# Plug Power Inc: Form 10-Q for the period ended Jun 30, 2012

- Company: [Plug Power Inc](/companies/plug.md) (CIK 1093691)
- Form: 10-Q
- Filed: 2012-08-14
- Accepted by EDGAR: Aug 14, 2012, 18:12 ET
- Period: 2012-06-30
- Accession: 0001003297-12-000366
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1093691/000100329712000366/esplugpower10-q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1093691/000100329712000366/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2012-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2012-04-01 to 2012-06-30 | $7.7m | us-gaap:Revenues |
| Revenue | 6 months, 2012-01-01 to 2012-06-30 | $15.4m | us-gaap:Revenues |
| Cost of revenue | 3 months, 2012-04-01 to 2012-06-30 | $8.6m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 6 months, 2012-01-01 to 2012-06-30 | $17.7m | us-gaap:CostOfGoodsAndServicesSold |
| Research and development | 3 months, 2012-04-01 to 2012-06-30 | $1.6m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 6 months, 2012-01-01 to 2012-06-30 | $2.8m | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2012-04-01 to 2012-06-30 | $3.6m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2012-01-01 to 2012-06-30 | $7.5m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2012-04-01 to 2012-06-30 | −$7.5m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2012-01-01 to 2012-06-30 | −$15.3m | us-gaap:OperatingIncomeLoss |
| Net income | 3 months, 2012-04-01 to 2012-06-30 | −$6.5m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2012-01-01 to 2012-06-30 | −$13.1m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2012-04-01 to 2012-06-30 | −$0.17 | us-gaap:EarningsPerShareBasicAndDiluted |
| Diluted EPS | 6 months, 2012-01-01 to 2012-06-30 | −$0.43 | us-gaap:EarningsPerShareBasicAndDiluted |
| Operating cash flow | 6 months, 2012-01-01 to 2012-06-30 | −$8.4m | us-gaap:NetCashProvidedByUsedInOperatingActivitiesContinuingOperations |
| Capital expenditure | 6 months, 2012-01-01 to 2012-06-30 | $40.8k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2012-06-30 | $15.9m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2012-06-30 | $37.7m | us-gaap:AssetsCurrent |
| Total assets | at 2012-06-30 | $52.2m | us-gaap:Assets |
| Current liabilities | at 2012-06-30 | $12.2m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2012-06-30 | $19.5m | us-gaap:Liabilities |
| Shareholders' equity | at 2012-06-30 | $32.8m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 40,491 characters.

*The following discussion should be read in conjunction with our 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, 2011. In addition to historical information, this Form 10-Q and the following discussion contain statements that are not historical facts and are considered forward-looking within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. These forward-looking statements contain projections of our future results of operations 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,” “continue,” “estimate,” “expect,” “intend,” “may,” “should,” “will,” “would,” “plan,” “projected” or the negative of such words or other similar words or phrases. We believe that it is important to communicate our future expectations to our investors. However, there may be events in the future that we are not able to accurately predict or control and that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. Investors are cautioned not to unduly rely on forward-looking statements because they involve risks and uncertainties, and actual results may differ materially from those discussed as a result of various factors, including, but not limited to: the risk that we continue to incur losses and might never achieve or maintain profitability, the risk that we expect we will need to raise additional capital to fund our operations and such capital may not be available to us; the risk that the previously disclosed expected uses of the Company’s recently raised capital may change; our lack of extensive experience in manufacturing and marketing products may impact our ability to manufacture and market products on a profitable and large-scale commercial basis; the risk that unit orders will not ship, be installed and/or converted to revenue; the risk that pending orders may not convert to purchase orders; the cost and timing of developing, marketing and selling our products and our ability to raise the necessary capital to fund such costs; the ability to achieve the forecasted gross margin on the sale of our products; the actual net cash used for operating expenses may exceed the projected net cash for operating expenses; the cost and availability of fuel and fueling infrastructures for our products; market acceptance of our GenDrive systems; our ability to establish and maintain relationships with third parties with respect to product development, manufacturing, distribution and servicing and the supply of key product components; the cost and availability of components and parts for our products; our ability to develop commercially viable products; our ability to reduce product and manufacturing costs; our ability to successfully expand our product lines; our ability to improve system reliability for our GenDrive systems; competitive factors, such as price competition and competition from other traditional and alternative energy companies; our ability to protect our intellectual property; the cost of complying with current and future federal, state and international governmental regulations; and other risks and uncertainties discussed, but are not limited to, those set forth in Item 1A-Risk Factors in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011, as filed on March 30, 2012 as updated by Part II, Item 1A of our Form 10-Q for the quarter ended March 31, 2012 and this Form 10-Q. Readers should not place undue reliance on our forward-looking statements. These forward-looking statements speak only as of the date on which the statements were made and are not guarantees of future performance. Except as may be required by applicable law, we do not undertake or intend to update any forward-looking statements after the date of this Form 10-Q.*

