# Plug Power Inc: Form 10-Q for the period ended Sep 30, 2015

- Company: [Plug Power Inc](/companies/plug.md) (CIK 1093691)
- Form: 10-Q
- Filed: 2015-11-09
- Accepted by EDGAR: Nov 9, 2015, 20:07 ET
- Period: 2015-09-30
- Accession: 0001104659-15-077181
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1093691/000110465915077181/a15-18069_110q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1093691/000110465915077181/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2015-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2015-07-01 to 2015-09-30 | $31.4m | us-gaap:Revenues |
| Revenue | 9 months, 2015-01-01 to 2015-09-30 | $64.9m | us-gaap:Revenues |
| Research and development | 3 months, 2015-07-01 to 2015-09-30 | $4.1m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 9 months, 2015-01-01 to 2015-09-30 | $10.5m | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2015-07-01 to 2015-09-30 | $8.2m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2015-01-01 to 2015-09-30 | $24.0m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2015-07-01 to 2015-09-30 | −$12.3m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2015-01-01 to 2015-09-30 | −$34.9m | us-gaap:OperatingIncomeLoss |
| Net income | 3 months, 2015-07-01 to 2015-09-30 | −$10.2m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2015-01-01 to 2015-09-30 | −$30.5m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2015-07-01 to 2015-09-30 | −$0.06 | us-gaap:EarningsPerShareBasicAndDiluted |
| Diluted EPS | 9 months, 2015-01-01 to 2015-09-30 | −$0.17 | us-gaap:EarningsPerShareBasicAndDiluted |
| Operating cash flow | 9 months, 2015-01-01 to 2015-09-30 | −$37.3m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2015-01-01 to 2015-09-30 | $2.9m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2015-09-30 | $85.0m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2015-09-30 | $143.6m | us-gaap:AssetsCurrent |
| Total assets | at 2015-09-30 | $204.6m | us-gaap:Assets |
| Current liabilities | at 2015-09-30 | $33.6m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2015-09-30 | $54.8m | us-gaap:Liabilities |
| Shareholders' equity | at 2015-09-30 | $148.6m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 32,191 characters.

*The following discussion should be read in conjunction with our accompanying unaudited interim 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, 2014. 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 will need to raise additional capital to fund our operations and such capital may not be available to us; the risk that 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, in whole or in part; the risk that a loss of one or more of our major customers could result in a material adverse effect on our financial condition; the risk that a sale of a significant number of shares of stock could depress the market price of our common stock; the risk that negative publicity related to our business or stock could result in a negative impact on our stock value and profitability; the risk of potential losses related to any product liability claims or contract disputes; the risk of loss related to an inability to maintain an effective system of internal controls or key personnel; the risks related to the use of flammable fuels in our products; the risk that pending orders may not convert to purchase orders, in whole or in part; the cost and timing of developing, marketing and selling our products and our ability to raise the necessary capital to fund such costs; our ability to obtain financing arrangements to support the sale or leasing of our products and services to customers; the ability to achieve the forecasted gross margin on the sale of our products; the cost and availability of fuel and fueling infrastructures for our products; market acceptance of our products and services, including 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 internationally; our ability to improve system reliability for our products; 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; the risks associated with potential future acquisitions; the volatility of our stock price; and other risks and uncertainties discussed under Item IA—Risk Factors in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014, as filed March 17, 2015. 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 hydrogen fuel cell systems used primarily for the material handling and stationary power market.

We are focused on proton exchange membrane, or PEM, fuel cell and fuel processing technologies, fuel cell/battery hybrid technologies, and associated hydrogen storage and dispensing infrastructure from which multiple products are available. A fuel cell is an electrochemical device that combines hydrogen and oxygen to produce electricity and heat without combustion. Hydrogen is derived from hydrocarbon fuels such as liquid petroleum gas, or LPG, natural gas, propane, methanol, ethanol, gasoline or biofuels. Hydrogen can also be obtained from the electrolysis of water, or produced on-site at consumer locations through a process known as reformation. Plug Power develops complete hydrogen delivery, storage and refueling solutions for customer locations.

