2022 . The Loan Agreement includes covenants, limitations, and events of default customary for similar facilities. Interest and a portion of the principal amount is payable on a quarterly basis. Principal payments will be funded in part by releases of restricted cash, as described in Note 15, Commitments and Contingencies. Based on the current amortization schedule, the outstanding balance of$157.5 million under the Term Loan Facility will be fully paid byMarch 31, 2024 . If addition term loans are funded, the entire then-outstanding principal balance of the Term Loan Facility, together with all accrued and unpaid interest, will be due and payable on the maturity date ofOctober 31, 2025 .
All obligations under the Loan Agreement are unconditionally guaranteed byEmerging Power Inc. andEmergent Power Inc. The Term Loan Facility is secured by substantially all of the Company's and the guarantor subsidiaries' assets, including, among other assets, all intellectual property, all securities in domestic subsidiaries and 65% of the securities in foreign subsidiaries, subject to certain exceptions and exclusions. The Loan Agreement contains covenants, including, among others, (i) the provision of annual and quarterly financial statements, management rights and insurance policies and (ii) restrictions on incurring debt, granting liens, making acquisitions, making loans, paying dividends, dissolving, and entering into leases and asset sales and (iii) compliance with a collateral coverage covenant. The Loan Agreement also provides for events of default, including, among others, payment, bankruptcy, covenant, representation and warranty, change of control, judgment and material adverse effect defaults at the discretion of the lender. As ofMarch 31, 2020 , the Company was in compliance with all the covenants.
The Loan Agreement provides that if there is an event of default due to the Company's insolvency or if the Company fails to perform in any material respect the servicing requirements for fuel cell systems under certain customer agreements, which failure would entitle the customer to terminate such customer agreement, replace the Company or withhold the payment of any material amount to the Company under such customer agreement, thenGenerate Capital has the right to causeProton Services Inc. , a wholly owned subsidiary of the Company, to replace the Company in performing the maintenance services under such customer agreement.
As ofMarch 31, 2020 , the Term Loan Facility requires the principal balance at the end of each of the following years amortization may not exceed the following (in thousands):December 31, 2020 $ 86,159 December 31, 2021 59,373 As ofMay 6, 2020 , the Term Loan Facility, including the incremental borrowing subsequent toMarch 31, 2020 , as described above, requires the principal balance at the end of each of the following years amortization may not exceed the following (in thousands):December 31, 2020 $ 125,687 December 31, 2021 89,301December 31, 2022 51,478December 31, 2023 16,863 We have historically funded our operations primarily through public and private offerings of equity and debt, as well as short-term borrowings, long-term debt and project financings. The Company believes that its current working capital and cash anticipated to be generated from future operations, as well as borrowings from lending and project financing sources and proceeds from equity and debt offerings, including the at-the-market offering, will provide sufficient liquidity to fund operations for at least one year after the date the financial statements are issued. There is no guarantee that future funding will be available if and when required or at terms acceptable to the Company. This projection is based 45
on our current expectations regarding new project financing and product sales and service, cost structure, cash burn rate and other operating assumptions.