### Overview

Plug Power Inc., or the Company, is a leading provider of alternative energy technology focused on the design, development, commercialization and manufacture of fuel cell systems for the industrial off-road (forklift or material handling) market. We continue to leverage our unique fuel cell application and integration knowledge to identify early adopter markets for which we can design and develop innovative systems and customer solutions that provide superior value, ease-of-use and environmental design. We have made significant progress in our analysis of the material handling market. We believe we have developed reliable products which allow the end customers to eliminate incumbent power sources from their operations, and realize their sustainability objectives through clean energy alternatives.

In October, 2011 we introduced our next generation GenDrive products. These next generation fuel cell units include a simplified architecture featuring 30% fewer components, giving customers greater flexibility in managing their deployments.

We have experienced and continue to experience negative cash flows from operations and we expect to continue to incur net losses in the foreseeable future. Accordingly, in 2010, we restructured and consolidated our operations to focus on the GenDrive business. This restructuring significantly reduced our operating expenses in 2011. As of June 30, 2012, we had approximately $25.5 million of working capital, which includes $15.9 million of cash and cash equivalents to fund our future operations. Our future liquidity and capital requirements will depend upon numerous factors, including those identified in Part II, Item 1A (Risk Factors) of this Form 10-Q.

### Recent Developments

On January 24, 2012, the Company entered into a Master and Shareholders' Agreement with Axane, S.A., a subsidiary of Air Liquide, pursuant to which the Company and Axane formed a joint venture company based in France under the name HyPulsion (the "JV"). The principal purpose of the JV will be to develop and sell hydrogen fuel cell systems for the European material handling market. On February 29, 2012, the Company completed the formation of the JV and the Company and the JV entered into a Contribution and License Agreement and a Supply and Engineered Services Agreement.

On March 23, 2012, the Company and Broadridge Corporate Issuer Solutions, Inc., as rights agent, entered into Amendment No. 3 (the Rights Amendment) to the Shareholders Rights Agreement, dated as of June 23, 2009 (as amended, the Rights Agreement). The Rights Amendment provides that, generally, any beneficial ownership of shares of our common stock by affiliates and associates of AWM Investments Company, including but not limited to Special Situations Technology Fund, L.P., Special Situations Technology Fund II, L.P., and Special Situations Private Equity Fund, L.P., (collectively, SSF) will not cause the preferred stock purchase rights to become exercisable under the Rights Agreement, so long as SSF and their affiliates and associates do not at any time beneficially own shares of our common stock equaling or exceeding three percent more than the percentage of the then outstanding shares of common stock beneficially owned by SSF and their affiliates and associates immediately following the closing of our public offering on March 28, 2012.

On March 28, 2012, the Company completed an underwritten public offering of 13,000,000 shares of common stock. The shares were sold at $1.15 per share for gross proceeds of approximately $15.0 million. Net proceeds, after underwriting discounts and commissions and other estimated fees and expenses payable by the Company, were approximately $13.7 million. The Company intends to use the net proceeds of the offering for general corporate purposes, which may include working capital, capital expenditures, research and development expenditures, commercial expenditures, acquisitions of new technologies or businesses that are complementary to its current technologies or business focus, and investments. In connection with the offering, the Company granted the underwriter a 45-day option to purchase up to an additional 1,950,000 shares of common stock to cover over-allotments.

On March 29, 2012, the Company sold 1,950,000 additional shares of common stock, pursuant to the underwriter’s exercise of its over-allotment option in connection with the Company’s public offering, resulting in additional net proceeds to the Company of $2,085,525.

As a result of the March 28 and 29, 2012 public offerings and pursuant to the effect of the anti-dilution provisions included in our warrants issued in 2011, the exercise price of the warrants was reduced from $3.00 per share of common stock to $2.27 per share of common stock. Simultaneously with the adjustment to the exercise price, the number of common stock shares that may be purchased upon exercise of the warrants was increased from 7,128,563 shares to 9,421,008 shares.

