SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2003
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 00027527
PLUG POWER INC.
(Exact name of registrant as specified in its charter)
968 ALBANY-SHAKER ROAD, LATHAM, NEW YORK 12110
(Address of registrant’s principal executive office)
(518) 782-7700
(Registrant’s telephone number, including area code)
Delaware | 22-3672377 | |
(State or other jurisdiction of Incorporation) | (I.R.S. Employer Identification Number) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes Xx No
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨
The number of shares of common stock outstanding as of October 31, 2002April 30, 2003 was 50,865,30460,075,536 with a par value of $.01 per share.
INDEX to FORM 10-Q
Page | ||||
PART I. FINANCIAL INFORMATION | ||||
Item 1—Financial Statements | ||||
Condensed Consolidated Balance Sheets—December 31, 2002 and March 31, 2003 | 3 | |||
4 | ||||
5 | ||||
6–13 | ||||
Condition and Results of Operations | ||||
14–20 | ||||
20 | ||||
20 | ||||
21 | ||||
21 | ||||
21 | ||||
21 | ||||
22 | ||||
23 | ||||
24–25 |
Plug Power Inc. and SubsidiarySubsidiaries
(A Development Stage Enterprise)
Assets | December 31, 2001 | (Unaudited) September 30, 2002 | ||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 53,648,145 | $ | 40,241,697 | ||||
Restricted cash | 310,000 | 310,000 | ||||||
Marketable securities | 39,034,314 | 25,768,135 | ||||||
Accounts receivable | 2,608,321 | 3,386,700 | ||||||
Inventory | 2,271,278 | 1,843,639 | ||||||
Prepaid development costs | 1,760,131 | 2,574,505 | ||||||
Prepaid expenses and other current assets | 932,719 | 1,269,736 | ||||||
Total current assets | 100,564,908 | 75,394,412 | ||||||
Restricted cash | 5,000,274 | 5,000,274 | ||||||
Property, plant and equipment, net | 30,240,631 | 27,536,546 | ||||||
Intangible asset | 3,470,139 | 1,287,139 | ||||||
Investment in affiliates | 11,498,000 | 9,953,949 | ||||||
Other assets | 600,055 | 474,701 | ||||||
Total assets | $ | 151,374,007 | $ | 119,647,021 | ||||
Liabilities and Stockholders’ Equity | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 762,972 | $ | 1,054,352 | ||||
Accrued expenses | 3,421,106 | 2,232,566 | ||||||
Deferred revenue | 5,684,793 | 5,370,364 | ||||||
Current portion of capital lease obligation and long-term debt | 330,072 | 316,726 | ||||||
Total current liabilities | 10,198,943 | 8,974,008 | ||||||
Long-term debt | 5,000,274 | 5,000,274 | ||||||
Deferred grant revenue | 400,000 | 250,000 | ||||||
Capital lease obligation | 4,706 | 885 | ||||||
Other liabilities | 767,193 | 767,193 | ||||||
Total liabilities | 16,371,116 | 14,992,360 | ||||||
Stockholders’ equity: | ||||||||
Preferred stock, $0.01 par value per share; 5,000,000 shares authorized; none issued and outstanding | — | — | ||||||
Common stock, $0.01 par value per share; 245,000,000 shares authorized at December 31, 2001 and 245,000,000 shares authorized at September 30, 2002; 50,322,928 shares issued and outstanding, December 31, 2001 and 50,861,508 shares issued and outstanding September 30, 2002 | 503,229 | 508,615 | ||||||
Paid-in capital | 342,842,203 | 346,987,838 | ||||||
Deficit accumulated during the development stage | (208,342,541 | ) | (242,841,792 | ) | ||||
Total stockholders’ equity | 135,002,891 | 104,654,661 | ||||||
Total liabilities and stockholders’ equity | $ | 151,374,007 | $ | 119,647,021 | ||||
December 31, 2002 | March 31, 2003 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 27,257,641 |
| $ | 54,004,319 |
| ||
Restricted cash |
| 325,000 |
|
| 325,000 |
| ||
Marketable securities |
| 28,590,378 |
|
| 22,847,333 |
| ||
Accounts receivable |
| 4,145,328 |
|
| 3,693,833 |
| ||
Inventory |
| 2,031,995 |
|
| 2,884,294 |
| ||
Prepaid development costs |
| 2,145,265 |
|
| 1,780,504 |
| ||
Prepaid expenses and other current assets |
| 2,639,630 |
|
| 2,467,342 |
| ||
Total current assets |
| 67,135,237 |
|
| 88,002,625 |
| ||
Restricted cash |
| 4,675,274 |
|
| 4,675,274 |
| ||
Property, plant and equipment, net |
| 26,320,676 |
|
| 26,597,174 |
| ||
Intangible asset |
| 514,847 |
|
| 5,500,000 |
| ||
Investment in affiliates |
| 9,488,762 |
|
| 9,003,561 |
| ||
Goodwill |
| — |
|
| 8,730,229 |
| ||
Other assets |
| 547,995 |
|
| 520,595 |
| ||
Total assets | $ | 108,682,791 |
| $ | 143,029,458 |
| ||
Liabilities and Stockholders’ Equity | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 947,839 |
| $ | 1,852,904 |
| ||
Accrued expenses |
| 3,103,135 |
|
| 5,260,138 |
| ||
Deferred revenue |
| 5,878,784 |
|
| 4,565,485 |
| ||
Current portion of capital lease obligation and long-term debt |
| 329,706 |
|
| 344,582 |
| ||
Total current liabilities |
| 10,259,464 |
|
| 12,023,109 |
| ||
Long-term debt |
| 4,644,288 |
|
| 4,756,438 |
| ||
Deferred grant revenue |
| 200,000 |
|
| 150,000 |
| ||
Other liabilities |
| 882,271 |
|
| 896,656 |
| ||
Total liabilities |
| 15,986,023 |
|
| 17,826,203 |
| ||
Stockholders’ equity: | ||||||||
Preferred stock, $0.01 par value per share; 5,000,000 shares authorized; none issued and outstanding |
| — |
|
| — |
| ||
Common stock, $0.01 par value per share; 245,000,000 shares authorized; 50,997,073 shares issued and outstanding at December 31, 2002 and 60,062,253 shares issued and outstanding at March 31, 2003 |
| 509,971 |
|
| 600,623 |
| ||
Paid-in capital |
| 347,747,664 |
|
| 393,930,394 |
| ||
Deficit accumulated during the development stage |
| (255,560,867 | ) |
| (269,327,762 | ) | ||
Total stockholders’ equity |
| 92,696,768 |
|
| 125,203,255 |
| ||
Total liabilities and stockholders’ equity | $ | 108,682,791 |
| $ | 143,029,458 |
| ||
The accompanying notes are an integral part of the condensed consolidated financial statements.
Plug Power Inc. and SubsidiarySubsidiaries
(A Development Stage Enterprise)
Three months ended September 30, | Nine months ended September 30, | Cumulative Amounts from Inception | ||||||||||||||||||
2001 | 2002 | 2001 | 2002 | |||||||||||||||||
Revenue | ||||||||||||||||||||
Product and service revenue | $ | 436,976 | $ | 2,619,110 | $ | 436,976 | $ | 7,381,398 | $ | 9,954,832 | ||||||||||
Research and development contract revenue | 483,249 | 374,577 | 2,799,575 | 1,060,244 | 31,341,449 | |||||||||||||||
Total revenue | 920,225 | 2,993,687 | 3,236,551 | 8,441,642 | 41,296,281 | |||||||||||||||
Cost of revenue and expenses | ||||||||||||||||||||
Cost of revenues | 2,409,624 | 3,142,867 | 6,578,767 | 7,725,699 | 57,660,152 | |||||||||||||||
In-process research and development | — | — | — | — | 9,026,640 | |||||||||||||||
Research and development expense: | ||||||||||||||||||||
Noncash stock-based compensation | — | 269,836 | 375,000 | 520,006 | 2,068,595 | |||||||||||||||
Other research and development | 15,069,212 | 8,411,249 | 46,689,559 | 29,405,724 | 180,801,132 | |||||||||||||||
General and administrative expense: | ||||||||||||||||||||
Noncash stock-based compensation | — | 22,135 | 311,000 | 415,308 | 11,953,551 | |||||||||||||||
Other general and administrative | 1,758,540 | 1,667,745 | 5,275,693 | 4,688,194 | 30,121,729 | |||||||||||||||
Interest expense | 55,061 | 24,897 | 209,264 | 75,644 | 888,184 | |||||||||||||||
Operating loss | (18,372,212 | ) | (10,545,042 | ) | (56,202,732 | ) | (34,388,933 | ) | (251,223,702 | ) | ||||||||||
Interest income | 956,007 | 352,079 | 3,091,972 | 1,433,733 | 17,005,711 | |||||||||||||||
Loss before equity in losses of affiliates | (17,416,205 | ) | (10,192,963 | ) | (53,110,760 | ) | (32,955,200 | ) | (234,217,991 | ) | ||||||||||
Equity in losses of affiliates | (1,291,346 | ) | (481,403 | ) | (2,930,995 | ) | (1,544,051 | ) | (8,623,801 | ) | ||||||||||
Net loss | $ | (18,707,551 | ) | $ | (10,674,366 | ) | $ | (56,041,755 | ) | $ | (34,499,251 | ) | $ | (242,841,792 | ) | |||||
Loss per share: | ||||||||||||||||||||
Basic and diluted | $ | (0.38 | ) | $ | (0.21 | ) | $ | (1.23 | ) | $ | (0.68 | ) | ||||||||
Weighted average number of common shares outstanding | 48,920,871 | 50,818,978 | 45,711,589 | 50,558,138 | ||||||||||||||||
Three months ended March 31, | Cumulative Amounts from Inception | |||||||||||
2002 | 2003 | |||||||||||
Revenue | ||||||||||||
Product and service revenue | $ | 2,572,537 |
| $ | 2,033,063 |
| $ | 14,033,300 |
| |||
Research and development contract revenue |
| 331,729 |
|
| 919,292 |
|
| 33,591,871 |
| |||
Total revenue |
| 2,904,266 |
|
| 2,952,355 |
|
| 47,625,171 |