We concentrate our efforts on developing, manufacturing and selling our hydrogen products and services on commercial terms for material handling applications, with a focus on multi-shift high volume manufacturing and high throughput distribution sites.

### Recent Developments

On July 24, 2015, the Company entered into a Share Purchase Agreement with Axane, pursuant to which on July 31, 2015, the Company (through a wholly-owned subsidiary) acquired Axane’s 80% equity interest in HyPulsion for $11.5 million, payable in shares of its common stock. In connection with the aforementioned agreement, the Company initially issued 4,781,250 shares of its common stock at closing. On August 26, 2015, the Company subsequently issued an additional 1,613,289 shares of common stock pursuant to a post-closing true-up provision, which was liability classified contingent consideration. As a result of this acquisition, the Company now holds 100% of the equity interests in HyPulsion.

### Results of Operations

*Product revenue:* Product revenue generally includes revenue from the sale of our GenDrive units, as well as revenue from ReliOn’s stationary backup power units.

Product revenue for the three months ended September 30, 2015 increased $5.4 million or 42.7%, to $18.0 million from $12.6 million for the three months ended September 30, 2014. The increase is due to 1,221 fuel cell systems in total that were recognized as revenue for the three months ended September 30, 2015, compared to 835 for the three months ended September 30, 2014, as well as product mix. The revenue recognized included the effect of closing sales/leaseback transactions that involved 990 fuel cell systems for the three months ended September 30, 2015, as compared to 552 for the three months ended September 30, 2014.

Product revenue for the nine months ended September 30, 2015 increased $9.1 million or 31.9%, to $37.4 million from $28.3 million for the nine months ended September 30, 2014. The increase is due to 2,378 fuel cell systems in total that were recognized as revenue for the nine months ended September 30, 2015, compared to 1,687 for the nine months ended September 30, 2014, as well as product mix. The revenue recognized included the effect of closing sales/leaseback transactions that involved 1,726 fuel cell systems for the nine months ended September 30, 2015, as compared to 851 for the nine months ended September 30, 2014.

*Service revenue:* Service revenue generally includes revenue from installation of hydrogen infrastructure, our service and maintenance contracts, hydrogen delivery contracts, spare parts, and leased units.

Service revenue for the three months ended September 30, 2015 increased $6.5 million or 94.4%, to $13.4 million from $6.9 million for the three months ended September 30, 2014. The increase is primarily related to an increase in the number of units covered by GenCare service contracts over the last year, when the Company introduced GenKey, a turn-key solution. GenKey has led to an increase in the installed base of GenDrive units, as well as incremental GenFuel contracts, as our customer base grows and requires additional hydrogen deliveries and uptime maintenance. Also, the Company recognized revenue for hydrogen installations associated with seven sites during the three months ended September 30, 2015, as compared to three sites during the three months ended September 30, 2014.

Service revenue for the nine months ended September 30, 2015 increased $13.8 million or 102.9%, to $27.2 million from $13.4 million for the nine months ended September 30, 2014. The increase is generally due to the same reasons as for the three month period commented on above. Also, the Company recognized revenue for hydrogen installations associated with eleven sites during the nine months ended September 30, 2015, as compared to four sites during the nine months ended September 30, 2014.

*Research and development contract revenue:* Research and development contract revenue relates to both cost reimbursement and fixed price research and development contracts associated with the development of PEM fuel cell technology. Revenue from time and material contracts is recognized on the basis of labor hours expended plus other reimbursable contract costs incurred during the period. Revenue from fixed fee contracts is recognized on the basis of percentage of completion. We expect to continue certain research and development contract work that is related to our current product development efforts.

Research and development contract revenue for the three months ended September 30, 2015 decreased $361 thousand, or 97.3%, to $10 thousand from $371 thousand for the three months ended September 30, 2014. The decrease is primarily related to a reduced effort on legacy funded projects that are complete or near completion.

