Plug Power Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Unaudited consolidated results. Plug Power designs and supplies hydrogen fuel-cell systems, fueling infrastructure, service and related power solutions, primarily for material handling and stationary-power markets.
Financial results
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $20.5M | $24.0M | $35.8M | $33.4M |
| Gross profit (loss) | $0.4M | $1.6M | $0.6M | $(0.5)M |
| Gross margin | 1.9% | 6.5% | 1.5% | (1.6)% |
| Operating loss | $(13.4)M | $(9.9)M | $(26.3)M | $(22.6)M |
| Net loss attributable to common shareholders | $(13.2)M | $(9.3)M | $(24.9)M | $(20.3)M |
All figures above are in U.S. dollars; amounts are rounded. Q2 revenue fell 14.8% year over year, while first-half revenue increased 7.1%. First-half operating cash use was $15.8M versus $24.3M a year earlier. Investing cash use was $28.8M, including $26.3M for construction of leased property; financing provided $46.6M. Cash and equivalents rose to $66.0M from $64.0M at year-end 2015.
Balance sheet and liquidity
- At June 30, cash and equivalents were $66.0M; restricted cash was $47.9M. Working capital was $77.8M, down from $88.5M at December 31, 2015. Accumulated deficit was $1.019B.
- Long-term debt was $23.9M. Finance obligations totaled approximately $40.4M, including $5.2M current and $35.3M long-term. These obligations reflect financing and sale/leaseback arrangements.
- The Hercules secured term facility provided up to $40M; $25M was borrowed at 10.45% annual interest, with a $2.5M end-of-term charge. Additional borrowing was subject to conditions. The facility is secured by substantially all company and guarantor assets and includes minimum unencumbered-cash covenants.
- The separate $25M short-term borrowing at 12% was repaid June 27 using project financing accounted for as capital leases. The M&T master lease required at least $50M unrestricted cash at quarter-end; the minimum was reduced to $40M on July 27, 2016.
Changes and management commentary
- Fuel-cell systems and infrastructure sales declined 51% in Q2 and 40% in the first half. The filing attributes much of the decline to units and sites treated as leased property under capital-lease sale/leaseback accounting rather than recognized as upfront sales. In Q2, 672 shipped GenDrive units were recorded as leased property; first-half total was 1,346.
- Service revenue rose 86% in Q2 and 92% in the first half, reflecting a larger installed base. However, service remained loss-making, with gross margins of (10.6)% for Q2 and (10.1)% for the first half.
- PPA revenue and hydrogen-fuel revenue grew with site deployments, but both had negative gross margins in 2016. Management cited financing costs, depreciation and maintenance for PPA margin deterioration, and fuel-use inefficiencies for fuel margins.
- Systems-sales gross margin was 11.8% in Q2, down from 21.0%, partly due to cost overruns at two sites and product/pricing mix. First-half margin was 16.7%, similar to 16.5% a year earlier.
- Operating expenses rose: first-half R&D increased 59% to $10.0M, mainly from staffing, infrastructure design, cost-reduction work and stack prototyping; SG&A rose 7% to $16.8M.
- A renegotiated service contract reduced estimated future losses, producing a $1.1M gain in cost of revenue. The remaining service-loss-contract accrual was $5.4M at June 30.
Outlook, risks and contingencies
Management said current working capital, expected operating cash generation and potential project-financing sources should fund operations for at least the next 12 months. This is conditional on assumptions about financing, sales, service, costs and cash burn; the filing gives no specific revenue or earnings guidance. The company reported continuing net losses and negative operating cash flow and warned that unavailable financing or insufficient cash generation could force it to delay, reduce or cease operations or seek bankruptcy protection.
- Liquidity is constrained by restricted cash, cash-minimum covenants, substantial lease commitments and debt terms. The Hercules facility includes a lender-discretionary material-adverse-change default provision.
- Customer concentration remains significant: Walmart and one other customer represented 49.4% of first-half revenue; three customers represented 50.8% of accounts receivable at June 30.
- GE and an affiliate sued seeking $1M under an indemnification agreement; Plug Power said it is vigorously defending the action. Management did not expect known litigation, net of insurance and accruals, to have a material adverse effect.
- Other disclosed risks include ongoing losses, possible future capital needs, order and shipment conversion, customer financing, product reliability and cost reductions, fuel and infrastructure costs, market acceptance, and dependence on major customers and third parties.
Investor verification priorities
- Reconcile reported sales declines with the shift to capital-lease accounting and the growth in PPA deployments; assess cash returns and profitability of those projects.
- Track gross margins by revenue stream, particularly service, PPAs and delivered hydrogen, and test whether reported improvements depend on reserve releases.
- Verify unrestricted cash availability against Hercules and M&T cash covenants, restricted-cash requirements and upcoming debt or lease obligations.
- Assess whether management’s 12-month liquidity expectation is supported by realized project financing, customer orders and operating cash flow.
- Monitor customer concentration, the GE claim, and performance of the remaining $5.4M service-loss-contract accrual.