Several key indicators of liquidity are summarized in the following table (in
thousands):
Three months Year
ended or at ended or at
March 31, 2020 December 31, 2019 Cash and cash equivalents at end of period$ 74,340 $
139,496
Restricted cash at end of period 232,874
230,004
Working capital at end of period 125,431
162,549
Net loss attributable to common stockholders 37,492 85,517 Net cash used in operating activities (60,015)
(51,522)
Net cash used in investing activities (6,355)
(14,244)
Net cash provided by financing activities 4,083
325,060
InSeptember 2019 , the Company issued a$40.0 million aggregate principal amount of 7.5% Convertible Senior Note due onJanuary 5, 2023 in exchange for net proceeds of$39.1 million , in a private placement to an accredited investor pursuant to Rule 144A under the Securities Act of 1933, as amended, or the Securities Act. There are no required principal payments prior to maturity of the note. Upon maturity of the note, the Company is required to repay 120% of$40.0 million , or$48.0 million . The note bears interest at 7.5% per annum, payable quarterly in arrears onJanuary 5 ,April 5 ,July 5 andOctober 5 of each year beginning onOctober 5, 2019 and will mature onJanuary 5, 2023 unless earlier converted or repurchased in accordance with its terms. The note is unsecured and does not contain any financial covenants or any restrictions on the payment of dividends, or the issuance or repurchase of common stock by the Company. The note has an initial conversion rate of 387.5969, which is subject to adjustment in certain events. The initial conversion rate is equivalent to an initial conversion price of approximately$2.58 per share of common stock. The holder of the note may convert at its option at any time until the close of business on the second scheduled trading day immediately prior to the maturity date for shares of the Company's common stock, subject to certain limitations. In addition, the note will be automatically converted if (1) the daily volume-weighted average price per share of common stock exceeds 175% of the conversion price (as described above) on each of the 20 consecutive VWAP trading days (as defined in the note) beginning after the issue date of the note and (2) certain equity conditions (as defined in the note) are satisfied. Only if both criteria are met is the note automatically converted. Upon either the voluntary or automatic conversion of the note, the Company will deliver shares of common stock based on (1) the then-effective conversion rate and (2) the original principal amount of$40.0 million and not the maturity principal amount of$48.0 million . The note does not allow cash settlement (entirely or partially) upon conversion. As such, the Company uses the if-converted method for calculating any potential dilutive effect of the conversion option on diluted earnings per share. The Company concluded the conversion features did not require bifurcation. Specifically, while the Company determined that (i) the conversion features were not clearly and closely related to the host contracts, (ii) the note (i.e., hybrid instrument) is not remeasured at fair value under otherwise applicable GAAP with changes in fair value reported in earnings as they occur and (iii) the conversion features, if freestanding, would meet the definition of a derivative, the Company concluded such conversion features meet the equity scope exception, and therefore, the conversion features are not required to be bifurcated from the note. If the Company undergoes a fundamental change prior to the maturity date, subject to certain limitations, the holder may require the Company to repurchase for cash all or a portion of the note at a cash repurchase price equal to any accrued and unpaid interest on the note (or portion thereof), plus the greater of (1) 115% of the maturity principal amount of$48.0 million (or portion thereof) and (2) 110% of the product of (i) the conversion rate in effect as of the trading day immediately preceding the date of such fundamental change; (ii) the principal amount of the$40.0 million note to be repurchased divided by$1,000 ; and (iii) the average of the daily volume-weighted average price per share of the Company's common stock over the five consecutive VWAP trading days immediately before the effective date of such fundamental change. 46
In addition, with the consent of the holder of the note, subject to certain limitations, the Company may redeem all or any portion of the note, at the Company's option, at a cash redemption price equal to any accrued and unpaid interest on the note (or portion thereof), plus the greater of (1) 105% of the maturity principal amount of$48.0 million (or portion thereof); and (2) 115% of the product of (i) the conversion rate in effect as of the trading day immediately preceding the related redemption date; (ii) the principal amount of the$40.0 million note to be redeemed divided by$1,000 ; and (iii) the arithmetic average of the daily volume-weighted average price per share of common stock over the five consecutive VWAP trading days immediately before
the related redemption date. While the Company concluded the fundamental change redemption option represents an embedded derivative, the Company concluded the value of the embedded derivative to be immaterial given the likelihood of the occurrence of a fundamental change was deemed to be remote. As related to the call option, the Company concluded the call option was clearly and closely related to the host contract, and therefore, did not meet the definition of an embedded derivative. The Company concluded the total debt discount at issuance of the note equaled approximately$8.0 million . This debt discount was attributed to the fact that upon maturity, the Company is required to repay 120% of$40.0 million , or$48.0 million . The related debt issuance costs were$1.0 million . The debt discount was recorded as debt issuance cost (presented as contra debt in the unaudited interim condensed consolidated balance sheets) and is being amortized to interest expense over the term of the note using the effective interest rate method.