Research and development contract revenue for the nine months ended September 30, 2015 decreased $732 thousand, or 70.0%, to $313 thousand from $1.0 million for the nine months ended September 30, 2014. The decrease is primarily related to a reduced effort on legacy funded projects that are complete or near completion.

*Cost of product revenue:* Cost of product revenue includes direct material and labor costs, warranty cost, and an allocation of overhead costs that relate to the manufacture of GenDrive products and ReliOn’s stationary backup power units.

Cost of product revenue for the three months ended September 30, 2015 increased 37.0%, or $4.1 million, compared to the three months ended September 30, 2014. The increase in cost is a result of the increase in the number of units shipped and recognized as revenue, however gross margin improved from 12.2% for the three months ended September 30, 2014 to 15.7% for the three months ended September 30, 2015. This can be attributed to better leverage on the fixed cost base, supply chain and product design cost down programs, and manufacturing process improvements, offset by product and customer mix.

Cost of product revenue for the nine months ended September 30, 2015 increased 22.8%, or $5.7 million, compared to the nine months ended September 30, 2014. The increase in cost is a result of the increase in the number of units shipped and recognized as revenue, however gross margin improved from 11.9% for the nine months ended September 30, 2014 to 18.0% for the nine months ended September 30, 2015. This can be attributed to the same initiatives as for the three month period above.

*Cost of service revenue.* Cost of service revenue includes the labor and material costs incurred for our hydrogen installations, our product service and hydrogen site maintenance contracts, our hydrogen delivery contracts, replacement parts, rental units (short term) and leased units. In addition, cost of service revenue also includes allocation of overhead costs that relate to the servicing of our products.

Cost of service revenue for the three months ended September 30, 2015 increased 75.8%, or $7.0 million, compared to the three months ended September 30, 2014. The increase in the cost of service revenue was primarily related to the increase in the number of hydrogen sites installed and serviced and a higher number of GenFuel and GenCare service contracts, as noted in the service revenue section above. Gross margin improved from (33.3)% for the three months ended September 30, 2014 compared to (20.5)% for the three months ended September 30, 2015. The improvement in the margin can be attributed to better leverage on the fixed cost base, most significantly as it relates to the hydrogen sites, and improvement in unit performance, as evidenced by lower parts costs.

Cost of service revenue for the nine months ended September 30, 2015 increased 79.3%, or $15.2 million, compared to the nine months ended September 30, 2014. Gross margin improved from (42.9)% for the nine months ended September 30, 2014 compared to (26.3)% for the nine months ended September 30, 2015. The increase in the cost of service revenue and improvement in the margin was primarily due to the same drivers as for the three month period above.

*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 September 30, 2015 decreased $689 thousand, or 98.6% compared to the three months ended September 30, 2014, and for the nine months ended September 30, 2015 decreased $1.5 million, or 80.3% compared to the nine months ended September 30, 2014. As noted above related to revenue, the decrease is primarily related to a reduced effort on legacy funded projects that are complete or near completion.

*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 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 September 30, 2015 increased $2.5 million, or 151.3% to $4.1 million, from $1.6 million for the three months ended September 30, 2014. This increase was primarily related to increased investments to support continued growth, product design and performance enhancement programs.

Research and development expense for the nine months ended September 30, 2015 increased $6.2 million, or 143.5% to $10.5 million, from $4.3 million for the nine months ended September 30, 2014. This increase was primarily related to increased investments noted in the three month period above, as well as costs associated with ReliOn which is only included in six of the nine months from the prior period.

*Legal reserve.* Legal reserve represents the estimated reserve required for current litigation.

During the third quarter of 2014 the Company accrued a $2.4 million liability relating to litigation dating back to 2008 with Soroof Trading Development Company Ltd.

*Selling, general and administrative expenses.* Selling, general and administrative expenses includes cash and non-cash compensation, benefits, amortization of intangible assets 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 September 30, 2015 increased $2.6 million, or 47.5%, to $8.2 million from $5.6 million for the three months ended September 30, 2014. This increase was primarily related to an increase in personnel related expenses to support the growth in the business, including an expanded salesforce and additional staffing in the executive and finance functions. During the three months ended September 30, 2015 the Company completed the acquisition of HyPulsion. Related acquisition and other European startup costs were $0.9 million. Amortization expense related to intangible assets was $0.1 million and $0.6 million for the three months ended September 30, 2015 and 2014, respectively.