| |||
Cost of revenue and expenses | ||||||||||||
Cost of revenues |
| 1,691,164 |
|
| 1,765,983 |
|
| 63,041,093 |
| |||
In-process research and development |
| — |
|
| 3,000,000 |
|
| 12,026,640 |
| |||
Research and development expense: | ||||||||||||
Noncash stock-based compensation |
| 69,013 |
|
| 226,125 |
|
| 2,778,330 |
| |||
Other research and development |
| 10,857,747 |
|
| 9,905,330 |
|
| 200,586,286 |
| |||
General and administrative expense: | ||||||||||||
Noncash stock-based compensation |
| 343,076 |
|
| 21,001 |
|
| 12,041,171 |
| |||
Other general and administrative |
| 1,417,169 |
|
| 1,500,727 |
|
| 33,408,219 |
| |||
Operating loss |
| (11,473,903 | ) |
| (13,466,811 | ) |
| (276,256,568 | ) | |||
Interest income |
| 487,373 |
|
| 202,237 |
|
| 17,429,290 |
| |||
Interest expense |
| (24,977 | ) |
| (17,120 | ) |
| (926,295 | ) | |||
Loss before equity in losses of affiliates |
| (11,011,507 | ) |
| (13,281,694 | ) |
| (259,753,573 | ) | |||
Equity in losses of affiliates |
| (584,375 | ) |
| (485,201 | ) |
| (9,574,189 | ) | |||
Net loss | $ | (11,595,882 | ) | $ | (13,766,895 | ) | $ | (269,327,762 | ) | |||
Loss per share: | ||||||||||||
Basic and diluted | $ | (0.23 | ) | $ | (0.27 | ) | ||||||
Weighted average number of common shares outstanding |
| 50,345,437 |
|
| 51,664,671 |
| ||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
Plug Power Inc. and SubsidiarySubsidiaries
(A Development Stage Enterprise)
Nine months ended September 30, | Cumulative | |||||||||||
2001 | 2002 | Amounts from Inception | ||||||||||
Cash Flows From Operating Activities: | ||||||||||||
Net loss | $ | (56,041,755 | ) | $ | (34,499,251 | ) | $ | (242,841,792 | ) | |||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||
Depreciation and amortization | 3,306,833 | 4,335,369 | 14,162,733 | |||||||||
Equity in losses of affiliates | 2,930,995 | 1,544,051 | 8,623,801 | |||||||||
Amortization of intangible asset | 2,517,696 | 2,183,000 | 8,337,361 | |||||||||
Noncash prepaid development costs | 4,586,053 | 1,185,626 | 7,425,495 | |||||||||
Amortization of deferred grant revenue | (150,000 | ) | (150,000 | ) | (550,000 | ) | ||||||
Stock based compensation | 686,000 | 1,232,563 | 14,783,319 | |||||||||
Loss on disposal of property, plant and equipment | — | — | 108,625 | |||||||||
In-kind services | — | — | 1,340,000 | |||||||||
Amortization of deferred rent | — | — | 150,000 | |||||||||
Write-off of deferred rent | — | — | 1,850,000 | |||||||||
In-process research and development | — | — | 4,042,640 | |||||||||
Changes in assets and liabilities: | ||||||||||||
Accounts receivable | 558,344 | (778,379 | ) | (3,386,700 | ) | |||||||
Inventory | (522,150 | ) | 427,639 | (1,843,639 | ) | |||||||
Due from investor | — | — | 286,492 | |||||||||
Prepaid expenses and other current assets | 393,540 | (337,017 | ) | (1,247,822 | ) | |||||||
Accounts payable and accrued expenses | (3,864,250 | ) | (897,160 | ) | 3,238,810 | |||||||
Deferred revenue | 1,867,250 | (314,429 | ) | 6,170,364 | ||||||||
Due to investor | — | — | (286,492 | ) | ||||||||
Net cash used in operating activities | (43,731,444 | ) | (26,067,988 | ) | (179,636,805 | ) | ||||||
Cash Flows From Investing Activities: | ||||||||||||
Purchase of property, plant and equipment | (2,388,512 | ) | (1,505,930 | ) | (29,699,300 | ) | ||||||
Proceeds from disposal of property, plant and equipment | — | — | 36,666 | |||||||||
Purchase of intangible asset | — | — | (9,624,500 | ) | ||||||||
Investment in affiliate | — | — | (1,500,000 | ) | ||||||||
Marketable securities | (5,140,581 | ) | 13,266,179 | (25,768,135 | ) | |||||||
Cash provided by (used in) investing activities | (7,529,093 | ) | 11,760,249 | (66,555,269 | ) | |||||||
Cash Flows From Financing Activities: | ||||||||||||
Proceeds from issuance of common stock | 9,600,000 | — | 140,342,782 | |||||||||
Proceeds from initial public offering, net | — | — | 94,611,455 | |||||||||
Proceeds from secondary public offering, net | 52,017,750 | — | 52,017,750 | |||||||||
Stock issuance costs | (429,199 | ) | — | (2,068,776 | ) | |||||||
Proceeds from stock option exercises | 2,374,411 | 918,458 | 7,944,391 | |||||||||
Cash placed in escrow | — | — | (5,310,274 | ) | ||||||||
Principal payments on capital lease obligations | (70,394 | ) | (17,167 | ) | (253,557 | ) | ||||||
Principal payments on long-term debt | — | — | (850,000 | ) | ||||||||
Net cash provided by financing activities | 63,492,568 | 901,291 | 286,433,771 | |||||||||
(Decrease) increase in cash and cash equivalents | 12,232,031 | (13,406,448 | ) | 40,241,697 | ||||||||
Cash and cash equivalents, beginning of period | 58,511,563 | 53,648,145 | — | |||||||||
Cash and cash equivalents, end of period | $ | 70,743,594 | $ | 40,241,697 | $ | 40,241,697 | ||||||
Three months ended March 31, | Cumulative Amounts from Inception | |||||||||||
2002 | 2003 | |||||||||||
Cash Flows From Operating Activities: | ||||||||||||
Net loss | $ | (11,595,882 | ) | $ | (13,766,895 | ) | $ | (269,327,762 | ) | |||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||
Depreciation and amortization |
| 1,226,756 |
|
| 1,099,001 |
|
| 16,405,196 |
| |||
Equity in losses of affiliates |
| 584,375 |
|
| 485,201 |
|
| 9,574,189 |
| |||
Amortization of intangible asset |
| 638,414 |
|
| 514,847 |
|
| 9,624,500 |
| |||
Noncash prepaid development costs |
| 377,391 |
|
| 364,761 |
|
| 8,219,496 |
| |||
Amortization of deferred grant revenue |
| (50,000 | ) |
| (50,000 | ) |
| (650,000 | ) | |||
Stock based compensation |
| 569,139 |
|
| 247,126 |
|
| 15,283,425 |
| |||
Loss on disposal of property, plant and equipment |
| — |
|
| — |
|
| 32,493 |
| |||
In-kind services |
| — |
|
| — |
|
| 1,340,000 |
| |||
Amortization and write-off of deferred rent |
| — |
|
| — |
|
| 2,000,000 |
| |||
In-process research and development |
| — |
|
| 3,000,000 |
|
| 7,042,640 |
| |||
Changes in assets and liabilities, net of effects of acquisition: | ||||||||||||
Accounts receivable |
| 1,746,274 |
|
| 624,495 |
|
| (3,520,833 | ) | |||
Inventory |
| 42,378 |
|
| (99,934 | ) |
| (2,131,929 | ) | |||
Prepaid expenses and other current assets |
| (104,880 | ) |
| 1,809,590 |
|
| (808,126 | ) | |||
Accounts payable and accrued expenses |
| 80,373 |
|
| (1,398,378 | ) |
| 2,604,488 |
| |||
Deferred revenue |
| (1,271,767 | ) |
| (1,313,299 | ) |
| 5,365,485 |
| |||
Net cash used in operating activities |
| (7,757,429 | ) |
| (8,483,485 | ) |
| (198,946,738 | ) | |||
Cash Flows From Investing Activities: | ||||||||||||
Proceeds from acquisition |
| — |
|
| 36,521,491 |
|
| 36,521,491 |
| |||
Integration costs and expenses associated with acquisition |
| — |
|
| (7,055,750 | ) |
| (7,055,750 | ) | |||
Purchase of property, plant and equipment |
| (479,913 | ) |
| (49,135 | ) |
| (29,510,061 | ) | |||
Proceeds from disposal of property, plant and equipment |
| — |
|
| — |
|
| 310,666 |
| |||
Purchase of intangible asset |
| — |
|
| — |
|
| (9,624,500 | ) | |||
Investment in affiliate |
| — |
|
| — |
|
| (1,500,000 | ) | |||
Marketable securities |
| 15,375,043 |
|
| 5,800,837 |
|
| (22,789,541 | ) | |||
Cash provided by (used in) investing activities |
| 14,895,130 |
|
| 35,217,443 |
|
| (33,647,695 | ) | |||
Cash Flows From Financing Activities: | ||||||||||||
Proceeds from issuance of common stock |
| — |
|
| — |
|
| 140,342,782 |
| |||
Proceeds from initial public offering, net |
| — |
|
| — |
|
| 94,611,455 |
| |||
Proceeds from secondary public offering, net |
| — |
|
| — |
|
| 52,017,750 |
| |||
Stock issuance costs |
| — |
|
| — |
|
| (2,068,776 | ) | |||
Proceeds from shares issued for stock option exercises and employee stock purchase plan |
| 232,386 |
|
| 13,965 |
|
| 8,144,508 |
| |||
Cash placed in escrow |
| — |
|
| — |
|
| (5,000,274 | ) | |||
Principal payments on long-term debt and capital lease obligations |
| (9,509 | ) |
| (1,245 | ) |
| (1,448,693 | ) | |||
Net cash provided by financing activities |
| 222,877 |
|
| 12,720 |
|
| 286,598,752 |
| |||
Increase in cash and cash equivalents |
| 7,360,578 |
|
| 26,746,678 |
|
| 54,004,319 |
| |||
Cash and cash equivalents, beginning of period |
| 53,648,145 |
|
| 27,257,641 |
|
| — |
| |||
Cash and cash equivalents, end of period | $ | 61,008,723 |
| $ | 54,004,319 |
| $ | 54,004,319 |
| |||
The accompanying notes are an integral part of the condensed consolidated financial statements.