On March 30, 2012, the Company executed a Second Loan Modification Agreement with SVB, amending the Loan Agreement. This Second Loan Modification Agreement increases the total revolving credit facility availability from $7 million to $15 million to support working capital need, and extends the agreement through March 29, 2013. All remaining terms of the Loan Agreement remain in full force and effect.

### Results of Operations

*Product and service revenue.* Effective April 1, 2010, the Company adopted ASU No. 2009-13 on Topic 605, Revenue Recognition– Multiple Deliverable Revenue Arrangements retroactive to January 1, 2010. ASU No. 2009-13 amends the FASB ASC to eliminate the residual method of allocation for multiple-deliverable revenue arrangements, and requires that arrangement consideration be allocated at the inception of an arrangement to all deliverables using the relative selling price method. The Company anticipates that the effect of the adoption of this guidance on subsequent periods will be primarily based on the arrangements entered into and the timing of shipment of deliverables. See Note 3, Multiple-Deliverable Revenue Arrangements, of the condensed consolidated financial statements, Part I, Item 1 of this Form 10-Q for further discussion of our multiple-deliverable revenue arrangements.

For all product and service revenue transactions entered into prior to the implementation of ASU No. 2009-13, the Company will continue to defer the recognition of product and service revenue and recognize revenue on a straight-line basis as the continued service, maintenance and other support obligations expire, which are generally for periods of twelve to thirty months, or which can extend over multiple years. While contract terms for those transactions generally required payment shortly after shipment or delivery and installation of the fuel cell system and were not contingent on the achievement of specific milestones or other substantive performance, the multiple-element revenue obligations within our contractual arrangements were generally not accounted for separately based on our limited experience and lack of evidence of fair value of the undelivered components.

Product and service revenue for the three months ended June 30, 2012 increased $4.6 million, or 174.8%, to $7.2 million from $2.6 million for the three months ended June 30, 2011. During the three months ended June 30, 2012 we shipped 388 fuel cell systems to end customers as compared to 73 fuel cell systems shipped during the three months ended June 30, 2011. During the three months ended June 30, 2012, and June 30, 2011, we deferred $669,000 and $273,000 in revenue, respectively, due to contingent provisions in our agreements, as well as deliverables under ASU No. 2009-13 on Topic 605, Revenue Recognition– Multiple Deliverable Revenue Arrangements, where the deliverables have not yet been met. Additionally, in the three months ended June 30, 2012, we recognized approximately $648,000 of deferred revenue due to deliverables that have now been met, whereas in the three months ended June 30, 2011, we recognized approximately $327,000 of deferred revenue due to deliverables that have now been met.

Product and service revenue for the six months ended June 30, 2012 increased $6.8 million, or 89.6%, to $14.4 million from $7.6 million for the six months ended June 30, 2011. During the six months ended June 30, 2012 we shipped 687 fuel cell systems to end customers as compared to 217 fuel cell systems shipped during the six months ended June 30, 2011. During the six months ended June 30, 2012, and June 30, 2011, we deferred $2.7 million and $526,000 in revenue, respectively, due to contingent provisions in our agreements, as well as deliverables under ASU No. 2009-13 on Topic 605, Revenue Recognition– Multiple Deliverable Revenue Arrangements, where the deliverables have not yet been met. Additionally, in the six months ended June 30, 2012, we recognized approximately $1.6 million of deferred revenue due to deliverables that have now been met, whereas in the six months ended June 30, 2011, we recognized approximately $802,000 of deferred revenue due to deliverables that have now been met.

*Research and development contract revenue.* Research and development contract revenue primarily relates to cost reimbursement research and development contracts associated with the development of PEM fuel cell technology. We generally share in the cost of these programs with our cost-sharing percentages generally ranging from 30% to 50% of total project costs. Revenue from time and material contracts is recognized on the basis of hours expended plus other reimbursable contract costs incurred during the period. We expect to continue certain research and development contract work that is directly related to our current product development efforts.

Research and development contract revenue for the three months ended June 30, 2012 decreased approximately $1.1 million, or 70.7%, to $458,000 from $1.6 million for the three months ended June 30, 2011. The decrease is primarily related to fewer active projects in 2012.