The note consisted of the following (in thousands):
March 31, December 31,
2020 2019
Principal amounts:
Principal at maturity $ 48,000 $ 48,000
Unamortized debt discount (6,800) (7,400)
Unamortized debt issuance costs (891) (969)
Net carrying amount $ 40,309 $ 39,631 Based on the closing price of the Company's common stock of$3.54 onMarch 31, 2020 , the if-converted value of the notes was greater than the principal amount. The estimated fair value of the note atMarch 31, 2020 andDecember 31, 2019 was approximately$57.3 million and$53.5 million , respectively. The Company utilized a Monte Carlo simulation model to estimate the fair value of the convertible debt. The simulation model is designed to capture the potential settlement features of the convertible debt, in conjunction with simulated changes in the Company's stock price over the term of the note, incorporating a volatility assumption of 70%. This is considered a Level 3 fair value measurement.
InMarch 2018 , the Company issued$100.0 million in aggregate principal amount of 5.5% Convertible Senior Notes due onMarch 15, 2023 in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act. There are no required principal payments prior to maturity of the notes.
The total net proceeds from the 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
47
The notes bear interest at 5.5%, payable semi-annually in cash onMarch 15 andSeptember 15 of each year. The notes will mature onMarch 15, 2023 , unless earlier converted or repurchased in accordance with their terms. The notes are unsecured and do not contain any financial covenants or any restrictions on the payment of dividends, or the issuance or repurchase of common stock by the Company. Each$1,000 principal amount of the notes is convertible into 436.3002 shares of the Company's common stock, which is equivalent to a conversion price of approximately$2.29 per share, subject to adjustment upon the occurrence of specified events. Holders of these notes may convert their notes at their option at any time prior to the close of the last business day immediately precedingSeptember 15, 2022 , only under the following circumstances:
1) during any calendar quarter (and only during such calendar quarter), if the
last reported sale price of the Company's common stock for at least 20 trading
days (whether or not consecutive) during a period of 30 consecutive trading
days ending on, and including, the last trading day of the immediately
preceding calendar quarter is greater than or equal to 130% of the conversion
price on each applicable trading day;
2) during the five business day period after any five consecutive trading dayperiod (the measurement period) in which the trading price (as defined in the
indenture governing the notes) per
trading day of the measurement period was less than 98% of the product of the
last reported sale price of the Company's common stock and the conversion rate
for the notes on each such trading day;
3) if the Company calls any or all of the notes for redemption, at any time prior
to the close of business on the second scheduled trading day immediately
preceding the redemption date; or
4) upon the occurrence of certain specified corporate events, such as a
beneficial owner acquiring more than 50% of the total voting power of the
Company's common stock, recapitalization of the Company, dissolution orliquidation of the Company, or the Company's common stock ceases to be listed
on an active market exchange.
On or after September 15, 2022 , holders may convert all or any portion of their
notes at any time prior to the close of business on the second scheduled trading
day immediately preceding the maturity date regardless of the foregoing
conditions.
Upon conversion of the notes, the Company will pay or deliver, as the case may
be, cash, shares of the Company's common stock or a combination of cash and
shares of the Company's common stock, at the Company's election. While the
Company plans to settle the principal amount of the notes in cash subject to
available funding at time of settlement, we currently use the if-converted
method for calculating any potential dilutive effect of the conversion option on
diluted net income per share, subject to meeting the criteria for using the
treasury stock method in future periods.
The conversion rate will be subject to adjustment in some events but will not be
adjusted for any accrued or unpaid interest. Holders who convert their notes in
connection with certain corporate events that constitute a "make-whole
fundamental change" per the indenture governing the notes or in connection with
a redemption will be, under certain circumstances, entitled to an increase in
the conversion rate. In addition, if the Company undergoes a fundamental change
prior to the maturity date, holders may require the Company to repurchase for
cash all or a portion of its notes at a repurchase price equal to 100% of the
principal amount of the repurchased notes, plus accrued and unpaid interest.
