Plug Power Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Plug Power develops and sells hydrogen fuel-cell systems, hydrogen infrastructure, and related services, primarily for material handling and stationary-power markets. Financial statements are unaudited; amounts below are in U.S. dollars.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenue | $24.0 million | $17.3 million | $33.4 million | $22.9 million |
| Operating loss | $9.9 million | $6.6 million | $22.6 million | $14.0 million |
| Net income (loss) attributable to company | $(9.2) million | $3.9 million | $(20.3) million | $(72.0) million |
| Net income (loss) attributable to common shareholders | $(9.3) million | $3.8 million | $(20.3) million | $(72.1) million |
| EPS, basic and diluted | $(0.05) | $0.02 | $(0.12) | $(0.49) |
- Q2 revenue grew 38.6% year over year. Product revenue rose 21.8% to $15.3 million; service revenue rose 90.9% to $8.4 million; R&D contract revenue declined to $0.3 million.
- Management reported Q2 overall gross margin of 7%, with GenDrive at 26%. Product gross margin was 24%, compared with 17% a year earlier. Service gross margin remained negative at 24%, improving from negative 34%.
- R&D expense increased to $3.4 million in Q2, and SG&A increased to $8.0 million, reflecting product-development investment and added staffing to support growth.
- Q2 2014 earnings included a $9.6 million gain from a decrease in the fair value of warrant liabilities and a $1.0 million bargain-purchase gain. The six-month 2014 loss included a $58.9 million noncash warrant-liability fair-value expense; the corresponding 2015 period recorded a $2.4 million gain. These valuation changes materially affect period comparisons.
Cash, liquidity, and obligations
- Cash and cash equivalents were $109.1 million at June 30, down from $146.2 million at December 31, 2014. Restricted cash was $11.6 million, principally related to sales-leasebacks and letters of credit.
- Net working capital was $135.8 million, compared with $167.0 million at year-end. Inventory increased to $32.9 million from $24.7 million.
- Six-month operating cash use was $24.3 million, versus $19.9 million in the comparable 2014 period. Investing cash use was $1.4 million; financing cash use was $11.4 million, including $11.1 million of increased restricted cash.
- Reported obligations included $0.2 million current capital-lease obligations and a $2.4 million finance obligation; the $7.0 million common-stock warrant liability is a fair-value derivative liability, not conventional borrowing. Total liabilities were $40.2 million.
- The company reported an accumulated deficit of $958.4 million and ongoing net losses and negative operating cash flow. Management believed existing cash, anticipated sales cash flow, and potential warrant exercises would fund operations for at least 12 months, subject to its operating assumptions.
Changes, outlook, risks, and unusual items
- Management’s 2015 outlook called for bookings above $200 million, revenue above $100 million, sales of more than 3,300 GenDrive units, construction of at least 15 GenFuel hydrogen infrastructures, and continued gross-margin progress. Q2 bookings exceeded $59 million; year-to-date bookings exceeded $106 million. Management expected Q3 revenue above $30 million and said $10 million had been recognized to date in Q3.
- Unit revenue recognition included sales-leaseback transactions involving 498 fuel-cell systems in Q2 and 736 for the first six months. The filing also describes $10.6 million held in escrow under sales-leaseback agreements.
- On July 31, 2015, after quarter-end, the company acquired Axane’s 80% interest in HyPulsion for $11.5 million payable in shares. It issued 4,781,250 shares and may issue up to 3,105,348 additional shares in specified circumstances; other post-closing adjustments may be payable in cash.
- Customer and revenue concentration is significant: three customers represented 95.1% of first-half 2015 revenue, including one at 68.8%. Two customers represented 42.6% of accounts receivable at June 30.
- Management warned that continued losses, inability to raise capital, failure to achieve forecast margins, delayed orders or shipments, and loss of major customers could adversely affect the business; without operating cash flow or external financing, it could need to reduce or cease operations or seek bankruptcy protection. The filing specifically identifies customer financing for product leases as a risk to sales and profitability.
- A lawsuit by General Electric and an affiliate seeks $1 million under an indemnification agreement. Plug Power said it is vigorously defending the claim and management did not expect litigation, net of insurance and accruals, to have a material adverse effect.
- Sales depend heavily on leases, sometimes requiring Plug Power or third parties to finance products. Revenue growth and improving product margins were offset by operating losses, negative service margins, and higher operating expenses.
Important facts for investors to verify
- Whether bookings convert into firm purchase orders, shipments, installations, and recognized revenue, and whether the stated 2015 revenue and booking targets are achieved.
- Whether service margins improve and overall gross margins progress while the installed base and hydrogen infrastructure expand.
- Cash burn, working-capital needs, restricted-cash requirements, and the assumptions supporting management’s at-least-12-month liquidity outlook.
- Exposure to the three major revenue customers and the availability and terms of customer or third-party lease financing.
- Final HyPulsion acquisition consideration, any additional share issuance or cash adjustments, and the resulting dilution.
- Outcome of the $1 million GE indemnification litigation and the effect of warrant-liability remeasurement on reported earnings.