Plug Power Inc. — Q3 2012 Form 10-Q
Business context and reporting period. Unaudited results for the quarter and nine months ended September 30, 2012. Plug Power designs and sells fuel-cell systems, principally GenDrive products for material-handling equipment.
Financial performance and position
- Revenue: Q3 revenue was $4.78 million, down 12.7% from $5.47 million a year earlier. Nine-month revenue was $20.19 million, up 28.1% from $15.76 million. Product and service revenue was $4.27 million for Q3 and $18.71 million year to date; nine-month shipments rose to 873 systems from 412.
- Profitability and margins: Q3 net loss was $10.33 million, versus $6.29 million; nine-month net loss was $23.39 million, versus $20.29 million. Operating losses were $11.78 million and $27.13 million, respectively. Calculated gross loss was approximately $6.86 million in Q3 and $10.75 million for nine months, equivalent to gross margins of approximately negative 144% and negative 53% of revenue. Loss per share was $0.27 for Q3 and $0.71 for nine months.
- Cash flow: Nine-month operating cash use was $15.55 million, compared with $19.15 million in 2011. Investing cash use was $0.23 million; financing provided $11.39 million, primarily from equity proceeds net of offering costs and credit-line repayments. Cash declined by $4.40 million to $9.46 million.
- Liquidity and debt: Working capital was $15.6 million. The company had $1.0 million outstanding on its Silicon Valley Bank line, with approximately $1.9 million of additional availability under borrowing-base limits. The facility expires March 29, 2013. Total liabilities were $22.52 million; no other debt balance is clearly identified in the provided filing text.
- Balance sheet: Total assets were $45.57 million, down from $55.66 million at December 31, 2011; stockholders’ equity was $23.04 million. Inventory increased to $13.01 million from $10.35 million, including about $3 million related to 245 units shipped to a customer site under a lease arrangement that was not complete.
Material changes and notable items
- Q3 product and service revenue was nearly flat year over year, while total revenue fell mainly because research and development contract revenue declined and licensed-technology revenue ended after 2011. Nine-month product and service revenue rose 57.1%, reflecting higher shipments.
- Product and service costs rose 42.1% in Q3, primarily due to an approximately $3.3 million warranty reserve adjustment for GenDrive component quality issues. The warranty reserve reached $2.97 million, versus $1.21 million at year-end 2011. The company said affected units would be retrofitted with replacement components.
- The reported results included a $1.43 million Q3 and $3.73 million nine-month gain from the change in fair value of warrant liabilities. This noncash item reduced reported losses; the liability was measured using a Level 3 Black-Scholes model.
- March 2012 ownership changes triggered IRC Section 382 limits: the company said all but approximately $14.9 million of federal and state net operating loss carryforwards would expire before use. The potential tax benefits are therefore substantially reduced.
Outlook, risks, and contingencies
- Management expected cash, future sales, and available credit to fund operations into 2013, but warned that additional external financing may be needed thereafter. If financing is unavailable, the company could have to delay, reduce, or cease operations or seek bankruptcy protection. Possible contingency measures include expense reductions, a real-estate sale-leaseback, technology licensing, or strategic transactions.
- At September 30, the company was out of compliance with the credit facility’s adjusted quick-ratio covenant; the bank waived the breach. The facility is secured by substantially all company assets and includes restrictive covenants.
- On October 12, 2012, Nasdaq notified the company that its share price had remained below $1 for 30 consecutive business days. It had until April 10, 2013 to regain compliance, including a period of at least 10 consecutive business days at or above $1; otherwise, its shares could face delisting.
- Customer concentration is material: three customers represented 55.5% of nine-month revenue, and four customers represented 79.4% of accounts receivable at quarter-end. The company also had an approximately $2.2 million remaining commitment to purchase fuel-cell stacks by December 31, 2012.
- The company continued to report operating losses and negative operating cash flow and cautioned that profitability, product acceptance, shipments, gross margins, reliability, and access to financing were uncertain. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether GenDrive warranty claims and retrofit costs remain within the increased reserve, and whether reliability and gross margins improve.
- Whether shipments, customer orders, and revenue recognition convert to cash on the expected schedule.
- Cash burn, borrowing-base availability, covenant compliance, and the company’s financing plan before the credit facility expires in March 2013.
- Progress toward Nasdaq’s minimum bid-price requirement and the consequences if compliance is not restored.
- Customer concentration, the completion and accounting of the 245-unit lease arrangement, and the remaining stack-purchase commitment.