The Company may not redeem the notes prior to March 20, 2021 . The Company may
redeem for cash all or any portion of the notes, at the Company's option, on or
after March 20, 2021 if the last reported sale price of the Company's common
stock has been at least 130% of the conversion price then in effect for at least
20 trading days (whether or not consecutive), including at least one of the
three trading days immediately preceding the date on which the Company provides
notice of redemption, during any 30 consecutive trading day period ending on,
and including, the trading day immediately preceding the date on which the
Company provides notice of redemption at a redemption price equal to 100% of the
principal amount of the notes to be redeemed, plus accrued and unpaid interest
to, but excluding, the redemption date.
In accounting for the issuance of the notes, the Company separated the notes
into liability and equity components. The initial carrying amount of the
liability component of approximately $58.2 million , net of costs incurred,
was
calculated
48
by measuring the fair value of a similar liability that does not have an
associated convertible feature. The carrying amount of the equity component of
approximately $37.7 million , net of costs incurred, representing the conversion
option, was determined by deducting the fair value of the liability component
from the par value of the notes. The difference between the principal amount of
the notes and the liability component (the debt discount) is amortized to
interest expense using the effective interest method over the term of the notes.
The effective interest rate is approximately 16.0%. The equity component of the
notes is included in additional paid-in capital in the unaudited interim
condensed consolidated balance sheets and is not remeasured as long as it
continues to meet the conditions for equity classification.
We incurred transaction costs related to the issuance of the notes of
approximately $4.1 million , consisting of initial purchasers' discount of
approximately $3.3 million and other issuance costs of $0.9 million . In
accounting for the transaction costs, we allocated the total amount incurred to
the liability and equity components using the same proportions as the proceeds
from the notes. Transaction costs attributable to the liability component were
approximately $2.4 million , were recorded as debt issuance cost (presented as
contra debt in the unaudited interim condensed consolidated balance sheets) and
are being amortized to interest expense over the term of the notes. The
transaction costs attributable to the equity component were approximately $1.7
million and were netted with the equity component in stockholders' equity.The notes consisted of the following (in thousands):
March 31, December 31,
2020 2019
Principal amounts:
Principal $ 100,000 $ 100,000
Unamortized debt discount (1) (25,985) (27,818)
Unamortized debt issuance costs (1) (1,446) (1,567)
Net carrying amount $ 72,569 $ 70,615
Carrying amount of the equity component (2)
1) Included in the unaudited interim condensed consolidated balance sheets within
the $100.0 million Convertible Senior Notes, net and amortized over the
remaining life of the notes using the effective interest rate method.
2) Included in the unaudited interim condensed consolidated balance sheets within
additional paid-in capital, net of
associated income tax benefit of $9.2 million .
Based on the closing price of the Company's common stock of$3.54 onMarch 31, 2020 , the if-converted value of the notes was greater than the principal amount. The estimated fair value of the notes atMarch 31, 2020 andDecember 31, 2019 was approximately$147.4 million and$135.3 million , respectively. The Company utilized a Monte Carlo simulation model to estimate the fair value of the convertible debt. The simulation model is designed to capture the potential settlement features of the convertible debt, in conjunction with simulated changes in the Company's stock price over the term of the notes, incorporating a volatility assumption of 70%. This is considered a Level 3 fair value measurement. Capped Call In conjunction with the issuance of the$100 million 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 condensed consolidated balance sheets. The Capped Call is generally expected to reduce or offset the potential dilution to the Company's common stock upon any conversion of the$100 million Convertible Senior Notes and/or offset any cash payments the Company is required to make in excess of the principal amount of the converted notes, as the case may be, with such reduction and/or offset subject to a cap based on the cap price. The cap price of the Capped Call transactions is initially$3.82 per share, which represents a premium of 100% over the last then-reported sale price of the Company's common stock of$1.91 per 49
share on the date of the transaction and is subject to certain adjustments under the terms of the Capped Call. The Capped Call becomes exercisable if the conversion option is exercised.
By entering into the Capped Call, the Company expects to reduce the potential dilution to its common stock (or, in the event the conversion is settled in cash, to provide a source of cash to settle a portion of its cash payment obligation) in the event that at the time of conversion its stock price exceeds the conversion price under the$100 million Convertible Senior Notes.
