# Plug Power Inc: Form 10-Q for the period ended Mar 31, 2016

- Company: [Plug Power Inc](/companies/plug.md) (CIK 1093691)
- Form: 10-Q
- Filed: 2016-05-10
- Accepted by EDGAR: May 10, 2016, 20:02 ET
- Period: 2016-03-31
- Accession: 0001558370-16-005803
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1093691/000155837016005803/plug-20160331x10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1093691/000155837016005803/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2016-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2016-01-01 to 2016-03-31 | $15.3m | us-gaap:Revenues |
| Cost of revenue | 3 months, 2016-01-01 to 2016-03-31 | $15.2m | us-gaap:CostOfRevenue |
| Gross profit | 3 months, 2016-01-01 to 2016-03-31 | $170.0k | us-gaap:GrossProfit |
| Research and development | 3 months, 2016-01-01 to 2016-03-31 | $4.8m | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2016-01-01 to 2016-03-31 | $8.3m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2016-01-01 to 2016-03-31 | −$12.9m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2016-01-01 to 2016-03-31 | −$392.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2016-01-01 to 2016-03-31 | −$11.8m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2016-01-01 to 2016-03-31 | −$0.07 | us-gaap:EarningsPerShareBasicAndDiluted |
| Operating cash flow | 3 months, 2016-01-01 to 2016-03-31 | −$6.9m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2016-01-01 to 2016-03-31 | $1.9m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2016-03-31 | $66.9m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2016-03-31 | $130.5m | us-gaap:AssetsCurrent |
| Total assets | at 2016-03-31 | $222.2m | us-gaap:Assets |
| Current liabilities | at 2016-03-31 | $67.7m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2016-03-31 | $105.0m | us-gaap:Liabilities |
| Short-term borrowings | at 2016-03-31 | $24.0m | us-gaap:ShortTermBorrowings |
| Shareholders' equity | at 2016-03-31 | $116.0m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 38,700 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, 2015. 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; our ability to attract and maintain 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; the risk of elimination of government subsidies and economic incentives for alternative energy products; market acceptance of our products and services, including GenDrive units; 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 market, distribute and service our products and services 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, 2015, as filed March 14, 2016. 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. Plug Power develops complete hydrogen delivery, storage and refueling solutions for customer locations. Hydrogen can also be obtained from the electrolysis of water, or produced on-site at consumer locations through a process known as reformation. Currently, the Company obtains hydrogen by purchasing it from fuel suppliers.

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.

### Results of Operations

Revenue, cost of revenue, gross profit/(loss) and gross margin for the three months ended March 31, 2016 and 2015, was as follows (in thousands):

| For the three months ended March 31, 2016: | Revenue | Cost of Revenue | Gross Profit/(Loss) | Gross Margin |
| --- | ---: | ---: | ---: | ---: |
| Sales of fuel cell systems and related infrastructure | $5,218 | $3,898 | $1,320 | 25.3% |
| Services performed on fuel cell systems and related infrastructure | 5,273 | 5,783 | (510) | (9.7)% |
| Power Purchase Agreements | 2,706 | 2,881 | (175) | (6.5)% |
| Fuel delivered to customers | 2,010 | 2,411 | (401) | (20.0)% |
| Other | 125 | 189 | (64) | (51.2)% |
| Total | $15,332 | $15,162 | $170 | 1.1% |
| For the three months ended March 31, 2015: |  |  |  |  |
| Sales of fuel cell systems and related infrastructure | $5,090 | $5,079 | $11 | 0.2% |
| Services performed on fuel cell systems and related infrastructure | 2,645 | 4,770 | (2,125) | (80.3)% |
| Power Purchase Agreements | 977 | 751 | 226 | 23.1% |
| Fuel delivered to customers | 659 | 876 | (217) | (32.9)% |
| Other | 45 | 51 | (6) | (13.3)% |
| Total | $9,416 | $11,527 | $(2,111) | (22.4)% |

Our primary sources of revenue are from sales of fuel cell systems and related infrastructure, services performed on fuel cell systems and related infrastructure, Power Purchase Agreements, and fuel delivered to customers. Revenue from sales of fuel cell systems and related infrastructure represents sales of our GenDrive units, GenSure (formerly ReliOn) stationary backup power units, as well as hydrogen fueling infrastructures. Revenue from services performed on fuel cell systems and related infrastructure represents revenue earned on our service and maintenance contracts and sales of spare parts. Revenue from Power Purchase Agreements primarily represents payments received from customers who make monthly payments to access the Company’s GenKey solution. Equipment used in these Power Purchase Agreements can be associated with sale/leaseback transactions in which the Company sells fuel cell systems and related infrastructure to a third-party, leases them back and provides them to customers who are parties to Power Purchase Agreements with the Company. Alternatively, the equipment can be held by the Company as leased assets. Revenue associated with fuel delivered to customers represents the sale of hydrogen to customers that has been purchased by the Company from a third party.