Research and development contract revenue for the six months ended June 30, 2012 decreased approximately $1.4 million, or 58.6%, to $973,000 from $2.3 million for the six months ended June 30, 2011. The decrease is primarily related to fewer active projects in 2012.

*Licensed technology revenue.* Licensed technology revenue relates to the sale of licensing rights and engineering assistance. This revenue was being amortized over a twelve month period that ended in October 2011.

Licensed technology revenue for the three months and six months ended June 30, 2011 was approximately $163,000 and $326,000, respectively.

*Cost of product and service revenue.* Cost of product and service revenue includes the direct material and labor cost as well as an allocation of overhead costs that relate to the manufacturing of products we sell. In addition, cost of product and service revenue also includes the labor and material costs incurred for product maintenance, replacement parts and service under our contractual obligations.

Cost of product and service revenue for the three months ended June 30, 2012 increased approximately $3.7 million, or 75.3%, to $8.6 million from $4.9 million for the three months ended June 30, 2011. This increase is directly related to increased fuel cell shipments to end customers. There were 388 fuel cell systems shipped during the three months ended June 30, 2012 as compared to 73 for the three months ended June 30, 2011.

Cost of product and service revenue for the six months ended June 30, 2012 increased approximately $6.1 million, or 52.3%, to $17.7 million from $11.6 million for the six months ended June 30, 2011. This increase is directly related to increased fuel cell shipments to end customers. There were 687 fuel cell systems shipped during the six months ended June 30, 2012 as compared to 217 for the six months ended June 30, 2011.

*Cost of research and development contract revenue*. Cost of research and development contract revenue includes costs associated with research and development contracts including: cash and non-cash 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 research and development contracts.

Cost of research and development contract revenue for the three months ended June 30, 2012 decreased approximately $1.6 million, or 66.3%, to $833,000 from $2.5 million for the three months ended June 30, 2011. The decrease is primarily a result of fewer active contracts in 2012, coupled with a lower percentage of cost sharing on active contracts in 2012.

Cost of research and development contract revenue for the six months ended June 30, 2012 decreased approximately $2.2 million, or 58.0%, to $1.6 million from $3.8 million for the six months ended June 30, 2011. The decrease is primarily a result of fewer active contracts in 2012, coupled with a lower percentage of cost sharing on active contracts in 2012.

*Research and development expense.* Research and development expense includes: materials to build development and prototype units, cash and non-cash 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 associated with our research and development activities.

Research and development expense for the three months ended June 30, 2012 increased approximately $471,000, or 42.6%, to $1.6 million from $1.1 million for the three months ended June 30, 2011. This increase was a result of engineering personnel charging less time to government programs due to fewer contracts in 2012.

Research and development expense for the six months ended June 30, 2012 increased approximately $636,000, or 29.3%, to $2.8 million from $2.2 million for the three months ended June 30, 2011. This increase was a result of an increase in personnel, coupled with engineering personnel charging less time to government programs due to fewer contracts in 2012.

*Selling, general and administrative expenses.* Selling, general and administrative expenses includes cash and non-cash compensation, benefits and related costs in support of our general corporate functions, including general management, finance and accounting, human resources, selling and marketing, information technology and legal services.

Selling, general and administrative expenses for the three months ended June 30, 2012 decreased approximately $316,000, or 8.1%, to $3.6 million from $3.9 million for the three months ended June 30, 2011. The decrease was primarily the result of lower professional fees.

Selling, general and administrative expenses for the six months ended June 30, 2012 increased approximately $59,000, or 0.8%, to $7.5 million from $7.4 million for the six months ended June 30, 2011. The increase was primarily the result of lower professional fees, offset by an increase in personnel related costs.

*Amortization of intangible assets.* Amortization of intangible assets represents the amortization associated with the Company’s acquired identifiable intangible assets from Plug Power Canada Inc., including acquired technology and customer relationships, which are being amortized over eight years.

Amortization of intangible assets decreased to approximately $573,000 for the three months ended June 30, 2012, compared to approximately $588,000 for the three months ended June 30, 2011. The decrease is related to foreign currency fluctuations.

Amortization of intangible assets decreased to approximately $1.1 million for the six months ended June 30, 2012, compared to approximately $1.2 million for the six months ended June 30, 2011. The decrease is related to foreign currency fluctuations.

*Interest and other income and net realized losses from available-for-sale securities.* Interest and other income and net realized losses from available-for-sale securities consists primarily of interest earned on our cash, cash equivalents, available-for-sale securities, and rental income.