Common Stock Forward
In connection with the sale of the$100 million Convertible Senior Notes, the Company also entered into a forward stock purchase transaction, or the Common Stock Forward, pursuant to which the Company agreed to purchase 14,397,906 shares of its common stock for settlement on or aboutMarch 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
The fair values of the Capped Call and Common Stock Forward are not remeasured.
Amazon Transaction Agreement
OnApril 4, 2017 , the Company and Amazon entered into a Transaction Agreement (the Amazon Transaction Agreement), pursuant to which the Company agreed to issue toAmazon.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. 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 during 2017. All future provision for common stock warrants is measured based on their grant-date fair value and recorded as a charge against revenue. The second tranche of 29,098,260 Amazon Warrant Shares will vest in four installments of 7,274,565 Amazon Warrant Shares each time Amazon or its affiliates, directly or indirectly through third parties, make an aggregate of$50.0 million in payments for goods and services to the Company, up to payments totaling$200.0 million in the aggregate. The exercise price for the first and second tranches of Amazon Warrant Shares is$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 throughApril 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 50
stock issuable upon exercise due to customary anti-dilution provisions based on future events. These warrants are classified as equity instruments.
At
Walmart Transaction Agreement
OnJuly 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 afterJanuary 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 unaudited interim condensed consolidated statements of operations during 2017. All future provision for common stock warrants is measured based on their grant-date fair value and recorded as a charge against revenue. The second tranche of 29,098,260 Walmart Warrant Shares will vest in four installments of 7,274,565 Walmart Warrant Shares each time Walmart or its affiliates, directly or indirectly through third parties, make an aggregate of$50.0 million in payments for goods and services to the Company, up to payments totaling$200.0 million in the aggregate. The exercise price for the first and second tranches of Walmart Warrant Shares is$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 throughJuly 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. AtMarch 31, 2020 andDecember 31, 2019 , 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 endedMarch 31, 2020 and 2019 was$0.9 million and$0.7 million , respectively. Lessor Obligations
As of
51
Future minimum lease payments under noncancelable operating leases (with initial
or remaining lease terms in excess of one year) as of March 31, 2020 were as
follows (in thousands):
Remainder of 2020 $ 27,806
2021 30,993
2022 23,632
2023 19,952
2024 16,508
2025 and thereafter $ 27,643
Total future minimum lease payments $ 146,534
Lessee Obligations
As of March 31, 2020 , the Company had operating and finance leases, as lessee,
primarily associated with sale/leaseback transactions that are partially secured
by restricted cash, security deposits and pledged escrows (see also Note 1,
Nature of Operations) as summarized below. These leases expire over the next one
to nine years. Minimum rent payments under operating and finance leases are
recognized on a straightline basis over the term of the lease. Leases contain
termination clauses with associated penalties, the amount of which cause the
likelihood of cancellation to be remote.
In prior periods, the Company entered into sale/leaseback transactions that were
accounted for as finance leases and reported as part of finance obligations. The
outstanding balance of finance obligations related to sale/leaseback
transactions at March 31, 2020 and December 31, 2019 was $29.8 million and $31.7
million , respectively. The fair value of the finance obligation approximated the
carrying value as of both March 31, 2020 and December 31, 2019 .
The Company has sold future services to be performed associated with certain
sale/leaseback transactions and recorded the balance as a finance
obligation. The outstanding balance of this obligation at March 31, 2020 was
$114.6 million , $17.0 million and $97.6 million of which was classified as
short-term and long-term, respectively, on the unaudited interim condensed
consolidated balance sheets. The outstanding balance of this obligation at
December 31, 2019 was $35.6 million , $6.0 million and $29.6 million of which was
classified as short-term and long-term, respectively. The amount is amortized
using the effective interest method. The fair value of this finance obligation
approximated the carrying value as of March 31, 2020 .
The Company has a finance lease associated with its property and equipment in
Latham, New York . Liabilities relating to this lease of $2.2 million has been
recorded as a finance obligation in the unaudited interim condensed
consolidated balance sheets as of March 31, 2020 and December 31, 2019 . The fair
value of this finance obligation approximated the carrying value as of March 31,
2020 .