Plug Power Inc.
(Unaudited)1. Nature of Operations
Description of Business
Plug Power Inc. and subsidiarysubsidiaries (Company), was originally formed as a joint venture between Edison Development Corporation (EDC) and Mechanical Technology Incorporated (MTI) in the State of Delaware on June 27, 1997 and succeeded by merger to all of the assets, liabilities and equity of Plug Power, L.L.C. in November 1999.
The Company is a development stage enterprise formed to research,design, develop manufacture and distributemanufacture on-site electric power generation systems utilizing proton exchange membrane (PEM) fuel cells for stationary applications. The Company is focused on fuel cell systems with electrical output of approximately 1-100-kilowatts (kW), fueled by natural gas, liquid petroleum gas (LPG), and hydrogen gas for a variety of stationary applications. The Company is developing an architected technology platform from which it expects to offer multiple point products, ranging from DC back-up power for telecom applications to AC prime power for residential and light commercial applications.
The Company’s initial product is in the preliminary stages of field testing and marketing itsa fully integrated, grid-parallel 5-kW fuel cell system that operates on natural gas. This initial commercial product is being marketed to a limitedselect number of customers, including utilities, government entities and the Company’s distribution partners, GE Fuel Cell Systems, LLC and DTE Energy Technologies, Inc. ThisThe initial product is a limited edition fuel cell system that is intended to offer complementary, quality power, while demonstrating the market value ofprovide valuable field testing experience and data and demonstrate fuel cells as a preferred form of alternative distributed power generation. Subsequent enhancements to itsIn June 2002, the Company’s 5-kW product became the first fuel cell systems including its next generation systems are expectedsystem to be certified by the California Energy Commission under the state’s Rule 21 grid interconnection standard, and in July, the Company launched the GenSysTM 5C, which added the capability of capturing heat for combined heat and power applications. In October, the Company added stand-by capability and launched the GenSysTM 5CS. Stand-by capability allows the fuel cell system to provide power to critical loads upon grid interruption. The Company expects subsequent product enhancements to expand the market opportunity for its fuel cells by lowering the installed cost, decreasing operating and maintenance costs, increasing efficiency, and improving reliability, and adding features such as grid independence and co-generation of heat and electric power.
Recent Developments
Acquisition of H Power Corp.: On November 12, 2002,March 25, 2003, the Company andconsummated a merger transaction with H Power Corp. announced that they entered into(“H Power”), a definitive merger agreementcompany also involved in the design, development and manufacture of proton exchange membrane fuel cells and fuel cell systems, pursuant to which the Company would acquireacquired all of the outstanding shares of H Power in a stock-for-stock exchange valued at approximately $50.7 million. Underexchange. In connection with the termstransaction, H Power stockholders received 0.8305 shares of the agreement, the exchange ratio is initially set at approximately eight-tenths of aCompany’s common stock for each share of H Power common stock held immediately prior to the transaction resulting in the issuance of 8,950,113 shares of the Company’s common stock. Immediately following the transaction, the Company for eachhad 60,049,328 shares outstanding and H Power share. The initial exchange ratio will vary within upper and lower boundsbecame a wholly-owned subsidiary of 10%Plug Power. For further information, see note 5 entitled “Acquisition of H Power Corp.” in the event thatnotes to the valuecondensed consolidated financial statements in this Form 10-Q.
Board of the Company's common stock during a defined pre-closing period varies by more than 10% from $5.88 per share. Currently, it is expected that H Power shareholders will receive $50.7 million of value and will own between approximately 13.3% and 15.8% of the Company's shares outstanding after the closing.
Offer to Exchange Options: On March 25, 2003, the shareholders approved a proposal for the Company to offer, to eligible employees, the right to exchange options to purchase shares of common stock with an exercise price greater than $8.53 for shares of the Company's Audit Committee.
Liquidity
The Company’s cash requirements depend on numerous factors, including but not limited to, product development activities, ability to commercialize its fuel cell systems, market acceptance of its systems and other factors. The Company expects to continue to devote substantial capital resources to its development programs directed at commercializing fuel cell systems worldwide, to hire and train production staff, develop and expand manufacturing capacity and continue research and development activities. The Company will pursue expansion of its operations through internal growth and strategic alliances and expects such activities will be funded from existing cash and cash equivalents, issuance of additional equity or debt securities or additional borrowings subject to market and other conditions.
At September 30, 2002,March 31, 2003, the Company had unrestricted cash, cash equivalents and marketable securities in the amount of $66.0$76.9 million and working capital of $66.4$76.0 million. Management believes that the Company’s currentcurrently available cash, cash equivalents and marketable securities will provide sufficient capital to fund operations for at least the next twelve months.
2. Basis of Presentation
Principles of Consolidation:The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiary.subsidiaries. All significant intercompany transactions have been eliminated in consolidation.
Interim Financial Statements: The unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, all adjustments, which consist solely of normal recurring adjustments, necessary to present fairly, in accordance with generally accepted accounting principles, the financial position, results of operations and cash flows for all periods presented, have been made. The results of operations for the interim periods presented are not necessarily indicative of the results that may be expected for the full year.
Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K filed for the fiscal year ended December 31, 2001.
The information presented in the accompanying unaudited condensed consolidated balance sheet as of December 31, 2002 has been derived from the Company’s December 31, 2002 audited consolidated financial statements. All other information has been derived from the Company’s unaudited consolidated financial statements for the periods as of and ending March 31, 2002 and 2003.
Cash Equivalents and Restricted Cash:Cash equivalents consist of money market accounts, overnight repurchase agreements and certificates of deposit with an initial term of less than three months. For purposes of the condensed consolidated statements of cash flows, the Company considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents.
At September 30, 2002,March 31, 2003, the Company hashad restricted cash in the amount of $5,310,274,$5.0 million that is required to be placed in escrow to collateralize debt related to the purchase of real estate. The escrowed amounts are recorded under the captions, “Restricted cash” in the accompanying condensed consolidated balance sheets.
Marketable Securities:Marketable securities includes investments in corporate debt securities and US Treasury obligations which are carried at fair value. These investments are considered available for sale, and the difference between the cost and the fair value of these securities would be reflected in other comprehensive income (loss) and as a separate component of stockholders’ equity. There was no significant difference between cost and fair value of these investments at September 30,March 31, 2003.
Inventory:Inventory is stated at the lower of average cost or market and consists of raw materials.
Intangible Assets: Intangible assets, including purchased technology and other intangible assets, are carried at cost less accumulated amortization. The Company amortizes intangible assets on a straight-line basis over their estimated useful lives. The range of estimated useful lives on the Company’s identifiable intangibles is two to ten years.
Impairment of Long-Lived Assets: Statement of Financial Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” provides a single accounting model for long-lived assets to be disposed of. SFAS No. 144 also changes the criteria for classifying an asset as held for sale and broadens the scope of businesses to be disposed of that qualify for reporting as discontinued operations and changes the timing of recognizing losses on such operations. The Company adopted SFAS No. 144 on January 1, 2002. The adoption of SFAS No. 144 did not affect the Company’s consolidated financial statements.
In accordance with SFAS No. 144, long-lived assets, such as property, plant, and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposed group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet. Prior to the adoption of SFAS No. 144, the Company accounted for long-lived assets in accordance with SFAS No. 121, “Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.”
Goodwill and intangible assets not subject to amortization, if any, are tested annually for impairment, and are tested for impairment more frequently if events and circumstances indicate that the asset might be impaired, under the provisions of SFAS No. 142, “ Goodwill and Other Intangible Assets”. As described in note 6, an impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value.
Product and Service Revenue:Generally, product and service revenue is recorded when products are shipped, customer acceptance has occurred and as other significant contractual obligations are met. The Company applies the guidance within SEC Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements” (SAB 101) in the evaluation of its contracts to determine when to properly recognize revenue. Under SAB 101 revenue is recognized when title and risk of loss have passed to the customer, there is persuasive evidence of an arrangement, delivery has occurred or services have been rendered, the sales price is determinable, and collectibility is reasonably assured.
The Company’s initial commercial sales for the delivery of limited edition fuel cell systems are contract specific arrangements containing multiple obligations, thatwhich may include a combination of fuel cell systems, continued service, maintenance and other support, and which are limited to a defined operating period that does not extend beyond the stated contractual term, as well as certain cancellation privileges.
The Company defers recognition of product and service revenue where allas a result of the criteria forcancellation privileges and revenue recognition have not yet been achieved. Product and service revenue excludes revenue which has been deferred and is being recognized on a straight line basis as the cancellation privileges expire ratably over the periodstated contractual term, which are for periods of the underlying service and other contractual obligations within the Company’s initial commercial agreements for the delivery of fuel cell systems.six to twenty-four months. At September 30, 2002,March 31, 2003, the Company hashad deferred product and service revenue in the amount of $5.2$3.8 million.
