Business context and reporting period
Plug Power Inc. designs and sells hydrogen fuel-cell systems, fueling infrastructure and related services, primarily for material-handling and stationary-power applications. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2017; balance-sheet comparisons are with December 31, 2016. Unless noted otherwise, amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Gross revenue, before warrant provision | $61.4 million | $17.6 million | $99.3 million | $53.4 million |
| Net revenue | $35.4 million | $17.6 million | $71.4 million | $53.4 million |
| Gross profit (loss) | $(19.4) million | $0.4 million | $(27.4) million | $0.9 million |
| Operating loss | $(36.4) million | $(13.3) million | $(84.1) million | $(39.6) million |
| Net loss attributable to common shareholders | $(41.0) million | $(13.4) million | $(110.7) million | $(38.4) million |
| Basic and diluted loss per share | $(0.18) | $(0.07) | $(0.52) | $(0.21) |
- Revenue and margins: Q3 system and infrastructure sales rose to $45.2 million from $5.7 million, principally on deployments at eight sites. Net revenue includes a $26.1 million warrant-related reduction in Q3 and $27.9 million year to date. Excluding that provision, reported gross revenue increased substantially, but total costs still exceeded net revenue. Product-sales gross margin was 21.0% in Q3 and 20.6% year to date; service, PPA and delivered-fuel lines had negative or near-zero margins.
- Operating costs and other items: Nine-month R&D expense was $20.1 million versus $15.0 million, reflecting ProGen development, staffing and product-cost initiatives. SG&A was $36.6 million versus $25.5 million, including $7.1 million of Amazon warrant-related expense and higher staffing and insurance costs. Nine-month interest and other expense was $7.1 million; the change in fair value of warrant liabilities added $16.5 million of expense.
- Cash flow: Nine-month operating cash use was $81.3 million, investing cash use $28.3 million, and financing cash inflow $71.2 million. Cash and cash equivalents fell to $8.0 million from $46.0 million at year-end 2016. Restricted cash was $48.6 million, largely securing lease obligations and not equivalent to freely available cash. Net working capital was $30.0 million, down from $44.4 million.
- Debt and obligations: The NY Green Bank loan had $40.8 million principal outstanding at 10.8% interest, maturing December 2019; scheduled remaining principal payments were approximately $8.0 million in 2017, $19.1 million in 2018 and $13.7 million in 2019. Balance-sheet long-term debt, including its current portion, totaled approximately $40.0 million. Finance obligations totaled approximately $59.4 million, including $45.9 million associated with sale/leaseback transactions.
- Other balance-sheet metrics: Total assets were $275.7 million and stockholders’ equity $86.8 million at September 30. Accounts receivable was $52.9 million, versus $11.9 million at year-end; inventory was $44.7 million, versus $29.9 million.
Material changes versus the prior comparable period
- Q3 system sales, PPA revenue and delivered-fuel revenue increased with higher deployment volumes and a larger number of customer sites. The company recognized revenue on 2,239 units in Q3, compared with 189 a year earlier; additional units were retained as leased assets and are expected to generate revenue over PPA terms.
- Despite the sales growth, the warrant provision reduced reported revenue, and gross results shifted from modest profit to substantial loss. Q3 PPA margin deteriorated to (36.2%) from (15.7%); nine-month service margin was (8.5%) versus (5.2%). Management attributed pressure in part to ramp-up and commercialization costs for new configurations.
- Net losses and operating cash use increased materially. The company also expanded financing and equity issuance: the NY Green Bank facility was increased by $20 million, and nine-month financing included $20.7 million of public-offering proceeds and $17.6 million from warrant exercises. Common shares issued increased to 228.1 million from 191.7 million at year-end 2016.
Outlook, risks, contingencies and unusual items
- Management stated that available working capital and anticipated operating cash generation, project financing, borrowing and potential equity proceeds were expected to fund operations for at least one year after issuance of the financial statements. It cautioned that financing may not be available on acceptable terms. The company continues to report losses and negative operating cash flows, and warns that insufficient funding could require it to delay, reduce or cease operations or seek bankruptcy protection.
- Amazon and Walmart each received warrants for up to 55.3 million shares, with most vesting tied to customer payments for goods and services of up to $600 million. The agreements contemplate, but do not guarantee, future purchase orders. Initial tranches of 5.82 million shares under each agreement had vested by September 30. Warrant valuations and estimates of future vesting affect revenue and may produce cumulative adjustments; the potential share issuance is a material dilution consideration.
- Customer concentration is significant: one customer represented approximately 87.1% of accounts receivable at September 30, and two customers represented 84.0% of nine-month revenue. The filing identifies loss of major customers and failure of orders to convert or ship as risks.
- Other risks include negative margins in service, PPA and fuel-delivery activities; execution and cost-reduction challenges; reliance on external financing and customer financing; restricted cash and lease commitments; and the ability to refinance or repay debt. The filing reports a $1 million indemnification lawsuit brought by GE, which Plug Power says it is defending; management did not expect known litigation to have a material adverse impact.
- The company reported no material changes to previously disclosed risk factors and stated that disclosure controls were effective. It reported no quantitative full-year revenue or profitability guidance in the provided filing text.
Important facts for investors to verify
- Whether deployments and customer orders convert into recognized revenue and cash collections, particularly given the receivable increase and customer concentration.
- The extent to which the $26.1 million Q3 and $27.9 million year-to-date warrant provisions, and future valuation adjustments, affect reported revenue and margins.
- Progress toward positive gross margins across product, service, PPA and fuel activities, including the costs of new configurations and service obligations.
- Available unrestricted liquidity, operating cash burn, restricted-cash release timing, financing availability, and repayment or refinancing of the NY Green Bank loan and finance obligations.
- Warrant vesting and potential dilution under the Amazon and Walmart agreements, and whether the customer spending targets are achieved.
- Developments in the GE litigation and the company’s ability to meet NY Green Bank deployment and employment targets, which could affect fees due at loan maturity.