*Revenue – sales of fuel cell systems and related infrastructure.* Revenue from sales of fuel cell systems and related infrastructure represents revenue from the sale of our fuel cells, such as GenDrive units and GenSure (formerly ReliOn) stationary backup power units, as well as hydrogen fueling infrastructure referred to at the site level as hydrogen installations.

Revenue from sales of fuel cell systems and related infrastructure for the three months ended March 31, 2016 increased $0.1 million or 2.5%, to $5.2 million from $5.1 million for the three months ended March 31, 2015. There were 160 GenDrive units recognized as revenue for the three months ended March 31, 2016, compared to 265 for the three months ended March 31, 2015. The change in revenue is inconsistent with the change in units sold due to pricing and class mix differences. An additional 674 units were shipped during the three months ended March 31, 2016 and held as leased assets. As such, the Company will recognize revenue on these shipments over the life of the related PPA under “Power Purchase Agreements” in the Consolidated Statement of Operations. No sales associated with hydrogen installations occurred during the three months ended March 31, 2016, however three sites were constructed and held as leased assets. There was one site recognized as revenue during the three months ended March 31, 2015. Sales of GenSure units increased $1.4 million to $2.0 million in the three months ended March 31, 2016, compared to the three months ended March 31, 2015 as the Company continues to fulfill a large multi-site order received in prior years.

*Revenue – services performed on fuel cell systems and related infrastructure.* Revenue from services performed on fuel cell systems and related infrastructure represents revenue earned on our service and maintenance contracts and sales of spare parts.

Revenue from services performed on fuel cell systems and related infrastructure for the three months ended March 31, 2016 increased $2.6 million or 99.4%, to $5.3 million from $2.6 million for the three months ended March 31, 2015. The increase in this revenue category is primarily related to the increase in sales of fuel cell systems and hydrogen installations in 2014 and 2015, which has had a corresponding impact on the installed base. At March 31, 2016, there were 8,695 fuel cell units under extended maintenance contracts, an increase of 60.2% from 5,428 at March 31, 2015. Revenue growth is directionally consistent with installed base growth, however the extent of the increases can be impacted by concentration of units per site, pricing, unit class mix, and timing of when units were installed within the reporting periods. At March 31, 2016, there were extended maintenance contracts associated with 23 hydrogen installations, as compared to nine at March 31, 2015.

*Revenue – Power Purchase Agreements.* Revenue from Power Purchase Agreements represents payments received from customers for power generated via the provision of equipment and service. The equipment and service can be associated with sale/leaseback transactions in which the Company sells fuel cell systems and related infrastructure to a third-party, leases them back and operates them at customers’ locations who are parties to Power Purchase Agreements with the Company. Alternatively, the equipment can be held by the Company as leased assets.

Revenue from Power Purchase Agreements for the three months ended March 31, 2016 increased $1.7 million or 177.0%, to $2.7 million from $1.0 million for the three months ended March 31, 2015. The increase is due to the increased numbers of GenKey sites the Company has deployed with these types of arrangements (17 at March 31, 2016 as compared to five in March 31, 2015).

*Revenue – fuel delivered to customers.* Revenue associated with fuel delivered to customers represents the sale of hydrogen to customers that has been purchased by the Company from a third party. As part of the GenKey solution, the Company contracts with fuel suppliers to purchase liquid hydrogen, which is then sold to its customers.

Revenue associated with fuel delivered to customers for the three months ended March 31, 2016 increased $1.4 million or 205.0%, to $2.0 million from $0.7 million for the three months ended March 31, 2015. The increase in revenue is due to 25 sites taking fuel deliveries at March 31, 2016, compared eight at March 31, 2015. The sites generally are the same as those which had purchased hydrogen installations within the GenKey solution.

*Revenue – other.* Other revenue primarily represents 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 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 related to our current product development efforts. Other miscellaneous revenue is recognized from time to time.

Other revenue for the three months ended March 31, 2016 increased $80 thousand, or 177.8%, to $125 thousand from $45 thousand for the three months ended March 31, 2015. During the three months ended March 31, 2016, the Company recorded $125 thousand associated with a customer stack development program. The Company had no current period revenue associated with a U.S. government-related research and development contract for which it had revenue in prior years.