Interest and other income and net realized losses from available-for-sale securities for the three months ended June 30, 2012 decreased approximately $43,000, or 49.9%, to $44,000 from $87,000 for the three months ended June 30, 2011. The decrease is primarily related to a decrease in rental income.

Interest and other income and net realized losses from available-for-sale securities for the six months ended June 30, 2012 decreased approximately $30,000, or 24.7%, to $91,000 from $121,000 for the six months ended June 30, 2011. The decrease is primarily related to a decrease in rental income, partially offset by a realized loss from available-for-sale securities recorded in the first quarter of 2011.

*Change in fair value of common stock warrant liability.* We account for common stock warrants in accordance with applicable accounting guidance provided in ASC 815, Derivatives and Hedging – Contracts in Entity’s Own Equity, as either derivative liabilities or as equity instruments depending on the specific terms of the warrant agreement. Derivative warrant liabilities are valued using the Black-Scholes pricing model at the date of initial issuance and each subsequent balance sheet date. Changes in the fair value of the warrants are reflected in the condensed consolidated statement of operations as change in the fair value of common stock warrant liability.

The change in fair value of common stock warrant liability for the three months ended June 30, 2012 decreased $737,000 or 41.2%, to $1.1 million from $1.8 million for the three months ended June 30, 2011. The change in fair value of common stock warrant liability for the six months ended June 30, 2012 increased $501,000 or 28.0%, to $2.3 million from $1.8 million for the six months ended June 30, 2012. These variances are primarily due to changes in the Company’s common stock share price, and changes in volatility of our common stock, which are significant inputs to the Black-Scholes valuation model.

*Interest and other expense and foreign currency gain (loss).* Interest and other expense and foreign currency gain (loss) consists of interest related to the Loan and Security Agreement, loan modification fees related to the Credit Line Agreement, and foreign currency exchange gain (loss).

Interest and other expense and foreign currency gain (loss) for the three months ended June 30, 2012 and 2011 was approximately $(43,000) and $5,000, respectively. Interest and other expense related to the Credit Line Agreement was approximately $43,000 and $0, respectively, for the three months ended June 30, 2012 and 2011.

Interest and other expense and foreign currency gain (loss) for the six months ended June 30, 2012 and 2011 was approximately $(99,000) and $20,000, respectively. Interest and other expense related to the Credit Line Agreement was approximately $109,000 and $0, respectively, for the six months ended June 30, 2012 and 2011.

*Income taxes.* We did not report a benefit for federal and state income taxes in the condensed consolidated financial statements for the three and six months ended June 30, 2012 and 2011 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 carry forward will not be realized.

### Liquidity and Capital Resources

We have experienced recurring operating losses and as of June 30, 2012, we had an accumulated deficit of approximately $767.8 million. Substantially all of our losses resulted from costs incurred in connection with our operating expenses, research and development expenses and from general and administrative costs associated with our operations. To date, we have funded our operations primarily through private and public offerings of our common and preferred stock, our line of credit and maturities and sales of our available-for-sale securities. We anticipate incurring substantial additional losses and may never achieve profitability.

As of June 30, 2012, we had approximately $25.5 million of working capital, which includes $15.9 million of cash and cash equivalents to fund our future operations. Additionally, as of March 30, 2012, we executed a Second Loan Modification Agreement with Silicon Valley Bank which increased our credit facility, providing us access of up to $15 million in financing, subject to borrowing base limitations, to support working capital needs (See Note 4, Loan and Security Agreement, of the condensed consolidated financial statements). We believe that our current cash, cash equivalents and cash generated from future sales, in conjunction with the availability of the credit facility, will provide sufficient liquidity to fund operations into 2013. This projection is based on our current expectations regarding product sales, cost structure, cash burn rate and operating assumptions.