Income Taxes:Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their
Use of Estimates:The unaudited condensed consolidated financial statements of the Company have been prepared in conformity with accounting principles generally accepted in the United States of America, which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Impact of Recently Issued Accounting Standards:Standards:In June 2001,December 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS)SFAS No. 143,148, “Accounting for Asset Retirement Obligations”Stock Based Compensation”. SFAS No. 143 requires the Company148 provides alternative methods of transition for a voluntary change to record the fair value based method of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development and/or normal use of the assets. The Company also records a corresponding asset which is depreciated over the life of the asset. Subsequent to the initial measurement of the asset retirement obligation, the obligation will be adjusted at the end of each period to reflect the passage of time and changes in the estimated future cash flows underlying the obligation. The Company is required to adoptaccounting for stock-based employee compensation. In addition, SFAS No. 143 on January 1, 2003. Management is currently evaluating148 amends the impact, if any, that the adoptiondisclosure requirements of SFAS No. 143 will have123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. Certain of the disclosure modifications were required for fiscal years ending after December 31, 2002 and were included in the Company’s consolidated financial statements.Annual Report on Form 10-K for the year ended December 31, 2002.
In June 2002, the FASB issued SFAS No. 146,149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities”. SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, “Accounting for Costs Associated with Exit or DisposalDerivative Instruments and Hedging Activities”, which addresses accounting for restructuring and similar costs. SFAS No. 146 nullifies previous accounting guidance, principally EITF Issue No. 94-3. SFAS No. 146 requires that the liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF Issue No. 94-3, a liability for an exit cost was recognized at the date of the Company’s commitment to an exit plan. SFAS No. 146 also establishes that the liability should initially be measured and recorded at fair value. Accordingly, SFAS No. 146 may affect the timing of recognizing future restructuring costs as well as the amounts recognized.. The Company is required to adopt the provisions of SFAS No. 146149 for exitderivative instruments and hedging contracts entered into or disposal activities initiatedmodified after December 31, 2002.
3. Loss Per Share
Loss per share for the Company is calculated as follows:
Three Months Ended September 30, 2001 | Three Months Ended September 30, 2002 | Nine Months Ended September 30, 2001 | Nine Months Ended September 30, 2002 | |||||||||||||
Numerator: | ||||||||||||||||
Net loss | $ | (18,707,551 | ) | $ | (10,674,366 | ) | $ | (56,041,755 | ) | $ | (34,499,251 | ) | ||||
Denominator: | ||||||||||||||||
Weighted average number of common shares | 48,920,871 | 50,818,978 | 45,711,589 | 50,558,138 |
Three Months | Three Months | |||||||
Numerator: | ||||||||
Net loss | $ | (11,595,882 | ) | $ | (13,766,895 | ) | ||
Denominator: | ||||||||
Weighted average number of common shares |
| 50,345,437 |
|
| 51,664,671 |
| ||
Loss per share: | ||||||||
Basic and diluted |
| (0.23 | ) |
| (0.27 | ) |
No options or warrants outstanding were included in the calculation of diluted loss per share because their impact would have been anti-dilutive.
March 31, 2002 | March 31, 2003 | |||
Number of dilutive potential common shares | 6,649,599 | 6,198,942 |
4. Investments in Affiliates
GE Fuel Cell Systems, LLC
In February 1999, we entered into a joint venturean agreement with GE MicroGen, Inc. to form GE Fuel Cell Systems, LLC (GEFCS), to exclusively market, sell, install and service certain of our stationary PEM fuel cell systems under 35 kW designed for use in residential, commercial and industrial stationary power applications on a global basis, with the exception of the states of Illinois, Indiana, Michigan and Ohio, in which DTE Energy Technologies, Inc. (“DTE”), has exclusive distribution rights. Plug Power has a 40 percent ownership interest in GEFCS. Under the terms of our distribution agreement with GEFCS, we serve as GEFCS’ exclusive supplier of the PEM fuel cell systems and related components meeting the specifications set forth in the distribution agreement. GE MicroGen, Inc. is an indirecta wholly owned subsidiary of General Electric Company that operates within the GE Power Systems business. We may, under certain circumstances, sell systems directly to governmental and quasi-governmental entities under the terms of our distribution agreement with GEFCS. With respect to fuel cell systems that we do sell directly we will provide, or enter into a subcontract to provide, product support services directly.
In connection with the original formation of GEFCS, and the Company’s distribution agreement with GEFCS, including amendments thereto, the Company issued 2,250,000 shares of its common stock, and an option to purchase 725,000 additional shares of itsit’s common stock to GE MicroGen, Inc. Thein exchange for a 25% interest in GEFCS. As of the date of issuance of such shares, the Company has capitalized $16.3$11.3 million, the fair value of the shares issued, and the option to purchase additional shares under the caption “Investment in affiliates” in the accompanying condensed consolidated balance sheets. This investment is considered to be an intangible asset in the form of a distribution agreement and is being amortized on a straight line basis over a ten year period, the term of the original distribution agreement.financial statements. In accordance with the terms of the agreement, General Electric will provide capital in the form of a loan not to exceed $8.0 million, to fund the operations of GEFCS.
In August 2001, the Company amended its agreements with GE Microgen, Inc. and GEFCS to expand GEFCS’ exclusive worldwide distribution rights to include all of the Company’s stationary PEM fuel cell systems, excluding those states serviced by DTE. In addition, the Company increased its ownership interest in GEFCS from 25% to 40%. In return, the Company granted GE Power Systems Equities, Inc. an option to purchase 725,000 shares of our common stock at any time prior to August 21, 2006 at an exercise price of $15.00 per share. The Company also replaced the product specifications, prices and delivery schedule in the GEFCS distribution agreement with a high-level, multi-generation product plan, with subsequent modifications being subject to mutual agreement, and extended the term of the agreement to December 31, 2014. In connection with these transactions, the Company capitalized $5.0 million, the fair value, calculated using the Black-Scholes pricing model, of the option to purchase 725,000 shares of Plug Power common stock, under the caption “Investment in affiliates” in the accompanying condensed consolidated financial statements, and is amortizing this amount over the remaining term of the original distribution agreement.
The Company accounts for its interest in GEFCS on the equity method of accounting and adjusts its investment by its proportionate share of income or losses under the caption “Equity in losses of affiliates” in the accompanying condensed consolidated statements of operations. GEFCS had an operating and net loss of approximately $257,000$93,000 for the ninethree months ended September 30, 2002.March 31, 2003. For the ninethree months ended September 30, 2002,March 31, 2003, equity in losses of affiliates, related to GEFCS, was approximately $1,447,000$485,000 including amortization of the related intangible asset of $1,344,000.
Under a separate agreement, the Company has agreed to source from General Electric Company technical support services for its product development effort, including engineering, testing, manufacturing and quality control services. Under this agreement, the Company has committed to purchase a minimum of $12.0 million of such services over a five yearfive-year period, which began September 30, 1999. Through September 30, 2002,March 31, 2003, the Company hashad purchased approximately $6.2$7.1 million of such services. General Electric Company has agreed to act as the agent in procuring certain equipment, parts and components and is providing training services to the Company’s employees regarding procurement activities pursuant to this agreement.
Advanced Energy Incorporated
In March 2000, the Company acquired a 28% ownership interest in Advanced Energy Incorporated (AEI), formerly Advanced Energy Systems, Inc., in exchange for a combination of $1.5 million cash and Plug Power common stock valued at approximately $828,000. The Company accounts for its interest in AEI on the equity method of accounting and adjusts its investment by its proportionate
5. Acquisition of H Power Corp.
On March 25, 2003, the Company consummated a merger transaction with H Power, a company also involved in the design, development, and manufacture of Proton Exchange Membrane (PEM) fuel cells and fuel cell systems, pursuant to which the Company acquired all of the outstanding shares of H Power in a stock-for-stock exchange. In connection with this transaction, H Power common stockholders received 0.8305 shares of the Company’s common stock for each share of lossesH Power common stock held immediately prior to the transaction. The Company issued 8,950,113 shares of its common stock in connection with the transaction. Immediately following the transaction, the Company had 60,049,328 shares outstanding and H Power became a wholly owned subsidiary of the Company.
Effective March 25, 2003, the Company and H Power are treated as a single company for financial reporting purposes and the Company has recorded the fair value of H Power’s net assets on its consolidated financial statements. The historical financial statements of the Company will continue to be the historical financial statements of the combined company for periods prior to the merger. Based on an average common stock price of $5.10, determined using the Company’s closing common stock price on March 21, 2003, the day the exchange ratio was determined, and each of the two trading days before and after March 21, 2003, the fair value of the shares issued as a result of the transaction is estimated at approximately $45.9 million. The Company also incurred direct transaction costs of $3.5 million in connection with the transaction. As part of the acquisition, the Company acquired cash, cash equivalents and marketable securities of H Power of approximately $29.6 million, after payment of certain integration costs and expenses associated with the consummation of the merger of approximately $7.8 million which were accounted for as additional purchase price. The Company has included H Power in its consolidated financial position and results of operation since the date of acquisition.
The following table summarizes the fair value of the assets acquired and liabilities assumed at the date of acquisition. The Company is in the process of performing valuations of certain intangible assets; thus, the allocation of the purchase price is subject to refinement.
At March 25, 2003 | ||
Current assets | $39,091,365 | |
Property and equipment | 1,284,579 | |
Acquired in-process R&D | 3,000,000 | |
Intangible assets | 5,500,000 | |
Goodwill | 8,730,229 | |
Other | 50,585 | |
Total assets acquired | 57,656,758 | |
Current liabilities | 11,859,032 | |
Long-term debt | 112,150 | |
Total liabilities assumed | 11,971,182 | |
Net assets acquired | $45,685,576 | |
Approximately $3.0 million of the purchase price represents the estimated fair value of acquired in-process research and development projects. Accordingly, this amount was immediately expensed in the consolidated statement of operations as of the date of acquisition. This write-off is included in in-process research and development expenses on the accompanying condensed consolidated statement of operations as of March 31,2003. The acquired in-process research and development expense relates to certain H Power fuel cell technology.
Additionally, the Company capitalized the fair value of identifiable intangible assets (acquired technology) in the amount of $5.5 million related to certain H Power fuel cell technology. This acquired technology will be amortized over its estimated useful life of 24 months.
