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PLUG > SEC Filings for PLUG > Form 10-Q on 14-Aug-2013All Recent SEC Filings

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Form 10-Q for PLUG POWER INC


14-Aug-2013

Quarterly Report


Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with our accompanying unaudited 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 ended December 31, 2012. In addition to historical information, this 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 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 expect we will need to raise additional capital to fund our operations and such capital may not be available to us; the risk that we do not have enough cash to fund our operations to profitability and if we are unable to secure additional capital, we may need to reduce and/or cease our operations; the risk that a "going concern" opinion from our auditors, KPMG LLP, could impair our ability to finance its operations through the sale of equity, incurring debt, or other financing alternatives; the recent restructuring plan we adopted may adversely impact management's ability to meet financial reporting requirements; 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 will not ship, be installed and/or converted to revenue; the risk that pending orders may not convert to purchase orders; the risk that our continued failure to comply with NASDAQ's listing standards may result in our common stock being delisted from the NASDAQ stock market, which may severely limit our ability to raise additional capital; the cost and timing of developing, marketing and selling our products and our ability to raise the necessary capital to fund such costs; the ability to achieve the forecasted gross margin on the sale of our products; the actual net cash used for operating expenses may exceed the projected net cash for operating expenses; the cost and availability of fuel and fueling infrastructures for our products; market acceptance of our GenDrive 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; our ability to develop commercially viable products; our ability to reduce product and manufacturing costs; our ability to successfully expand our product lines; our ability to improve system reliability for our GenDrive systems; competitive factors, such as price competition and competition from other traditional and alternative energy companies; our ability to protect our intellectual property; the cost of complying with current and future federal, state and international governmental regulations; and other risks and uncertainties discussed under Item IA-Risk Factors in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012, as filed on April 1, 2013. Readers should not place undue reliance on our forward-looking statements. These forward-looking statements speak only as of the date on which the statements were made and are not guarantees of future performance. 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 Form 10-Q.

Overview

We are a leading provider of alternative energy technology focused on the design, development, commercialization and manufacture of fuel cell systems for the industrial off-road (forklift or material handling) market. We continue to leverage our unique fuel cell application and integration knowledge to identify early adopter markets for which we can design and develop innovative systems and customer solutions that provide superior value, ease-of-use and environmental design. We have made significant progress in our analysis of the material handling market. We believe we have developed reliable products which allow the end customers to eliminate incumbent power sources from their operations, and realize their sustainability objectives through clean energy alternatives.


In October, 2011 we introduced our next generation GenDrive products. These next generation fuel cell units include a simplified architecture featuring 30% fewer components, giving customers greater flexibility in managing their deployments. By the third quarter of 2012, the majority of units produced and shipped were based on this simplified architecture.

We have experienced and continue to experience negative cash flows from operations and we expect to continue to incur net losses in the foreseeable future. We adopted a restructuring plan on December 11, 2012, aimed at improving organizational efficiency and to conserve working capital needed to support the growth of our GenDrive business. As a result of the recent restructuring, we expect to reduce annual expenses by $3.0 to $4.0 million.

Net cash used in operating activities for the six months ended June 30, 2013 was $7.7 million. Additionally, on June 30, 2013, we had cash and cash equivalents of $7.4 million and net working capital of $11.1 million. This compares to $9.4 million and $6.9 million, respectively, at December 31, 2012.

Recent Developments

Purchase and Sale Agreement and Lease Agreement.

On January 24, 2013, we entered into a Purchase and Sale Agreement with 968 Albany Shaker Road Associates, LLC (the Buyer). The Purchase and Sale Agreement provides, among other things, that the Company will sell to the Buyer its property (building and land) located at 968 Albany Shaker Road, Latham, New York consisting of approximately 34.45 acres for an aggregate purchase price of $4,500,000 and that the Company and the Buyer will form a new limited liability company. The new limited liability company will provide the Company with monthly distributions.