In the event that our operating expenses are higher than anticipated or the gross margins and shipments of our GenDrive products do not increase as we expect, we may be required to implement contingency plans within our control to conserve and/or enhance our liquidity to meet operating needs. Such plans include: our ability to further reduce discretionary expenses, monetize our real estate assets through a sale-leaseback arrangement and obtain additional funding from licensing the use of our technologies. Our cash requirements relate primarily to working capital needed to operate and grow our business, including funding operating expenses, growth in inventory to support both shipments of new units and servicing the installed base, and continued development and expansion of our products. Our ability to achieve profitability and meet future liquidity needs and capital requirements will depend upon numerous factors, including the timing and quantity of product orders and shipments, the timing and amount of our operating expenses; the timing and costs of working capital needs; the timing and costs of building a sales base; the timing and costs of developing marketing and distribution channels; the timing and costs of product service requirements; the timing and costs of hiring and training product staff; the extent to which our products gain market acceptance; the timing and costs of product development and introductions; the extent of our ongoing and any new research and development programs; and changes in our strategy or our planned activities. As a result, we can provide no assurance that we will be able to fund our operations beyond 2013 without additional external financing.

If additional funding is required beyond 2013, alternatives the Company would consider include equity or debt financings, strategic alliances or joint ventures. Under such conditions, if we are unable to obtain additional capital in 2013, we may not be able to sustain our future operations and may be required to delay, reduce and/or cease our operations and/or seek bankruptcy protection. We cannot assure you that any necessary additional financing will be available on terms favorable to us, or at all. Given the difficult current economic environment, we believe that it could be difficult to raise additional funds and there can be no assurance as to the availability of additional financing or the terms upon which additional financing may be available. Additionally, even if we raise sufficient capital through equity or debt financing, strategic alliances or otherwise, there can be no assurances that the revenue or capital infusion will be sufficient to enable us to develop our business to a level where it will be profitable or generate positive cash flow. If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our stockholders could be significantly diluted, and these newly issued securities may have rights, preferences or privileges senior to those of existing stockholders. If we incur additional debt, a substantial portion of our operating cash flow may be dedicated to the payment of principal and interest on such indebtedness, thus limiting funds available for our business activities. The terms of any debt securities issued could also impose significant restrictions on our operations. Broad market and industry factors may seriously harm the market price of our common stock, regardless of our operating performance, and may adversely impact our ability to raise additional funds. If we raise additional funds through collaborations and/or licensing arrangements, we might be required to relinquish significant rights to our technologies, or grant licenses on terms that are not favorable to us.

Several key indicators of liquidity are summarized in the following table:

*(in thousands)*

|  | Six months ended or at June 30, 2012 | Six months ended or at June 30, 2011 | Year ended or at December 31, 2011 |
| --- | ---: | ---: | ---: |
| Cash and cash equivalents at end of period | 15,851 | 27,151 | 13,857 |
| Borrowings under line of credit at end of period | - | - | 5,405 |
| Working capital at end of period | 25,520 | 30,625 | 22,452 |
| Net loss | 13,063 | 13,996 | 27,454 |
| Net cash used in operating activities | 8,407 | 13,172 | 33,310 |
| Purchase of property, plant and equipment | 41 | 1,065 | 1,326 |

The Company is party to a loan and security agreement, as amended, (the Loan Agreement) with Silicon Valley Bank (SVB) providing the Company with access to up to $15,000,000 of financing in the form of (i) revolving loans, (ii) letters of credit, (iii) foreign exchange contracts and (iv) cash management services such as merchant services, direct deposit of payroll, business credit card and check cashing services.

Advances under the Loan Agreement cannot exceed a borrowing base limit calculated using (A) an advanced rate of 80% on the Company's eligible accounts receivable and (B) an advanced rate of 25% on the Company's eligible inventory (subject to a limit of the lesser of (a) $3 million and (b) 30% of all outstanding advances), subject to certain reserves established by SVB and other adjustments.

Interest on advances of credit under the Loan Agreement for: (i) financed accounts receivables are equal to (a) SVB’s prime rate, which is currently 3.25% per annum, plus 3.0% per annum or (b) if the Company maintains at all times during any month an adjusted quick ratio of 2.0 to 1.0, then SVB’s prime rate plus 1.50% per annum; and (ii) financed inventory is equal to (a) SVB’s prime rate plus 5.25% per annum or (b) if the Company maintains at all times during any month an adjusted quick ratio of 2.0 to 1.0, then SVB’s prime rate plus 3.25% per annum. The minimum monthly interest charge is $6,000 per month. The Loan Agreement will be used by the Company to support its current working capital needs.

The Loan Agreement is secured by substantially all of the Company's properties, rights and assets, including substantially all of its equipment, inventory, receivables, intellectual property and general intangibles.