Selling, general and administrative expenses for the nine months ended September 30, 2015 increased $9.1 million, or 61.7%, to $24.0 million from $14.8 million for the nine months ended September 30, 2014. This increase was primarily related to the same drivers as for the three month period above. During the nine months ended September 30, 2015 the Company completed the acquisition of HyPulsion. Related acquisition and other European startup costs were $0.9 million. Amortization expense related to intangible assets was $0.8 million and $1.8 million for the nine months ended September 30, 2015 and 2014, respectively. Also, the prior period only includes costs associated with ReliOn for six of the nine months.

*Interest and other income.* Interest and other income consists primarily of interest earned on our cash, note receivable, and other income.

Compared to prior year periods, interest and other income decreased $600 thousand to $28 thousand for the three months ended September 30, 2015, and $631 thousand to $91 thousand for the nine months ended September 30, 2015. These decreases are not significant.

*(Loss) gains on acquisition activity, net.* During the three and nine months ended September 30, 2015, the Company recognized a gain of $2.9 million associated with the acquisition of HyPulsion and related step acquisition accounting. Also included in (loss) gains on acquisition activity, net is expense of $3.0 million associated with shares issued pursuant to a post-closing true up provision associated with the HyPulsion acquisition. During the nine months ended September 30, 2014, the Company recognized a gain on bargain purchase of $1.0 million associated with the acquisition of ReliOn.

*Change in fair value of common stock warrant liability.* We account for common stock warrants as common stock warrant liability with changes in the fair value reflected in the 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 September 30, 2015 resulted in a decrease in the associated warrant liability of $2.2 million as compared to a decrease of $0.5 million for the three months ended September 30, 2014. These variances are primarily due to changes in the Company’s common stock share price during the respective quarters, changes in volatility of our common stock, changes the number of warrants outstanding, and reducing remaining terms, which are significant inputs to the Black-Scholes valuation model.

The change in fair value of common stock warrant liability for the nine months ended September 30, 2015 resulted in a decrease in the associated warrant liability of $4.6 million as compared to an increase of $58.4 million for the nine months ended September 30, 2014. These variances are primarily due to changes in the Company’s common stock share price during the respective nine month periods, changes in volatility of our common stock, changes in the number of warrants outstanding, and reducing remaining terms, which are significant inputs to the Black-Scholes valuation model.

*Interest and other expense.* Interest and other expense consists of interest and other expenses related to interest on obligations under capital lease and our finance obligation, as well as foreign currency exchange gain (loss).

Compared to prior year periods, interest and other expense decreased $57 thousand to $36 thousand for the three months ended September 30, 2015, and $119 thousand to $186 thousand for the nine months ended September 30, 2015. These decreases are not significant.

*Income taxes.* We did not report a benefit for federal and state income taxes in the unaudited interim consolidated financial statements for the three and nine months ended September 30, 2015 and 2014 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. As needed, the Company also recognizes accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense.

### Liquidity and Capital Resources

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, funding the growth in our GenKey “turn-key” solution which also includes the installation of our customer’s hydrogen infrastructure as well as delivery of the hydrogen molecule, 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; attaining positive gross margins; 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 ability of our customers to obtain financing to support commercial transactions; our ability to obtain financing arrangements to support the sale or leasing of our products and services to customers and the terms of such agreements which may require us to pledge or escrow substantial amounts of our cash to support these financing arrangements; 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 new research and development programs; and changes in our strategy or our planned activities. If we are unable to fund our operations with positive cash flows and cannot obtain external financing, we may not be able to sustain future operations. As a result, we may be required to delay, reduce and/or cease our operations and/or seek bankruptcy protection.