In connection with the Purchase and Sale Agreement, we also entered into a Lease Agreement on January 24, 2013 with the Buyer, pursuant to which the Company leases from the Buyer a portion of the premises sold pursuant to the Purchase and Sale Agreement for a term of 15 years.

On March 13, 2013, we entered into an Amendment to Purchase and Sale Agreement (the "Amendment") with the Buyer. Among other things, the Amendment decreases the amount payable to the Company at the closing of the Purchase and Sale Agreement, increases the value of the Company's membership interest in the new limited liability company, and increases the monthly distributions to be paid by the new limited liability company to the Company.

On March 27, 2013, the Company completed the sale and leaseback transaction of its property under the terms described above. Additionally, at the closing the Company issued two standby letters of credit to the benefit of the landlord/lessor that can be drawn by the beneficiary in the event of default on the lease by Plug Power. The standby letters total $750,000 and are 100% collateralized by cash balances of the Company. This cash is restricted from use by the Company for any other purpose than to collateralize the standby letters. The standby letters are renewable for a period of ten years and can be cancelled in part or in full if certain covenants are met and maintained by the Company.

The sale-leaseback transaction is being accounted for in accordance with applicable accounting guidance provided under Accounting Standards Codification (ASC) 840, Leases. Due to the Company's continuing involvement with the property, the sale-leaseback is being accounted for as a financing. Accordingly, approximately $2,523,000 and $56,000 have been recorded as finance obligation and current portion finance obligation (other current liabilities), respectively, in the condensed consolidated balance sheet as of June 30, 2013.

Shareholder Rights Agreement.

On February 12, 2013, we amended our Shareholder Rights Agreement dated as of June 23, 2009, as amended, to exempt any investor from purchasing shares of common stock and accompanying warrants in our public offering on February 13, 2013 of common stock and warrants to purchase shares of common stock, so long as such investor and its affiliates and associates do not at any time beneficially own shares of our common stock equaling or exceeding one-half of one percent more than the percentage of the then outstanding shares of common stock beneficially owned by such investor and its affiliates and associates immediately following the closing of the February 2013 offering. As a result, such ownership by any such investor will not trigger the exercisability of the preferred share purchase rights under the Shareholder Rights Agreement that would give each holder the right to receive upon exercise one ten-thousandth of a share of our Series A Junior Participating Cumulative Preferred Stock.


Public Offering.

On February 20, 2013, the Company completed an underwritten public offering of 18,910,000 shares of common stock and warrants to purchase an aggregate of 23,637,500 shares of common stock. The 18,910,000 shares and warrants in the underwritten public offering were sold as a fixed combination, with each combination consisting of one share of common stock and one warrant to purchase one share of common stock at a price to the public of $0.15 per fixed combination. The underwriter also purchased 2,836,500 warrants pursuant to the exercise of its over-allotment option. These warrants have an exercise price of $0.15 per share, are immediately exercisable and will expire on February 20, 2018. Additionally, the underwriter was also granted an additional 1,891,000 warrants at $0.18 per share. These warrants are exercisable on February 13, 2014 and will expire on February 13, 2018. Net proceeds, after underwriting discounts and commissions and other fees and expenses payable by Plug Power, were $1,948,766. The Company intends to use the net proceeds of the offering for working capital and other general corporate purposes, including capital expenditures.

On February 21, 2013, the Company sold 2,801,800 additional shares of common stock, pursuant to the underwriter's exercise of its over-allotment option in connection with the Company's recently announced public offering, resulting in additional net proceeds to the Company of approximately $365,000.

On May 31, 2011, the Company granted 7,128,563 warrants as part of an underwritten public offering. As a result of the March 28 and 29, 2012 public offerings and pursuant to the effect of the anti-dilution provisions, (as discussed in Note 5, Stockholders' Equity), the exercise price of the warrants was reduced to $2.27 per share of common stock. Simultaneously with the adjustment to the exercise price, the number of common stock shares that may be purchased upon exercise of the warrants was increased to 9,421,008 shares.