The Loan Agreement includes customary representations and warranties for credit facilities of this type. In addition, the Loan Agreement contains a number of covenants that will impose significant operating and financial restrictions on the Company's operations, including restrictions pertaining to, among other things: (i) the condition of inventory; (ii) maintenance of an adjusted quick ratio of at least 1.50 to 1.0; (iii) intellectual property right protection and registration; (iv) dispositions of assets; (v) changes in business, management, ownership or business locations; (vi) mergers, consolidations or acquisitions; (vii) incurrence or assumption of indebtedness; (viii) incurrence of liens on any of the Company's property; (ix) paying dividends or making distributions on, or redemptions, retirements or repurchases of, capital stock; (x) transactions with affiliates; and (xi) payments on or amendments to subordinated debt. As of June 30, 2012 the Company is in compliance with these covenants.

The Loan Agreement also contains events of default customary for credit facilities of this type with, in some cases, corresponding grace periods, including, (i) failure to pay any principal or interest when due, (ii) failure to comply with covenants, (iii) any material adverse change occurring, (iv) an attachment, levy or restraint on our business, (v) certain bankruptcy or insolvency events , (vi) payment defaults relating to, or acceleration of, other indebtedness or that could result in a material adverse change to the Company's business, (vii) the Company or its subsidiaries becoming subject to judgments, claims or liabilities in an amount individually or in aggregate in excess of $150,000 (viii) any misrepresentations, or (ix) any revocation, invalidation, breach or invalidation of any subordinated debt.

The Loan Agreement will expire on March 29, 2013. The Loan Agreement may be terminated prior to March 29, 2013; however, the Company would be required to pay a $150,000 early termination fee in connection with a termination (i) by the Company for any reason or (ii) by SVB upon notice and after the occurrence and during the continuance of an event of default. At June 30, 2012 there were no borrowings outstanding.

During the six months ended June 30, 2012, cash used for operating activities was $8.4 million, consisting primarily of a net loss of $13.1 million, offset by changes in operating assets and liabilities of $3.8 million, and net non-cash expenses in the amount of $0.9 million, including $2.1 million for amortization and depreciation, $1.0 million for stock based compensation, $58,000 for loss on disposal of property, plant and equipment, offset by a $2.3 million reduction for the change in fair value of common stock warrant liability. Cash provided by investing activities for the six months ended June 30, 2012 was $17,000, consisting of purchases of property, plant and equipment of $41,000, offset by proceeds from the disposal of property, plant and equipment of $58,000. Cash provided by financing activities for the six months ended June 30, 2012 was approximately $10.4 million consisting primarily of $17.2 million in proceeds from the public offering offset by $1.4 million in public offering costs and $5.4 million in repayment of borrowings under line of credit.

### Income Taxes

Under Internal Revenue Code (IRC) Section 382, the use of net operating loss carry-forwards, capital loss carry-forwards and other tax credit carry-forwards may be limited if a change in ownership of a company occurs. If it is determined that due to transactions involving the Company’s shares owned by its five percent stockholders a change of ownership has occurred under the provisions of IRC Section 382, the Company's net operating loss, capital loss and tax credit carry-forwards could be subject to significant IRC Section 382 limitations.

Prior to March 2011, the Company had approximately $703 million in Federal and state net operating loss carry-forwards and $15.6 million in Federal research and experimentation tax credit carry-forwards. A Section 382 ownership change occurred during March 2011 that resulted in approximately $675 million of Federal and state net operating loss carry-forwards being subject to IRC Section 382 limitations and as a result of IRC Section 382 limitations, approximately $618 million of the net operating loss carry-forwards and $15.6 million of the Federal research and experimentation tax credit carry-forwards will expire prior to utilization. As a result of the IRC Section 382 limitations, these net operating loss and tax credit carry-forwards that will expire unutilized were not reflected in the Company’s gross deferred tax asset as of December 31, 2011. The ownership change also resulted in Net Unrealized Built in Losses per IRS Notice 2003-65 which should result in Recognized Built in Losses during the five year recognition period of approximately $7 million. This will translate into unfavorable book to tax add backs in the Company's 2011 to 2016 U.S. corporate income tax returns that resulted in a gross deferred tax liability of $2.6 million at the time of the ownership change and $1.8 million at December 31, 2011 with a corresponding reduction to the valuation allowance. This gross deferred tax liability will offset certain existing gross deferred tax assets (i.e. capitalized research expense). This had no impact on the Company's current financial position, results of operations, or cash flows because of the full valuation allowance.