*Cost of revenue – sales of fuel cell systems and related infrastructure.* Cost of revenue from sales of fuel cell systems and related infrastructure includes direct material, labor costs, and allocated overhead costs related to the manufacture of our fuel cells such as GenDrive units and GenSure (formerly ReliOn) stationary backup power units, as well as hydrogen fueling infrastructure referred to at the site level as hydrogen installations.

Cost of revenue from sales of fuel cell systems and related infrastructure for the three months ended March 31, 2016 decreased 23.3%, or $1.2 million, compared to the three months ended March 31, 2015. Gross margin generated from sales of fuel cell systems and related infrastructure was 25.3% for the three months ended March 31, 2016, up from 0.2% for the three months ended March 31, 2015. Gross margin on GenDrive sales during the three months ended March 31, 2016 was 36.4%, an improvement from 12.7% during the three months ended March 31, 2015. Gross margin has improved as a result of better leverage on the fixed cost base, supply chain and product design cost down programs, as well as manufacturing process improvements. There was no gross margin on hydrogen infrastructure for the three months ended March 31, 2016 as the sites constructed were held as leased assets rather than sold. Gross margin on GenSure sales improved to 22.5% during the three months ended March 31, 2016, up from (37.1%) during the three months ended March 31, 2015, due to cost synergies with the integration of ReliOn operations into the Company and better leverage of costs with the increase in sales volume.

*Cost of revenue – services performed on fuel cell systems and related infrastructure.* Cost of revenue from services performed on fuel cell systems and related infrastructure includes the labor, material costs and allocated overhead costs incurred for our product service and hydrogen site maintenance contracts and spare parts.

Cost of revenue from services performed on fuel cell systems and related infrastructure for the three months ended March 31, 2016 increased 21.2%, or $1.0 million, compared to the three months ended March 31, 2015. These increases are a direct result of a growing installed base of GenDrive units, and the number of associated customers that have GenCare and GenFuel service contracts. These increases resulted in increased costs of replacement parts, as well as labor and overhead for service personnel necessary to support these service and hydrogen site maintenance contracts. At March 31, 2016 there were 8,695 GenDrive units under GenCare contracts and 23 customer sites under GenFuel contracts, as compared to 5,428 GenDrive units under GenCare contracts and nine customer sites under GenFuel contracts at March 31, 2015. Gross margin improved to (9.7%) for the three months ended March 31, 2016 from (80.3%) for the three months ended March 31, 2015 due to improved model design driving down parts costs, better leverage of fixed costs and absorption of $1.7 million in net losses on loss contracts against the accrual for loss contracts related to service. During 2015, the Company recognized a $10.1 million provision for loss contracts related to service. This provision represented expected losses on extended maintenance contracts that had projected costs over the remaining life of the contracts which exceeded contractual revenues.

*Cost of revenue – Power Purchase Agreements.* Cost of revenue from Power Purchase Agreements includes payments made to financial institutions for leased equipment and service. Leased units are primarily associated with sale/leaseback transactions in which the Company sells fuel cell systems and related infrastructure to a third-party, leases them back, and operates them at customers’ locations who are parties to Power Purchase Agreements with the Company. Alternatively, the Company can hold the equipment for investment and recognize the depreciation and service cost of the assets as cost of revenue from Power Purchase Agreements.

Cost of revenue from Power Purchase Agreements for the three months ended March 31, 2016 increased $2.1 million, or 283.6%, to $2.9 million from $0.8 million for the three months ended March 31, 2015. The increase was a result of the increase in the number of customer sites party to these agreements (17 at March 31, 2016 as compared to five at March 31, 2015). Gross margin declined to (6.5%) for the three months ended March 31, 2016 from 23.1% for the three months ended March 31, 2015, due primarily to changes in financing pricing.

*Cost of revenue – fuel delivered to customers.* Cost of revenue from fuel delivered to customers represents the purchase of hydrogen from suppliers that ultimately is sold to customers. As part of the GenKey solution, the Company contracts with fuel suppliers to purchase liquid hydrogen and separately sells to its customers upon delivery.

Cost of revenue from fuel delivered to customers for the three months ended March 31, 2016 increased $1.5 million, or 175.2%, to $2.4 million from $0.9 million for the three months ended March 31, 2015. The increase is due primarily to higher volume of liquid hydrogen delivered to customer sites, as a result of an increase in the number of hydrogen installations completed under GenKey agreements. At March 31, 2016, there were 25 customer sites taking hydrogen fuel delivery compared to eight customer sites at March 31, 2015. The sites generally are the same as those who had purchased hydrogen installations within the GenKey solution. Gross margin improved to (20.0%) during the three months ended March 31, 2016 from (32.9%) during the three months ended March 31, 2015, due to improvements in product design that had caused inefficiencies in fuel usage.