As a result of the February 20 and 21, 2013 public offerings and pursuant to the effect of the anti-dilution provisions, the exercise price of the warrants was reduced to $1.13 per share of common stock. Simultaneously with the adjustment to the exercise price, the number of common stock shares that may be purchased upon exercise of the warrants was increased to 18,925,389 shares. As a result of the May 8, 2013 agreement to issue and sell Air Liquide 10,431 shares of Series C Redeemable Convertible Preferred Stock, and pursuant to the effect of the anti-dilution provisions, the exercise price of the warrants was reduced to $1.03 per share of common stock. Simultaneously with the adjustment to the exercise price, the number of common stock shares that may be purchased upon exercise was increased to 20,762,805 shares.

Securities Purchase Agreement.

On May 8, 2013, the Company entered into a Securities Purchase Agreement (the "Purchase Agreement") with Air Liquide Investissements d'Avenir et de Demonstration ("Air Liquide"), pursuant to which the Company agreed to issue and sell to Air Liquide 10,431 shares of the Company's Series C Redeemable Convertible Preferred Stock, par value $0.01 per share (the "Series C Preferred Stock"), for an aggregate purchase price of approximately $2.6 million (Euro 2 million) in cash. On an as-converted basis, Air Liquide initially owned approximately 14% of the Company's outstanding common stock, par value $0.01 per share (the "Common Stock").

Under the terms of the Purchase Agreement, for so long as Air Liquide holds any shares of Series C Preferred Stock, Air Liquide shall be entitled to designate one director to the Company's Board of Directors. In the event the Series C Preferred Stock is converted into shares of Common Stock and Air Liquide continues to hold at least 5% of the outstanding shares of Common Stock of the Company, or 50% of the shares of Common Stock held by Air Liquide on an as-converted basis immediately following the issuance of the Series C Preferred Stock, Air Liquide shall continue to be entitled to designate one director to the Company's Board of Directors. The Purchase Agreement also provides Air Liquide with the right to participate in certain future equity financings by the Company.


The Series C Preferred Stock will rank senior to the Common Stock with respect to rights upon the liquidation, dissolution or winding up of the Company. The Series C Preferred Stock will be entitled to receive dividends at a rate of 8% per annum payable in equal quarterly installments in cash or in shares of Common Stock, at the Company's option. The Series C Preferred Stock will be convertible into shares of Common Stock, at an initial conversion price equal to $0.248794 per share, at Air Liquide's option, (1) on or after May 8, 2014 or (2) upon any liquidation, dissolution or winding up of the Company, any sale, consolidation or merger of the Company resulting in a change of control, or any sale or other transfer of all or substantially all of the assets of the Company.

The Series C Preferred Stock has weighted average anti-dilution protection. Therefore, the conversion price is subject to adjustment in the event the Company issues additional shares of common stock for a consideration per share less than the Series C conversion price in effect immediately prior to such issue. Upon this occurrence, the conversion price shall be reduced to a price determined in accordance with a prescribed formula. Accordingly, with the exercise of 16,096,400 warrants at $0.15 occurring after the close of the redeemable preferred stock sale, the Series C Preferred Stock conversion price was adjusted from $0.248794 per share to $0.236529 per share.

The Series C Preferred Stock will vote together with the Common Stock on an as-converted basis on all matters. The shares of Series C Preferred Stock were issued in a private placement exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended (the "Securities Act").

In connection with the Series C Preferred Stock investment, the Company and Axane, S.A. ("Axane"), a subsidiary of Air Liquide, entered into transactions related to their HyPulsion S.A.S. joint venture ("Hypulsion"). HyPulsion was formed by the Company and Axane to develop and market hydrogen fuel cell systems for the European material handling market. Axane purchased a 25% ownership interest in HyPulsion from the Company for a cash purchase price of $3.3 million (Euro 2.5 million). The Company now owns 20% and Axane owns 80% of HyPulsion. The Company has the right to purchase an additional 60% of HyPulsion from Axane at any time between January 4, 2018 and January 29, 2018 at a formula price. If the Company exercises its purchase right, Axane will have the right, at any time between February 1, 2018 and December 31, 2021, to require the Company to buy the remaining 20% interest at a formula price.