Future minimum lease payments under operating and finance leases (with initial
or remaining lease terms in excess of one year) as of March 31, 2020 were as
follows (in thousands):
Other Total
Operating Finance Leased Finance
Leases Leases Property Obligations
Remainder of 2020 $ 34,998 $ 7,596 $ 285 $ 42,879
2021 46,669 9,276 407 56,352
2022 44,139 4,975 390 49,504
2023 39,074 3,149 366 42,589
2024 39,079 16,154 373 55,606
2025 and thereafter 40,250 - 1,174 41,424Total future minimum lease payments 244,209 41,150 2,995
288,354
Less imputed lease interest (66,624) (11,299) (838) (78,761)
Sale of future services 114,625 - - 114,625
Total lease liabilities $ 292,210 $ 29,851 $ 2,157 $ 324,218
52
Rental expense for all operating leases was
The gross profit on sale/leaseback transactions for all operating leases was$5.3 million and zero for the three months endedMarch 31, 2020 and 2019, respectively. Right of use assets obtained in exchange for new operating lease liabilities was$16.2 million and zero for the three months endedMarch 31 ,
2020 and 2019, respectively.
At bothMarch 31, 2020 andDecember 31, 2019 , security deposits associated with sale/leaseback transactions were$6.0 million , and were included in other assets in the unaudited interim condensed consolidated balance sheets. Other information related to the operating leases are presented in the following tables: Three months ended Three months ended March 31, 2020 March 31, 2019 Cash payments (in thousands) $ 12,522 $ 5,728 As of March 31, 2020 2019 Weighted average remaining lease term (years) 5.52 4.92 Weighted average discount rate 12.1% 12.1%
Finance lease costs include amortization of the right of use assets (i.e., depreciation expense) and interest on lease liabilities (i.e., interest and other expense, net in the unaudited interim consolidated statement of operations). Finance lease costs were as follows (in thousands):
Three months ended Three months ended
March 31, 2020 March 31, 2019
Amortization of right of use asset $ 870 $ 808
Interest on finance obligations 638 2,091 Total finance lease cost $ 1,508 $ 2,899
Right of use assets obtained in exchange for new finance lease liabilities
was zero for both the three months ended
Other information related to the finance leases are presented in the following
tables:
Three months ended Three months ended
March 31, 2020 March 31, 2019
Cash payments (in thousands) $ 2,610 $ 54,170
As of March 31,
2020 2019
Weighted average remaining lease term (years) 3.68 3.53
Weighted average discount rate 8.1% 10.8%
Restricted Cash
In connection with certain of the above noted sale/leaseback agreements, cash of
$129.7 million was required to be restricted as security as of March 31, 2020 ,
which restricted cash will be released over the lease term. As of March 31,
2020 , the Company also had certain letters of credit backed by security deposits
totaling $101.6 million that are security for the above noted sale/leaseback
agreements.
53
The Company also had letters of credit in the aggregate amount of $0.5 million
at March 31, 2020 associated with a finance obligation from the sale/leaseback
of its building. We consider cash collateralizing this letter of credit as
restricted cash.
Off-Balance Sheet Arrangements
As ofMarch 31, 2020 , the Company does not have off-balance sheet arrangements that are likely to have a current or future significant effect on the Company's financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources
that is material to investors. Critical Accounting Estimates
Management's discussion and analysis of our financial condition and results of operations are based upon our unaudited interim condensed consolidated financial statements, which have been prepared in accordance withU.S. GAAP. The preparation of these unaudited interim condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of and during the reporting period. On an on-going basis, we evaluate our estimates and judgments, including those related to revenue recognition for multiple element arrangements, bad debts, inventories, intangible assets, valuation of long-lived assets, accrual for loss contracts on service, operating and finance leases, product warranty reserves, unbilled revenue, common stock warrants, income taxes, stock-based compensation, contingencies, and purchase accounting. We base our estimates and judgments on historical experience and on various other factors and assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about (1) the carrying values of assets and liabilities and (2) the amount of revenue and expenses realized that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We refer to the policies and estimates set forth in the section "Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Estimates", as well as a discussion of significant accounting policies included in Note 2, Summary of Significant Accounting Policies, of the consolidated financial statements, both of which are included in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 .