As a result of certain equity transactions by five percent stockholders, a Section 382 ownership change occurred during March 2012 that resulted in all but approximately $14.9 million of the Company’s Federal and state net operating loss carry-forwards expiring prior to utilization, which resulted in the Company’s gross deferred tax asset and related valuation allowance decreasing by approximately $24.6 million. The ownership also resulted in Net Unrealized Built in Losses per IRS Notice 2003-65 which should result in Recognized Built in Losses during the five year recognition period of approximately $34.0 million. This will translate into unfavorable book to tax add backs in the Company's 2012 to 2017 U.S. corporate income tax returns that would result in a gross deferred tax liability of $12.9 million at the time of the ownership change with a corresponding reduction to the valuation allowance. This gross deferred tax liability will offset certain existing gross deferred tax assets (i.e. capitalized research expense). These decreases would have no impact on the Company’s financial position, results of operations, or cash flows. However, these potential future tax benefits would no longer be available to the Company.

### Critical Accounting Policies and Estimates

Management’s discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of and during the reporting period. On an on-going basis, we evaluate our estimates and judgments, including those related to bad debts, inventories, intangible assets, equity investments, unbilled revenue, common stock warrants, income taxes and contingencies. We base our estimates and judgments on historical experience and on various other factors and assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We refer to the policies and estimates set forth in the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Estimates” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2011, as well as a discussion of Significant Accounting Policies included in Note 2, Basis of Presentation, of the unaudited condensed consolidated financial statements in Part I, Item 1 of this Form 10-Q.

### Recent Accounting Pronouncements

There are no recently issued accounting standards with pending adoptions that the Company’s management currently anticipates will have any material impact upon its financial statements.

## Market risk

As filed, 1,604 characters.

We invest our excess cash in government, government backed and interest-bearing investment-grade securities that we generally hold for the duration of the term of the respective instrument. We do not utilize derivative financial instruments, derivative commodity instruments or other market risk sensitive instruments, positions or transactions in any material fashion. Accordingly, we believe that, while the investment-grade securities we hold are subject to changes in the financial standing of the issuer of such securities, we are not subject to any material risks arising from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices or other market changes that affect market risk sensitive instruments.

As of December 31, 2010, all of the Company’s operations had been relocated to the United States. A portion of the Company’s total financial performance for 2011 was attributable to activities related to the winding up of operations in both Canada and India. Our exposure to changes in foreign currency rates was primarily related to short-term inter-company transactions with our previous Canadian and Indian subsidiaries and from client receivables in different currencies. As exchange rates vary, the Company’s results can be affected.

In addition, the Company may source inventory from worldwide locations. This practice can give rise to foreign exchange risk resulting from the varying cost of inventory to the receiving location as well as from the revaluation of intercompany balances. The Company mitigates this risk through local sourcing efforts.

## Controls and procedures

As filed, 1,270 characters.

(a) Evaluation of disclosure controls and procedures

As required by Rule 13a-15(b) under the Securities and Exchange Act of 1934, our management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation as of the end of the period covered by this report, of the effectiveness of the Company’s disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective at a reasonable assurance level as of the end of the period covered by this report.

(b) Changes in internal controls over financial reporting

As required by Rule 13a-15(d) under the Securities Exchange Act of 1934, our management, including the Chief Executive Officer and Chief Financial Officer, also conducted an evaluation of the Company’s internal control over financial reporting to determine whether any changes occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. Based on that evaluation, there has been no such change during the period covered by this report.

## Risk factors

As filed, 1,000 characters.

Part II, Item 1A, “Risk Factors” of our most recently filed Annual Report on Form 10-K with the Securities and Exchange Commission (SEC), filed on March 30, 2012, sets forth information relating to important risks and uncertainties that could materially adversely affect our business, financial condition and operating results. Except to the extent that information disclosed elsewhere in this Quarterly Report on Form 10-Q relates to such risk factors (including, without limitation, the matters described in Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”), there have been no material changes to our risk factors disclosed in our most recently filed Annual Report on Form 10-K. However, those risk factors continue to be relevant to an understanding of our business, financial condition and operating results and, accordingly, you should review and consider such risk factors in making any investment decision with respect to our securities.

Filed Aug 14, 2012.
Source: SEC EDGAR, the filing index for accession 0001003297-12-000366. Last ingested by Listed: Oct 24, 2026, 15:02 ET. No prices; not investment advice.