We have experienced and continue to experience negative cash flows from operations and net losses. The Company incurred net losses attributable to common shareholders of $10.2 million and $30.6 million for the three and nine months ended September 30, 2015, and $88.6 million, $62.8 million and $31.9 million for the years ended December 31, 2014, 2013 and 2012, respectively, and has an accumulated deficit of $968.6 million at September 30, 2015.

During the nine months ended September 30, 2015, cash used for operating activities was $37.3 million, consisting primarily of a net loss attributable to the Company of $30.5 million, coupled with working capital net outflows of $10.5 million. The investment in working capital primarily was related to inventory build to meet our backlog, as well as units shipped but not recognized as revenue in the quarter. On September 30, 2015, we had cash and cash equivalents of $85.0 million and net working capital of $110.0 million. By comparison, at December 31, 2014, cash and cash equivalents was $146.2 million and net working capital was $167.0 million.

Cash used by investing and financing activities for the nine months ended September 30, 2015 included purchases of equipment, exercises of stock options and payments on capital lease and finance obligations. In addition, during 2015, the Company signed sales/leaseback agreements, which required cash held in escrow of $29.7 million, which is presented as restricted cash on the consolidated balance sheet.

During 2014, we received gross proceeds of $176.7 million from three underwritten public offerings. Net proceeds after underwriting discounts and commissions and other estimated fees and expenses were $165.7 million. In addition, during 2014 we received $18.3 million from the exercise of previously issued common stock warrants.

To date, we have funded our operations primarily through public and private offerings of common and preferred stock, a sale-leaseback of our building and our previous line of credit. The Company believes that its current cash, cash equivalents, cash anticipated to be generated from future operations and, to the extent exercised, cash generated from the exercise of outstanding warrants will provide sufficient liquidity to fund operations for at least the next twelve months. This projection is based on our current expectations regarding product sales and service, cost structure, cash burn rate and other operating assumptions.

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

|  | Nine months ended or at September 30, 2015 | Year ended or at December 31, 2014 |
| --- | ---: | ---: |
| Cash and cash equivalents at end of period | $85,009 | $146,205 |
| Working capital at end of period | 110,036 | 167,039 |
| Net loss attributable to common shareholders | 30,568 | 88,644 |
| Net cash used in operating activities | 37,296 | 40,780 |
| Purchase of property, plant and equipment | 2,902 | 1,413 |
| Net cash (used in) provided by financing activities | (22,858) | 182,923 |

### Operating Leases

As of September 30, 2015 and December 31, 2014, the Company has several non-cancelable operating leases that expire over the next six years. Minimum rent payments under operating leases are recognized on a straight-line basis over the term of the lease.

Future minimum lease payments under non-cancelable operating leases (with initial or remaining lease terms in excess of one year) for the years ending December 31, 2015 and thereafter, as of September 30, 2015 are (in thousands):

|  |  |
| --- | ---: |
| Remainder of 2015 | $2,104 |
| 2016 | 8,415 |
| 2017 | 8,401 |
| 2018 | 8,239 |
| 2019 | 7,583 |
| Thereafter | 10,133 |
| Total future minimum lease payments | $44,875 |

### Critical Accounting Estimates

Management’s discussion and analysis of our financial condition and results of operations are based upon our unaudited interim consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these unaudited interim 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, product warranty reserves, unbilled revenue, common stock warrants, income taxes, contingencies, and purchase accounting. 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.

One of the critical estimates that management makes is the projection of service costs related to GenDrive units under extended maintenance contracts. This estimate is important in management’s determination of whether a loss contract exists, as well as the amount of any loss. A variety of assumptions are included in the estimates of future service costs, including the life of parts, failure rates of parts, and future costs of parts. As management gains more experience with GenDrive units, these assumptions are continually updated. Recently, management, through its field service technicians and engineering professionals, combined with input from our primary stack supplier, believes it has identified the main cause of periodic stack life degradation. Stacks are a significant component of a GenDrive unit. A resolution to this matter may significantly improve the longevity of stacks and provide more insight into the life of legacy stacks that are currently components of GenDrive units in the installed base. This insight will be factored into management’s assumptions when projecting future service costs in determining whether loss contracts exist for certain of our extended maintenance contracts. At this time, management does not have sufficient information to estimate the costs related to this matter. Once the necessary information is available, management will estimate the impact of this matter, if any, on its extended maintenance contracts. This analysis could result in a charge to the Company’s consolidated statement of operations in the future.