Recently Adopted Accounting Pronouncements
InJune 2016 , Accounting Standards Update (ASU) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, was issued. Also, InApril 2019 , Accounting Standards Update (ASU) 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, was issued to make improvements to updates 2016-01, Financial Instruments - Overall (Subtopic 825-10), 2016-13, Financial Instruments - Credit Losses (Topic 326) and 2017-12, Derivatives and Hedging (Topic 815). ASU 2016-13 significantly changes how entities account for credit losses for financial assets and certain other instruments, including trade receivables and contract assets, that are not measured at fair value through net income. The ASU requires a number of changes to the assessment of credit losses, including the utilization of an expected credit loss model, which requires consideration of a broader range of information to estimate expected credit losses over the entire lifetime of the asset, including losses where probability is considered remote. Additionally, the standard requires the estimation of lifetime expected losses for trade receivables and contract assets that are classified as current. The Company adopted these standards effectiveJanuary 1, 2020 and determined the impact of the standards to be immaterial to the consolidated financial statements. InApril 2019 , Accounting Standards Update (ASU) 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, was issued to make improvements to updates 2016-01, Financial Instruments - Overall (Subtopic 825-10), 2016-13, Financial Instruments - Credit Losses (Topic 326) and 2017-12, Derivatives and Hedging (Topic 815). The Company adopted this standard effectiveJanuary 1, 2020 and determined the impact of this standard to be immaterial to the consolidated financial statements. 54 InJanuary 2017 , Accounting Standards Update (ASU) 2017-04, Intangibles -Goodwill and Other (Topic 350), was issued to simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit's goodwill with the carrying amount of that goodwill. The Company adopted this standard effectiveJanuary 1, 2020 . InAugust 2016 , Accounting Standards Update (ASU) 2016-15, Statement of Cash Flows (Topic 230)s: Classification of Certain Cash Receipts and Cash Payments, was issued to reduce the existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The Company adopted this standard in 2019 and determined the impact of this standard to be immaterial to the consolidated financial statements.
Recently Issued and Not Yet Adopted Accounting Pronouncements
InMarch 2020 , Accounting Standards Update (ASU) 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, was issued to provide temporary optional expedients and exceptions to the GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. This update is effective startingMarch 12, 2020 and the Company may elect to apply the amendments prospectively throughDecember 31, 2022 . The Company is evaluating the adoption method as well as the impact this update will have on the consolidated financial statements. InMarch 2020 , Accounting Standards Update (ASU) 2020-03, Codification Improvements to Financial Instruments, was issued to make various codification improvements to financial instruments to make the standards easier to understand and apply by eliminating inconsistencies and providing clarifications. This update will be effective at various dates as described in this ASU. The Company is evaluating the adoption method as well as the impact this update will have on the consolidated financial statements. InFebruary 2020 , Accounting Standards Update (ASU) 2020-02, Financial Instruments-Credit Losses (Topic 326) and Leases (Topic 842), was issued to add a note to anSEC paragraph of the FASB's Accounting Standards Codification stating that theSEC staff would not object to a public business entity that otherwise would not meet the definition of a public business entity except for a requirement to include or the inclusion of its financial statements or financial information in another entity's filing with theSEC adopting Topic 842. This update is effective for fiscal years beginning afterDecember 15, 2020 . This update requires a modified retrospective adoption method. The Company is evaluating the adoption method as well as the impact this update will have on the unaudited interim condensed consolidated financial statements. InJanuary 2020 , Accounting Standards Update (ASU) 2020-01,Investments-Equity Securities (Topic 321),Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815), was issued to clarify the interaction of the accounting rules for equity securities under Topic 321, investments accounted for under the equity method of accounting in Topic 323 and the accounting for certain forward contracts and purchased options accounted for under Topic 815. This update is effective for fiscal years beginning afterDecember 15, 2020 . The Company is evaluating the adoption method as well as the impact this update will have on the condensed consolidated financial statements.
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