The Company and HyPulsion also entered into an engineering service agreement under which, among other things, the Company will provide HyPulsion with engineering and technical services for a new fuel cell assembly line and manufacturing execution system. Under the service agreement, HyPulsion has paid the Company approximately $659,000 (Euro 500,000) in the aggregate for services to be performed by the Company.

In connection with the Air Liquide Investment, as outlined under Joint Venture and Redeemable Preferred Stock above, the Company considered the relative fair value of the components involved in its allocation of the overall investment and the associated accounting.

Results of Operations

Product and service revenue. Product and service revenue generally includes revenue from the sale of our GenDrive units, as well as revenue from installation, service, maintenance, fueling, and other support services.

Product and service revenue for the three months ended June 30, 2013 decreased $0.1 million or 1.0%, to $7.1 million from $7.2 million for the three months ended June 30, 2012. During the three months ended June 30, 2013 we shipped 246 fuel cell systems to end customers as compared to 388 fuel cell systems shipped during the three months ended June 30, 2012. During the three months ended June 30, 2013, and June 30, 2012, we deferred $49,000 and $669,000 in revenue, respectively, due to contingent provisions in our agreements, as well as certain deliverables where the criteria for recognition have not yet been met. Additionally, in the three months ended June 30, 2013, we recognized approximately $75,000 of deferred revenue in connection with deliverables that have since met the criteria for recognition, whereas in the three months ended June 30, 2012, we recognized approximately $648,000 of deferred revenue associated with deliverables that have since met the criteria for recognition. Although we shipped fewer systems in the three months ended June 30 2013, there was a significant change in the product mix of the units sold as compared to the three months ended June 30, 2012, with a large percentage of units sold relating to higher priced units.


Product and service revenue for the six months ended June 30, 2013 decreased $1.2 million or 8.8%, to $13.2 million from $14.4 million for the six months ended June 30, 2012. During the six months ended June 30, 2013 we shipped 484 fuel cell systems to end customers as compared to 687 fuel cell systems shipped during the six months ended June 30, 2012. During the six months ended June 30, 2013, and June 30, 2012, we deferred $85,000 and $2.7 million in revenue, respectively, due to contingent provisions in our agreements, as well as certain deliverables where the criteria for recognition have not yet been met. Additionally, in the six months ended June 30, 2013, we recognized approximately $544,000 of deferred revenue in connection with deliverables that have since met the criteria for recognition, whereas in the six months ended June 30, 2012, we recognized approximately $1.6 million of deferred revenue associated with deliverables that have since met the criteria for recognition. Although we shipped fewer systems in the six months ended June 30 2013, there was a significant change in the product mix of the units sold as compared to the six months ended June 30, 2012, with a large percentage of units sold relating to higher priced units.

Research and development contract revenue.Research and development contract revenue primarily relates to cost reimbursement research and development contracts associated with the development of PEM fuel cell technology. We generally share in the cost of these programs with our cost-sharing percentages generally ranging from 30% to 50% of total project costs. Revenue from time and material contracts is recognized on the basis of hours expended plus other reimbursable contract costs incurred during the period. We expect to continue certain research and development contract work that is directly related to our current product development efforts.

Research and development contract revenue for the three months ended June 30, 2013 decreased approximately $90,000, or 19.7%, to $368,000 from $458,000 for the three months ended June 30, 2012. The decrease is primarily related to a reduced effort on two funded projects that are near completion.

Research and development contract revenue for the six months ended June 30, 2013 decreased approximately $205,000, or 21.1%, to $768,000 from $973,000 for the six months ended June 30, 2012. The decrease is primarily related to a reduced effort on two funded projects that are near completion.

Cost of product and service revenue. Cost of product and service revenue includes the direct material and labor cost as well as an allocation of overhead costs that relate to the manufacturing of products we sell. In addition, cost of product and service revenue also includes the labor and material costs incurred for product maintenance, replacement parts and service under our contractual obligations.