The fair value of this technology was determined using an income approach, which reflects the estimated present value of future avoided costs by estimating the cost to develop similar technology into a commercially viable product, estimating the resulting net cash flows from such projects, and discounting the net cash flows back to their present value.
The Company also recorded approximately $8.7 million of goodwill related to the transaction.
The following unaudited pro forma financial information presents the combined results of operations as if the purchase transaction made by the Company had occurred as of January 1, 2002, after giving effect to certain adjustments including elimination of revenue and cost of revenue of related product lines not expected to be continued, amortization of identifiable intangible assets, and elimination of certain expenses including depreciation expense and rent expense which will not be incurred by AEI.
Historical | |||||||||||||
Plug Power for the three months ended March 31, 2002 | H Power for the three months ended February 28, 2002 | Pro forma Adjustments | Total | ||||||||||
Total revenue | $ | 2,904,266 |
| 346,396 |
| (346,396 | ) | 2,904,266 |
| ||||
Net loss |
| (11,595,822 | ) | (6,539,630 | ) | 532,777 |
| (17,603,235 | ) | ||||
Basic and diluted loss per share | (0.30 | ) |
Historical | |||||||||||||
Plug Power for the three months ended March 31, 2003 | H Power for the three months ended February 28, 2003 | Pro forma Adjustments | Total | ||||||||||
Total revenue | $ | 2,952,355 |
| 571,313 |
| (571,313 | ) | 2,952,355 |
| ||||
Net loss |
| (13,766,895 | ) | (8,479,718 | ) | 563,957 |
| (21,682,656 | ) | ||||
Basic and diluted loss per share | (0.36 | ) |
6. Goodwill and Other Intangible Assets.” SFAS No. 141 requires that the purchase method of accounting be used for all business combinations. SFAS No. 141 specifies criteria that intangible assets acquired in a business combination must meet to be recognized and reported separately from goodwill. The Company adopted the provisions of SFAS No. 141 as of July 1, 2001.
Effective January 1, 2002, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets.” This statement changed the accounting for goodwill and indefinite-lived intangible assets from an amortization approach to an impairment-only approach. Goodwill and intangible assets with indefinite useful lives are subject to a periodic impairment test. If the carrying value of goodwill or an intangible asset exceeds its fair value, an impairment loss shall be recognized. Acquired intangible assets with determinable useful lives continue to be amortized over their estimated useful lives in proportion to the economic benefits consumed. These estimated useful lives are required to be reevaluated each reporting period. Amortizable intangible assets are to be reviewed for impairment in accordance with SFAS No. 144.
In conjunction with the adoption of SFAS No. 142, the Company reassessed the useful lives and the classification of its finite-lived acquired intangible assets and determined that no revisions were necessary. The gross carrying amount and accumulated amortization of the Company’s acquired intangible assets as of December 31, 20012002 and September 30, 2002March 31, 2003 were as follows:
December 30, 2001 | September 31, 2002 | |||||||||||
Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | |||||||||
Distribution Agreement | $ | 16,250,000 | $ | 4,849,522 | $ | 16,250,000 | $ | 6,296,051 | ||||
Purchased Technology | 9,267,500 | 5,797,361 | 9,267,500 | 7,980,361 | ||||||||
Total | $ | 25,517,500 | $ | 10,646,883 | $ | 25,517,500 | $ | 14,276,412 | ||||
December 31, 2002 | March 31, 2003 | |||||||||||
Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | |||||||||
Distribution Agreement | $ | 16,250,000 | $ | 6,761,238 | $ | 16,250,000 | $ | 7,246,439 | ||||
Purchased Technology (2000) |
| 9,267,500 |
| 8,752,653 |
| 9,267,500 |
| 9,267,500 | ||||
Purchased Technology (2003) |
| — |
| — |
| 5,500,000 |
| — | ||||
Total | $ | 25,517,500 | $ | 15,513,891 | $ | 31,017,500 | $ | 16,513,939 | ||||
Amortization expense for acquired intangible assets during the ninethree months ended September 30, 2002March 31, 2003 was $3,526,701.$962,746. Estimated amortization expense for the remainder of 20022003 and the five succeeding years are as follows:
Estimated Amortization Expense | ||
2002 | $1,220,193 | |
2003 | 2,306,446 | |
2004 | 1,791,660 | |
2005 | 1,791,660 | |
2006 | 1,791,660 | |
2007 | 1,791,660 |
Estimated Amortization Expense | |||
2003 | $ | 3,406,200 | |
2004 |
| 4,541,600 | |
2005 |
| 2,479,100 | |
2006 |
| 1,791,600 | |
2007 |
| 1,791,600 | |
2008 |
| 530,762 |
7. Stockholders’ Equity
Changes in stockholders’ equity for the ninethree months ended September 30, 2002 isMarch 31, 2003 are as follows:
Common stock Shares | Amount | Additional Paid-in Capital | Deficit Accumulated During the Development Stage | Total Stockholders’ Equity | ||||||||||||
Balance, December 31, 2001 | 50,322,928 | $ | 503,229 | $ | 342,842,203 | $ | (208,342,541 | ) | $ | 135,002,891 | ||||||
Stock based compensation | 128,490 | 1,285 | 1,231,278 | 1,232,563 | ||||||||||||
Stock option exercises | 133,271 | 1,333 | 692,318 | 693,651 | ||||||||||||
Stock issued under employee stock purchase plan | 33,436 | 334 | 224,473 | 224,807 | ||||||||||||
Stock issued for development agreement | 243,383 | 2,434 | 1,997,566 | 2,000,000 | ||||||||||||
Net loss | (34,499,251 | ) | (34,499,251 | ) | ||||||||||||
Balance, September 30, 2002 | 50,861,508 | $ | 508,615 | $ | 346,987,838 | $ | (242,841,792 | ) | $ | 104,654,661 | ||||||
Common Stock | Amount | Additional | Deficit Accumulated During the Development | Total Stockholders’ Equity | ||||||||||||
Balance at December 31, 2002 | 50,997,073 | $ | 509,971 | $ | 347,747,664 | $ | (255,560,867 | ) | $ | 92,696,768 |
| |||||
Stock issued in acquisition of H Power | 8,950,113 |
| 89,501 |
| 45,596,075 |
| 45,685,576 |
| ||||||||
Stock based compensation | 111,314 |
| 1,113 |
| 572,728 |
| 573,841 |
| ||||||||
Stock option exercises | 3,753 |
| 38 |
| 13,927 |
| 13,965 |
| ||||||||
Net loss |
| (13,766,895 | ) |
| (13,766,895 | ) | ||||||||||
Balance at March 31, 2003 | 60,062,253 | $ | 600,623 | $ | 393,930,394 | $ | (269,327,762 | ) | $ | 125,203,255 |
| |||||
8. Commitments and Contingencies
Litigation:havePOWER, Settlement: As previously disclosed, havePOWER, LLC filed a compliant against Plug Power and its subsidiary, H Power, seeking damages and other relief as a result of alleged breach of contract and other claims. While Plug Power and H Power deny any and all liability to havePOWER, in May 2003 the parties have entered into a settlement agreement pursuant to which the parties have executed mutual releases. havePOWER has agreed to a dismissal of all its claims against Plug Power and H Power, and Plug Power has agreed to issue to havePower 112,967 restricted shares of Plug Power common stock.
Shareholder Class Action Lawsuit: As previously disclosed, in September 14, 2000, a shareholder class action complaint was filed in the federal district court for the Eastern District of New York alleging that wethe Company and various of ourits officers and a directordirectors violated certain federal securities laws by failing to disclose certain information concerning our products and future prospects. The action was brought on behalf of a class of purchasers of Plug Power stock who purchased the stock between February 14, 2000 and August 2, 2000. Subsequently, fourteen additional complaints with similar allegations and class periods were filed. By order dated October 30, 2000, the court consolidated the complaints into one action, entitled Plug Power Inc. Securities Litigation, CV-00-5553 (ERK) (RML). By order dated January 25, 2001, the Court appointed lead plaintiffs and lead plaintiffs’ counsel. Subsequently the plaintiffs served a consolidated amended complaint, which extends the class period to begin on October 29, 1999, and alleges claims under Sections 11, 12 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Exchange Act of 1934, and Rule 10b-5 promulgated thereunder by the Securities & Exchange Commission, 17 C.F.R. 240 10b-5. Subsequently, Plaintiffs withdrew their claims under the Securities Act of 1933. Plaintiffs allege that the defendants made misleading statements and omissions regarding the state of development of the Company’s technologyprospects in a registration statement and proxy statement issued in connection with the Company’sour initial public offering (“IPO”) and in subsequent press releases. A consolidated amended complaint extending the class period was subsequently filed.
We served our motion to dismiss the claims in May 2001. By order dated January 21, 2003, the Court dismissed all claims relating to pre-IPO press releases, the IPO prospectus and are seeking damages. all but three post-IPO press releases. The Court ruled that the three remaining press releases raised questions of fact that could not be resolved in a motion to dismiss. The Court also denied the motion to dismiss the claims against the individual defendants at that time.