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”, as well as a discussion of significant accounting policies included in Note 2, Summary of Significant Accounting Policies, of the consolidated financial statements, both of which are included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014.

### Recent Accounting Pronouncements

In July 2015, an accounting update was issued that changes inventory measurement from lower of cost or market to lower of cost and net realizable value. The new standard applies to inventory measured at first-in, first-out (FIFO) or average cost. This accounting update is effective for the reporting periods beginning after December 15,

2016, and interim periods within those years. We do not expect the adoption of this update to have a significant effect on our consolidated financial statements.

In August 2014, an accounting update was issued relating to how management assesses conditions and events that could raise substantial doubt about an entity’s ability to continue as a going concern. This accounting update is effective for reporting periods ending after December 31, 2016 and for interim and annual periods thereafter. We do not expect the adoption of this update to have a significant effect on our consolidated financial statements.

In June 2014, an accounting update was issued that replaces the existing revenue recognition framework regarding contracts with customers. In July 2015, the Financial Accounting Standards Board (FASB) announced a one year delay in the required adoption date from January 1, 2017 to January 1, 2018. We are evaluating the effect this update will have on our consolidated financial statements and have not yet selected a transition method.

## Market risk

As filed, 1,206 characters.

From time to time, we may invest our 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. 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.

Our exposure to changes in foreign currency rates is primarily related to sourcing inventory from foreign locations and operations of HyPulsion. This practice can give rise to foreign exchange risk resulting from the varying cost of inventory to the receiving location. The Company reviews the level of foreign content as part of its ongoing evaluation of overall sourcing strategies and considers the exposure to be not significant. Our HyPulsion exposure presently is mitigated by low levels of operations presently and its sourcing is primarily intercompany in nature and denominated in U.S. dollar.

## Controls and procedures

As filed, 1,341 characters.

a) Disclosure controls and procedures.

The chief executive officer and chief financial officer, based on their evaluation of disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q, have concluded that the Company’s disclosure controls and procedures are effective for ensuring that information required to be disclosed in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in filed or submitted reports is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer as appropriate, to allow timely decisions regarding required disclosure.

(b) Changes in internal control over financial reporting.

There were no changes in the Company’s internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

## Risk factors

As filed, 2,080 characters.

The following Risk Factor is in addition to the Risk Factors described in Part I, Item 1A, “Risk Factors” of our most recently filed Annual Report on Form 10-K, filed with the Securities and Exchange Commission for the fiscal year ended December 31, 2014, sets forth information relating to important risks and uncertainties that could materially adversely affect our business, financial condition and operating results. 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 addition to the risk factor included below in making any investment decision with respect to our securities.

***Our ability to obtain financing arrangements to support the sale or leasing of our products and services to customers may affect our sales, profitability and liquidity.***

Customers representing most of our revenue lease, rather than purchase, our products. These lease arrangements require us to finance the purchase of such products, either ourselves or through third-party financing sources. For example, approximately $29.2 million of our cash is currently pledged or escrowed as collateral to support such leasing arrangements, which prevents us from using such cash for other purposes. To date, we have been successful in obtaining or providing the necessary financing arrangements. There is no certainty, however, that we will be able to continue to obtain or provide adequate financing for these arrangements on acceptable terms, or at all, in the future. Failure to obtain or provide such financing may result in the loss of material customers and product sales, which could have a material adverse effect on our business, financial condition and results of operations. Further, if we are required to continue to pledge or escrow a substantial amounts of our cash to support these financing arrangements, such cash will not be available to us for other purposes, which may have a material adverse effect on our liquidity and financial position.

Filed Nov 9, 2015.
Source: SEC EDGAR, the filing index for accession 0001104659-15-077181. Last ingested by Listed: Oct 24, 2026, 15:02 ET. No prices; not investment advice.