Cost of product and service revenue for the three months ended June 30, 2013 increased approximately $0.4 million, or 3.8%, to $9.0 million from $8.6 million for the three months ended June 30, 2012. During the three months ended June 30, 2013 we shipped 246 fuel cell systems to end customers as compared to 388 fuel cell systems shipped during the three months ended June 30, 2012. Although we shipped fewer systems in the three months ended June 30 2013, there was a significant change in the product mix of the units sold as compared to the three months ended June 30, 2012, with a large percentage of units sold relating to higher cost units.

Cost of product and service revenue for the six months ended June 30, 2013 decreased approximately $0.7 million, or 4.1%, to $17.0 million from $17.7 million for the six months ended June 30, 2012. During the six months ended June 30, 2013 we shipped 484 fuel cell systems to end customers as compared to 687 fuel cell systems shipped during the six months ended June 30, 2012. Although we shipped fewer systems in the six months ended June 30 2013, there was a significant change in the product mix of the units sold as compared to the six months ended June 30, 2012, with a large percentage of units sold relating to higher cost units.

Cost of research and development contract revenue. Cost of research and development contract revenue includes costs associated with research and development contracts including: cash and non-cash compensation and benefits for engineering and related support staff, fees paid to outside suppliers for subcontracted components and services, fees paid to consultants for services provided, materials and supplies used and other directly allocable general overhead costs allocated to specific research and development contracts.


Cost of research and development contract revenue for the three months ended June 30, 2013 decreased approximately $300,000, or 36.0%, to $533,000 from $833,000 for the three months ended June 30, 2012. The decrease is primarily related to reduced effort on two funded projects that are near completion.

Cost of research and development contract revenue for the six months ended June 30, 2013 decreased approximately $0.4 million or 27.9%, to $1.2 million from $1.6 million for the six months ended June 30, 2012. The decrease is primarily related to reduced effort on two funded projects that are near completion.

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 outside suppliers for subcontracted components and services, 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 June 30, 2013 decreased approximately $753,000, or 47.8%, to $824,000 from $1.6 million for the three months ended June 30, 2012. This decrease was a result of lower personnel costs, coupled with a decrease in consulting fees.

Research and development expense for the six months ended June 30, 2013 decreased approximately $1.2 million, or 43.9%, to $1.6 million from $2.8 million for the six months ended June 30, 2012. This decrease was a result of lower personnel costs, coupled with a decrease in consulting fees.

Selling, general and administrative expenses.Selling, general and administrative expenses includes cash and non-cash compensation, benefits 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 June 30, 2013 decreased approximately $0.4 million, or 9.9%, to $3.2 million from $3.6 million for the three months ended June 30, 2012. The decrease was primarily the result of lower personnel costs.

Selling, general and administrative expenses for the six months ended June 30, 2013 decreased approximately $1.4 million, or 18.7%, to $6.1 million from $7.5 million for the six months ended June 30, 2012. The decrease was primarily the result of lower personnel costs, offset by an increase in legal and professional fees.

Amortization of intangible assets. Amortization of intangible assets represents the amortization associated with the Company's acquired identifiable intangible assets from Plug Power Canada Inc., including acquired technology and customer relationships, which are being amortized over eight years.

Amortization of intangible assets decreased to approximately $568,000 for the three months ended June 30, 2013, compared to approximately $573,000 for the three months ended June 30, 2012. The decrease is related to foreign currency fluctuations.

Amortization of intangible assets remained stable at approximately $1.1 million for the six months ended June 30, 2013, and June 30, 2012.

Interest and other income. Interest and other income consists primarily of interest earned on our cash, interest earned on our note receivable, interest earned on our sale-leaseback transaction, and rental income.


Interest and other income for the three months ended June 30, 2013 decreased approximately $3,000, or 6.5%, to $41,000 from $44,000 for the three months ended June 30, 2012. The decrease is primarily related to a decrease in rental . . .

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