The Company believes that the remaining allegations in the consolidated amended complaint are without merit and intendintends to vigorously defend against thethose claims. The Company does not believe that the outcome of these actions will have a
9. Supplemental Disclosures of Cash Flows Information
The following represents required supplemental disclosures of cash flows information and non-cash financing and investing activities which occurred during the three months ended March 31, 2002 and 2003:
March 31, 2002 | March 31, 2003 | |||||
Cash paid for interest | $ | 25,333 | $ | 17,376 | ||
Assets acquired, net of cash |
| — |
| 14,320,470 |
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with theour 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, 2001.2002. In addition to historical information, this Form 10-Q and the following discussion contain statements which are not historical facts and are considered forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements that reflectcontain projections of our plans, estimates, intentions,future results of operations, our product development expectations 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,” “estimate,” “expect,” “intend,” “may,” “should,” “will” and beliefs. Our“would” or similar words. You should not rely on these forward-looking statements because our actual results couldmay differ materially from those discussedindicated by these forward-looking statements as a result of a number of important factors. These factors include, but are not limited to, the risk that we will not integrate and restructure the H Power business successfully; the risk that we will incur unanticipated costs or liabilities as a result of the H Power merger; our ability to develop a commercially viable fuel cell system; the cost and timing of developing our fuel cell systems; market acceptance of our fuel cell systems; our reliance on our relationship with certain affiliates of General Electric; our ability to perform on the multi-generation product plan in a manner satisfactory to GEFCS and DTE; ability to manufacture fuel cell systems on a commercial basis; competitive factors, such as price competition, competition from other power technologies and competition from other fuel cell companies; the forward-looking statements. Factors that could cause or contributespeed and extent of consolidation of the fuel cell industry; the cost and availability of components and parts for our fuel cell systems; the ability to such differences include,raise and provide the necessary capital to develop, manufacture and market our fuel cell systems; our ability to lower the costs of our furl cell systems and demonstrate reliability; the cost of complying with current and future governmental regulations; and other risks and uncertainties discussed, but are not limited to, those set forth under the caption “Factors Affecting Future Results” in our Annual Report on Form 10-K filed for the fiscal year ended December 31, 2001.2002, dated March 31, 2003 and filed with the Securities and Exchange Commission.
Overview
We are a development stage enterprise formed to research,design, develop manufacture and distributemanufacture on-site electric power generation systems utilizing proton exchange membrane (PEM) fuel cells for stationary applications. We were formed in 1997, as a joint venture between Edison Development Corporation (EDC), a DTE Energy company and Mechanical Technology Incorporated (MTI). In addition, we have established an “extended enterprise” through strategic relationships with marketing, technology, supply chain, and government partners. See Management’s Discussion and Analysis of Financial Condition and Results of Operations—Acquisitions, Strategic Relationships and Development Agreements.
We are infocused on fuel cell systems with electrical output of approximately 1-100-kilowatt (kW), fueled by natural gas, liquid petroleum gas (LPG), and hydrogen gas, for a variety of stationary applications. We are developing an architected technology platform from which we expect to offer multiple point products, ranging from DC back-up power for telecom applications, to AC prime power for residential and light commercial applications. The platform approach is expected to improve our return on investment, while allowing us to leverage the preliminary stagesvolume of field testingseveral products into cost reduction of common platform components and marketing ourmodules.
Our initial commercial product is a fully integrated, grid-parallel 5 kW fuel cell system that operates on natural gas. This initial product is being marketed to a limitedselect number of customers, including utilities, government entities and our distribution partners, GE Fuel Cell Systems, LLC and DTE Energy Technologies, Inc. ThisThe initial product is a limited edition fuel cell system that is intended to offer complimentary, quality power, while demonstrating the market value ofprovide valuable field testing experience and data, and demonstrate fuel cells as a preferred form of alternative distributed power generation. Subsequent enhancements toIn June 2002, our 5-kW product became the first fuel cell systems including its next generation systems are expectedsystem to be certified by the California Energy Commission under the state’s Rule 21 grid interconnection standard, and in July, we launched the GenSysTM 5C, which added the capability of capturing heat for combined heat and power applications. In October, we added stand-by capability and launched the GenSysTM 5CS. Stand-by capability allows the fuel cell system to provide power to critical loads upon grid interruption. We expect subsequent product enhancements to expand the market opportunity for our fuel cells by lowering the installed cost, decreasing operating and maintenance costs, increasing efficiency, and improving reliability, and adding features such as grid independence and co-generation of heat and electric power.
Through September 30, 2002,March 31, 2003, our stockholders in the aggregate have contributed $292.8$293.0 million in cash, including $93.0 million in net proceeds from our initial public offering and $51.6 million in net proceeds from our follow-on public offering, of common stock, and $33.4 million in other contributions, consisting of in-process research and development, real estate, other in-kind contributions
and equity interests in affiliates.
From inception through September 30, 2002,March 31, 2003, we have incurred losses of $242.8$269.3 million and expect to continue to incur losses as we continue our product development and commercialization programs and prepare for the commencement of manufacturing operations. We expect that losses will fluctuate from quarter to quarter and that such fluctuations may be substantial as a result of, among other factors, the number of systems we produce and install, the related service requirements necessary to monitormaintain those systems and potential design changes required as a result of field testing.
Recent Developments
Acquisition of H Power Corp.: On November 12, 2002, the Company andMarch 25, 2003, we consummated a merger transaction with H Power Corp. announced that they entered into(“ H Power”), a definitive merger agreementcompany also involved in the design, development and manufacture of proton exchange membrane fuel cells and fuel cell systems, pursuant to which we acquired all of the Company would acquireoutstanding shares of H Power in a stock-for-stock exchange. In connection with the transaction, H Power stockholders received 0.8305 shares of our common stock for each share of H Power common stock held immediately prior to the transaction resulting in the issuance of 8,950,113 shares of our common stock. Immediately following the transaction, we had 60,049,328 shares outstanding and H Power became a wholly-owned subsidiary of Plug Power. For further information, see note 5 entitled “Acquisition of H Power Corp.” in the notes to the condensed consolidated financial statements in this Form 10-Q.
Offer to Exchange Options: On March 25, 2003, our shareholders approved a proposal for us to offer, to eligible employees, the right to exchange valued at approximately $50.7 million.options to purchase shares of common stock, with an exercise price greater than $8.53 for shares of restricted common stock. If the exchange is implemented, the number of shares of restricted common stock to be granted will be equal to one-third of the number of shares of the common stock underlying the options validly tendered and accepted for exchange by us. We currently intend to commence the exchange in the second quarter of 2003.
Acquisitions, Strategic Relationships and Development Agreements
Since our inception, we have formed strategic relationships with suppliers of key components, developed distributor and customer relationships, and entered into development and demonstration programs with electric utilities, government agencies and other energy providers. In addition to the H Power acquisition described above under Recent Developments, we continue to maintain key relationships as part of our “extended enterprise” strategy, including:
GE Entities: In February 1999, we entered into an agreement with GE MicroGen, Inc. to form GE Fuel Cell Systems, LLC (GEFCS), to exclusively market, sell, install and service our stationary PEM fuel cell systems on a global basis, with the exception of the states of Illinois, Indiana, Michigan and Ohio, in which DTE Energy Technologies, Inc., has exclusive distribution rights. GE MicroGen, Inc. is a wholly owned subsidiary of General Electric Company that operates within the GE Power Systems business. Plug Power has a 40 percent ownership interest in GEFCS. Under the terms of theour distribution agreement the exchange ratio is initially set at approximately eight-tenths of a sharewith GEFCS, we serve as GEFCS’ exclusive supplier of the Company for each H Power share. The initial exchange ratio will vary within upperPEM fuel cell systems and lower bounds of 10%related components meeting the specifications set forth in the eventdistribution agreement. We may, under certain circumstances, sell systems directly to governmental and quasi-governmental entities under the terms of our distribution agreement with GEFCS. With respect to fuel cell systems that the valuewe do sell directly we will provide, or enter into a subcontract to provide, product support services directly.
Under a separate agreement, we have agreed to source from General Electric Company technical support services for our product development effort, including engineering, testing, manufacturing and quality control services. Under this agreement, we have committed to purchase a minimum of the Company's common stock during a defined pre-closing period varies by more than 10% from $5.88 per share. Currently, it is expected that H Power shareholders will receive $50.7$12.0 million of valuesuch services over a five year period, which began September 30, 1999. Through March 31, 2003, we have purchased approximately $7.1 million of such services and will own between approximately 13.3%we expect to fulfill our obligation over the remainder of its term. General Electric Company has agreed to act as the agent in procuring certain equipment, parts and 15.8% ofcomponents and is providing training services to the Company's shares outstanding after the closing.
Honda Joint Development Agreement:Honda: In October 2002, we signed a definitiveWe have an agreement with Honda R&D Co., Ltd. of Japan, a subsidiary of Honda Motor Co., Ltd., to exclusively and jointly develop and test an initial prototype of a home refueling system for fuel cell automobiles. As
Celanese Amended and Restated Joint Development Agreement:Gastec: In August 2002,February 2000, we amendedacquired from Gastec, NV, a Netherlands-based company, certain fixed assets and restated ourall of its intellectual property related to fuel processor development for fuel cell systems capable of producing up to 100 kW of electric power. The total purchase price was $14.8 million, paid in cash.
Vaillant: We have a development agreement with Celanese.Vaillant GmbH (Vaillant), to develop a combination furnace, hot water heater and fuel cell system that is expected to provide both heat and electricity for the home. Under the restated agreement, we will worksell fuel cell subsystems directly and exclusively to Vaillant and Vaillant will distribute fuel cell heating appliances throughout Europe on a non-exclusive basis.
In exchange for the right to sell fuel cell subsystems directly and exclusively to Vaillant we have agreed to pay GE MicroGen, Inc. a royalty, based on a prescribed percentage of sales of fuel cell subsystems (as defined in the agreement), beginning in 2003.
Celanese: We have a joint development agreement with Celanese GmbH to develop, on the development ofan exclusive basis, a high temperature membrane electrode unit for stationary fuel cell systems with net electrical output of 750 watts up to 25 kilowatts. Additionally, we will work with Celanese on a non-exclusive basis to develop a high temperature membrane electrode unit for stationary fuel cell systems with net electrical output of less than 750 watts and greater than 25 kilowatts. Under the new agreement, we and Celanese will each fund our own development efforts.
Engelhard: In September 2000, we finalizedWe have a joint development agreement and a supply agreement with Engelhard Corporation for development and supply of advanced catalysts to increase the overall performance and efficiency of our fuel processor. Over the course of the joint development agreement we have contributed $10.0 million to fund Engelhard’s development efforts, and Engelhard in turn has acquired $10.0 million of our common stock.efforts. Of this amount, $7.4$8.2 million has been expensed with the remaining $2.6$1.8 million being recorded under the balance sheet caption “Prepaid development costs” as of September 30, 2002.
Results of Operations
Comparison of the Three Months Ended September 30, 2002March 31, 2003 and September 30, 2001.March 31, 2002.
Product and service revenue. Product and service revenue increased to $2.6 million for the three months ended September 30, 2002 compared to $437,000 during the third quarter of 2001. In the third quarter of last year2001, we began delivering fuel cell systems under our initial commercial agreements to a select number of customers in order to demonstrate, test and evaluate our fuel cell systems. During the third quarter of 2002, we delivered 49 fuel cell systems to these select customers. Our initial commercial sales for the delivery of limited edition fuel cell systems are contract specificcontract-specific arrangements containing multiple obligations, thatwhich may include a combination of fuel cell systems, continued service, maintenance and other support, and which are limited to a defined operating period that does not extend beyond the stated contractual term, as well as certain cancellation privileges. We defer recognitionprivileges that expire ratably over the stated contractual term. The multiple obligations within our contractual arrangements are not accounted for separately based on our limited commercial experience and available evidence of fair value. Contract terms on our initial commercial sales require payment upon delivery and installation of the fuel cell system and are not contingent on the achievement of specific milestones or other substantive performance. The costs associated with the product, service and other obligations are expensed as they are incurred.
During the three months ending March 31, 2003, we delivered 6 fuel cell systems to select customers as compared to 12 fuel cell systems for the three months ending March 31, 2002. Product and service revenue where alldecreased to $2.0 million for the three months ended March 31, 2003, from $2.6 million during the first quarter of the criteria for revenue recognition have not yet been achieved.2002. During the quarter ended September 30, 2002,March 31, 2003, we recognized revenue in the amount of
As of September 30, 2002,March 31, 2003, we have total product and service deferred revenue in the amount of $5.2$3.8 million and expect to recognize approximately $1.9 millionsubstantially all of the product and service deferred revenue throughout the remainder of 2002. The costs associated with the product, service and other obligations are expensed as they are incurred.
Research and development contract revenue.Research and development contract revenue increased to $919,000 for the three months ended March 31, 2003 from $332,000 during the same period last year. Research and development contract revenue primarily relates to cost reimbursement governmentresearch and development contracts related toassociated with the development of PEM fuel cell technology. We generally share in the cost of these programs with cost sharing percentages between 25% and 50%. Revenue from “time and material” contracts is recognized on the basis of hours utilized, plus other reimbursable contract costs incurred during the period. The increase
is due to the addition of development agreements with the New York State Energy Research and Development Authority and Honda R&D Co., Ltd. of Japan in which we began recognizing revenue in the fourth quarter of 2002. We expect to continue certain research and development contract revenue decreasedwork that is directly related to $375,000 for the three months ended September 30, 2002 from $483,000 during the same period last year. The decrease is the result of completion of government contracts with the U.S. Department of Energy and U.S. Department of Commerce – NIST.
Cost of revenues. Cost of revenues for the three months ended September 30, 2002,March 31, 2003, increased to $3.1$1.8 million from $2.4$1.7 million during the same period last year. Cost of revenues includes the direct cost incurred in the manufacture of the products we sell, as well as costs incurred for product maintenance, replacement parts and service under our contractual obligations. These costs consist primarily of productive materials and fees paid to outside suppliers for subcontracted components and services. It does not include any factory labor or overhead expenses.
Cost of revenues also includes costs associated with research and development contracts including: 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 governmentresearch and development contracts.
Cost of revenues for the three months ended March 31, 2002 and 2003 consists of the following:
Three Months | Three Months | |||||
Cost of product and service revenue | $ | 1,114,064 | $ | 564,536 | ||
Cost of research and development contract revenue |
| 577,100 |
| 1,201,447 | ||
Total cost of revenue | $ | 1,691,164 | $ | 1,765,983 | ||
Noncash research and development expense. Noncash research and development expense was $270,000 for the three months ended September 30, 2002. There was no noncash research and development expenseMarch 31, 2003, increased to $226,000 from $69,000 during the same period last year. Noncash research and development expense represents the fair value of stock grants to employees and stock grants and vested stock options to employees, consultants and others in exchange for services provided.
Other Researchresearch and development expense. Other research and development expense decreased to $8.4$9.9 million for the three months ended September 30, 2002March 31, 2003 from $15.0$10.9 million for the three months ended September 30, 2001.March 31, 2002. Research and development expense includes: materials to build development and prototype units, 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.
Research and development expenses also reversed accrued expensesinclude amortization of prepaid development costs in the amount of $1.8 million related to$365,000 under our joint development agreementprogram with Celanese. DuringEngelhard, recorded on our balance sheet under the third quarter we finalized negotiations with Celanese to revise the terms of our agreement with them. The new agreement includes an estimate, without obligation, of what Plug Power anticipates spending on an annual basis going forward relative to the jointcaption “Prepaid development of a high temperature membrane. In accordance with these revised terms we have reversed an accrualcosts” and amortization in the amount of $1.8 million$515,000 related to the funding obligationportion of the Gastec purchase price which has been capitalized and recorded on our balance sheet under the previous terms ofcaption “Intangible assets”. At March 31, 2003, the agreement, which required us to cost share the development efforts performed by Celanese.
Noncash general and administrative expense. Noncash general and administrative expenses were $22,000 for the three months ended September 30, 2002. There was no noncash general and administrative expense duringMarch 31, 2003 decreased to $21,000 from $343,000 for the same period last year. Noncash general and administrative expenses generallyexpense represents the fair value of stock grants to employees and stock grants and vested stock options to employees, consultants and others in exchange for services provided.
Other general and administrative expense. Other general and administrative expenses decreased to $1.7expense was $1.5 million for the three months ended September 30, 2002 from $1.8March 31, 2003 compared to $1.4 million for the three months ended September 30, 2001.same period last year. Other general and administrative expense includes compensation, benefits and related costs in support of our general corporate functions including general management, finance and accounting, human resources, marketing, information technology and legal services.
Interest expense. Interest expense was $25,000$17,000 for the three months ended September 30, 2002,March 31, 2003, compared to $55,000$25,000 for the same period last year. Interest expense consists of interest on our long-term obligation related to the purchase of real estate and interest paid on capital lease obligations.
Interest income. Interest income consisting of interest earned on our cash, cash equivalents and marketable securities decreased to $352,000$202,000 for the three months ended September 30, 2002,March 31, 2003, from $956,000$487,000 for the same period in 2001.2002. The decrease was due to a lower yield on our investment portfolio during a period of generally declining interest rates. The higher interest earned in 2001for the three months ended March 31, 2002 was the result of better yields on investments purchased during 2000 with maturities in 2001.2001 and early 2002.
Equity in losses of affiliates. Equity in losses of affiliates decreased to $481,000$485,000 for the three months ended September 30, 2002March 31, 2003 from $1.3 million$584,000 during the same period last year. Equity in losses of affiliates, which we account for under the equity method of accounting, is our proportionate share of the losses of GE Fuel Cell Systems in the amount of $34,000$37,000 and amortization of our original investments in the amount of $448,000.
Income taxes. We did not report a benefit for federal and state income taxes in the consolidated financial statements as the deferred tax asset generated from our net operating loss has been offset by a full valuation allowance because it is more likely than not that the tax benefits of the net operating loss carryforward may not be realized.
The preparation of financial statements in conformity with generally accepted accounting principles and related disclosure requires management to make estimates and assumptions that affect:
Specifically, managementwe must use estimates in determining the economic useful lives of assets, including identifiable intangibles, and various other recorded or disclosed amounts. Therefore, the Company’sour financial statements and related disclosure are necessarily affected by these estimates. Management evaluatesWe evaluate these estimates on an ongoing basis, utilizing historical experience and other methods considered reasonable in the particular circumstances. Nevertheless, actual results may differ significantly from estimates. To the extent that actual outcomes differ from estimates, or additional facts and circumstances cause management to revise estimates, the Company’sour financial position as reflected in its financial statements will be affected. Any effects on business, financial position or results of operations resulting from revisions to these estimates are recorded in the period in which the facts that give rise to the revision become known.
We believe that the following are the Company’sour most critical accounting policies affected by the estimates and assumptions the Company must make in the preparation of its financial statements and related disclosure:
Revenue recognition: We are a development stage enterprise in the beginning stages of field testing and marketing our initial commercial products to a limited number of customers, including utilities, government entities and our distribution partners. This initial product is a limited edition fuel cell system (“System” or “Unit”) that is intended to offer complimentary,complementary, quality power while demonstrating the market value of fuel cells as a preferred form of alternative distributed power generation. Subsequent enhancements to our Systems are expected to expand the market opportunity for fuel cells by lowering the installed cost, decreasing operating and maintenance costs, increasing efficiency and improving reliability, and adding features such as grid independence and co-generation and uninterruptible power supply (UPS) applications.reliability.
We apply the guidance within Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements”(SAB 101)to our initial sales contracts to determine when to properly recognize revenue. Our initial commercial sales for the delivery of limited edition fuel cell systems are contract specificcontract-specific arrangements containing multiple obligations, thatwhich may include a combination of fuel cell systems, continued service, maintenance and other support, and which are limited to a defined operating period that does not extend beyond the stated contractual term, as well as certain cancellation privileges. Presently,privileges that expire ratably over the stated contractual term. The multiple obligations within our contractual arrangements are not accounted for separately based on our limited commercial experience and available evidence of fair value. Contract terms on our initial commercial sales require payment upon delivery and installation of the fuel cell system and are not contingent on the achievement of specific milestones or other substantive performance. Under these initial commercial sales, we defer recognition of product and service revenue, where allas a result of the criteria forcancellation privileges, and recognize revenue recognition have not yet been achieved.
As we gain commercial experience, including field experience relative to service and warranty based on the sales of our initial products, the fair values for the multiple elements within our future contracts may become determinable and we may, in future periods, recognize revenue upon delivery of a unitthe Unit or we may continue to defer recognition, based on application of appropriate guidance within the existing authoritative literature.
Valuation of long-lived assets: We evaluate our long-lived assets, intangibles and related goodwill in accordance with (“SFAS”) No. 142, “Goodwill and Other Intangible Assets” and SFAS No. 144, “Accounting for Impairment or Disposal of Long-Lived Assets”. We review our long-lived assets, which includes property, plant and equipment and identifiable finite-lived intangible assets and goodwill: We assess thegoodwill for impairment of identifiable intangible and long-lived assets and related goodwill, if any, whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. Factors we consider important which could trigger an impairment review include, but are not limited to, the following:
significant changes in |
An impairment would be recognized based on the difference between the fair value of intangibles,the asset and its carrying value. Future events could cause us to conclude that impairment indicators exist and that long-lived assets and related goodwill may not be recoverable based upon the existence of one or more of the above indicators ofimpaired. Any resulting impairment we would measure any impairment based upon the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets”. On January 1, 2002, we adopted SFAS No. 142 and are required to perform an initial impairment review in 2002 and an annual impairment review thereafter. Basedloss could have a material adverse impact on our initial review we do not expect to record an impairment charge.
Accounting for income taxes: As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves the estimation of our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. Included in this assessment is the determination of the future tax benefit of the net operating loss carryforward that has resulted from our cumulative net operating losslosses since inception. These differences result in a net deferred tax asset. We must assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent that we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we must include an expense within the tax provision in the consolidated statement of operations.
Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. We recorded a valuation allowance due to uncertainties related to our ability to utilize the net deferred tax assets, primarily consisting of net operating losses and credits which may be carried forward, before they expire. In the event that actual results differ from these estimates or we adjust these estimates in future periods, we may need to adjust the recorded valuation allowance which could materially impact our financial position and results of operations. At September 30, 2002,March 31, 2003, our net deferred tax assets have been offset in full by a valuation allowance. As a result the net provision for income taxes is zero at September 30, 2002.
Liquidity and Capital Resources
Summary
Our cash requirements depend on numerous factors, including completion of our product development activities, ability to commercialize our fuel cell systems, market acceptance of our systems and other factors.
We expect to devote substantial capital resources to continue our development programs directed at commercializing our fuel cell systems for worldwide use, hire and train our production staff, develop and expand our manufacturing capacity, andbegin production activities and expand our research and development activities. We expect to pursue the expansion of our operations through internal growth and strategic acquisitions and expect that such activities will be funded from existing cash and cash equivalents, issuance of additional equity or debt securities or additional borrowings subject to market and other conditions. The failure to raise the funds necessary to finance our future cash requirements or consummate future acquisitions could adversely affect our ability to pursue our strategy and could negatively affect our operations in future periods. We anticipate incurring substantial additional losses over at least the next several years and believe that our current cash, cash equivalents and marketable securities balances will provide sufficient capital to fundsfund operations for at least the next twelve months.
We have financed our operations through September 30, 2002March 31, 2003 primarily from the saleissuance of equity, which has provided cash in the amount of $292.8$293.0 million from the sale of equity and cash proceeds from acquisition of $29.6 million. As of September 30, 2002,March 31, 2003, we had unrestricted cash and cash equivalents and marketable securities totaling $66.0$76.9 million and working capital of $66.4$76.0 million. Additionally, we have restricted cash in the amount of $5.3$5.0 million, which was escrowed to collateralize debt associated with the purchase of our facilities in 1999. Since inception, net cash used in operating activities has been $179.6$198.9 million and cash used in investing activities has been $66.6$33.6 million, including our purchase of property, plant and equipment of $29.5 million, our investments in marketable securities in the amount of $25.8$22.8 million offset, in part, by our proceeds from acquisition of $36.5 million.
We believe there have been no material changes in the Company’sour interest rate risk position since December 31, 2001.2002. Other types of market risk, such as foreign exchange rate risk and commodity price risk, do not arise in the normal course of the Company’sour business activities.
(a) Evaluation of disclosure controls and procedures.
As required by new Rule 13a-15 under the Securities Exchange Act of 1934, within the 90 days prior to the date of this report, the Companywe carried out an evaluation under the supervision and with the participation of the Company’sour management, including the Company’sour Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’sour disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’sour disclosure controls and procedures are effective to ensure that information required to be disclosed by the Companyus in the reports it fileswe file or submitssubmit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. In connection with the new rules, we currently are in the process of further reviewing and documenting our disclosure controls and procedures, including our internal controls and procedures for financial reporting, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that our systems evolve with our business.
(b) Changes in internal controls.
None.
havePOWER, Settlement: As previously disclosed, havePOWER, LLC filed a compliant against Plug Power and its subsidiary, H Power, seeking damages and other relief as a result of alleged breach of contract and other claims. While Plug Power and H Power deny any and all liability to havePOWER, in May 2003 the parties have entered into a settlement agreement pursuant to which the parties have executed mutual releases. havePOWER has agreed to a dismissal of all its claims against Plug Power and H Power, and Plug Power has agreed to issue to havePower 112,967 restricted shares of Plug Power common stock.
Shareholder Class Action Lawsuit: As previously disclosed, in September 14, 2000, a shareholder class action complaint was filed in the federal district court for the Eastern District of New York alleging that we and various of our officers and a directordirectors violated certain federal securities laws by failing to disclose certain information concerning our products and future prospects. The action was brought on behalf of a class of purchasers of Plug Power stock who purchased the stock between February 14, 2000 and August 2, 2000. Subsequently, fourteen additional complaints with similar allegations and class periods were filed. By order dated October 30, 2000, the court consolidated the complaints into one action, entitled Plug Power Inc. Securities Litigation, CV-00-5553 (ERK) (RML). By order dated January 25, 2001, the Court appointed lead plaintiffs and lead plaintiffs’ counsel. Subsequently the plaintiffs served a consolidated amended complaint, which extends the class period to begin on October 29, 1999, and alleges claims under Sections 11, 12 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Exchange Act of 1934, and Rule 10b-5 promulgated thereunder by the Securities & Exchange Commission, 17 C.F.R. 240 10b-5. Subsequently, Plaintiffs withdrew their claims under the Securities Act of 1933. Plaintiffs allege that the defendants made misleading statements and omissions regarding the state of development of the Company’s technologyprospects in a registration statement and proxy statement issued in connection with the Company’sour initial public offering (“IPO”) and in subsequent press releases. A consolidated amended complaint extending the class period was subsequently filed.
We served our motion to dismiss the claims in May 2001. By order dated January 21, 2003, the Court dismissed all claims relating to pre-IPO press releases, the IPO prospectus and are seeking damages. all but three post-IPO press releases. The Court ruled that the three remaining press releases raised questions of fact that could not be resolved in a motion to dismiss. The Court also denied the motion to dismiss the claims against the individual defendants at that time.
The Company believes that the remaining allegations in the consolidated amended complaint are without merit and intendintends to vigorously defend against thethose claims. The Company does not believe that the outcome of these actions will have a material adverse effect upon its financial position, results of operations or liquidity; however,liquidity. However, litigation is inherently uncertain and there can be no assurances as to the ultimate outcome or effect of these actions. If Plaintiffsthe plaintiffs were to prevail, such an outcome would have a material adverse effect on our financial condition, results of operationoperations and liquidity.
During the Securities Act of 1933, as amended (the “Securities Act”) in the following transactions. The shares of common stock issued in each of the transactions were offered and sold in reliance upon Section 4(2) of the Securities Act relative to sales by an issuer not involving a public offering.
ITEM 4—SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A special meeting of our stockholders o was held on March 25, 2003 to consider and vote upon (i) the issuance of shares of our common stock pursuant tour merger with H Power and (ii) the exchange of certain employee options to purchase our common stock for restricted shares of our common stock. Set forth below are the voting results from the special meeting:
Proposal | Votes For | Votes Against | ||
H Power Merger | 35,935,512 | 367,333 | ||
Option Exchange | 35,195,949 | 1,037,605 |
Effective March 25, 2003, pursuant to the H Power Agreement and Plan of Merger, our Board of Directors appointed Gary Willis as a non-employee director. Mr. Willis had been a director of H power since June 2000. Mr. Willis will serve as a Class I Director with a term expiring at the annual meeting of stockholders to be held in 2003. At the Company’s annual meeting on May 22, 2003, three Class I directors will be elected to serve until the annual meeting of shareholders in 2006. The Board of Directors has nominated Mr. Willis for re-election as a Class I director.
A) Exhibits.
99.1 and 10.43 represent the management contracts or compensation plans filed99.2 Certifications pursuant to Item 14(c)18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
B) Reports on Form 10-K.
On January 29, 2003, we filed a report on Form 10-Q8-K reporting under Item 5 the Court order dated January 21, 2003 relating to the previously disclosed shareholder class action pending in the federal district court for the period ended June 30, 2002 pursuant to 18 U.S.C. (S) 1350, as adopted pursuant to (S) 906Eastern District of New York.
On March 24, 2003, we filed a report on Form 8-K reporting under item 5 the Sarbanes-Oxley Actissuance of 2002.
On March 27, 2003, we filed a report on Form 8-K reporting under item 5 completion of our acquisition of H Power Corp.
Pursuant to requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
PLUG POWER INC. | ||||||
Date: | ||||||
by: | /s/ Roger B. Saillant | |||||
Chief Executive Officer | ||||||
by: | /s/ David A. Neumann | |||||
David A. Neumann Chief Financial Officer |
1. | I have reviewed this quarterly report on Form 10-Q of Plug Power Inc.; |
2. | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; |
4. | The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: |
5. | The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): |
6. | The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
Date: | by: | /s/ | ||||
Roger B. Saillant Chief Executive Officer |
I, W. Mark Schmitz,David A. Nuemann, certify that:
1. | I have reviewed this quarterly report on Form 10-Q of Plug Power Inc.; |
2. | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; |
4. | The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: |
5. | The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): |
6. | The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
Date: | by: | /s/ | ||||||
Chief Financial Officer |
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