*Cost of revenue – other.* Other cost of revenue primarily represents 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 other revenue for the three months ended March 31, 2016 increased $138 thousand, or 270.6%, to $189 thousand from $51 thousand for the three months ended March 31, 2015. The Company had been working on a U.S. government-related research and development contract in prior years and had service costs associated with units installed under that program.

*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 March 31, 2016 increased $1.9 million, or 66.5% to $4.8 million, from $2.9 million for the three months ended March 31, 2015. This increase was primarily related to an increase in personnel related expenses, focused on refinement of hydrogen infrastructure design, multiple product cost-down programs and prototyping for stack performance enhancement.

*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 March 31, 2016 increased $0.5 million, or 7.0%, to $8.3 million from $7.7 million for the three months ended March 31, 2015. The increase was primarily due to an increase in stock-based compensation resulting from increases in compensation and employee head count, partially offset by reductions in amortization of intangible assets.

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

Interest and other income remained relatively consistent at $87 thousand for the three months ended March 31, 2016 compared to $31 thousand for the three months ended March 31, 2015.

*Change in fair value of common stock warrant liability.* The Company accounts 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 March 31, 2016 resulted in a decrease in the associated warrant liability of $1.3 million as compared to a decrease of $1.8 million for the three months ended March 31, 2015. 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.* Interest and other expense consists of interest and other expenses related to interest on our short-term borrowing, obligations under capital lease and our finance obligation, as well as foreign currency exchange gain (loss).

Interest and other expense for the three months ended March 31, 2016, increased $471 thousand to $561 thousand from $90 thousand for the three months ended March 31, 2015. The increase is attributed to the short-term borrowing originated in the three months ended March 31, 2016 and the increase in finance obligations during 2015.

*Income taxes.* 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. The Company also recognizes accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense.

During the three months ended March 31, 2016, the Company released its liability for unrecognized tax benefits of $392 thousand, as the related statute of limitations has expired.

### 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, growth in equipment leased to customers under long-term arrangements, funding the growth in our GenKey “turn-key” solution, which includes the installation of our customer’s hydrogen infrastructure as well as delivery of the hydrogen fuel, continued development and expansion of our products, and the repayment or refinancing of our short-term borrowing. 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, including financing arrangements to repay or refinance our short-term borrowing, and the terms of such agreements that may require us to pledge or restrict 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 $11.8 million for the three months ended March 31, 2016 and $55.8 million, $88.6 million and $62.8 million for the years ended December 31, 2015, 2014, and 2013, respectively, and has an accumulated deficit of $1.0 billion at March 31, 2016.

During the three months ended March 31, 2016, cash used in operating activities was $6.9 million, consisting primarily of a net loss attributable to the Company of $11.8 million, offset by the impact of noncash charges/gains and net inflows from fluctuations in working capital and other assets and liabilities of $3.2 million. The changes in working capital primarily were related to collections of accounts receivable offset by an investment in inventory procured to meet our backlog requirements. As of March 31, 2016, we had cash and cash equivalents of $66.9 million and net working capital of $62.8 million. By comparison, at December 31, 2015, we had cash and cash equivalents of $64.0 million and net working capital of $88.5 million. Additionally, a portion of the cash and cash equivalents on hand at March 31, 2016, is required to be maintained at all times under a covenant requirement associated with the Company’s secured term loan facility that requires a minimum unencumbered cash and cash equivalents balance equal to or greater than the outstanding principal balance ($25.0 million at March 31, 2016).

Net cash used in investing activities for the three months ended March 31, 2016 included purchases of property, plant and equipment and outflows associated with materials, labor, and overhead necessary to construct new leased assets of $11.7 million. Cash outflows related to equipment that we sell and equipment we lease directly to customers are included in net cash used in operating activities and net cash used in investing activities, respectively. Net cash provided by financing activities for the three months ended March 31, 2016 primarily resulted from borrowings against a short-term secured term loan facility, as described in note 7 of the accompanying Interim Consolidated Financial Statements. The secured term loan facility has events of default, including a material adverse change clause that is at the sole discretion of the lender.

During 2014 and 2015, the Company signed sale/leaseback agreements with the Company’s primary financial institution (M&T Bank or the Bank) to facilitate the Company’s commercial transactions with key customers. These agreements represent the sale of the Company’s fuel cell systems, hydrogen infrastructure and agreements to provide related extended maintenance to the Bank. The Company then leased the fuel cell systems and hydrogen infrastructure back from the Bank and operates them at customer locations to fulfill Power Purchase Agreements (PPAs). In connection with these operating leases, the Bank requires the Company to maintain cash balances in restricted accounts securing its lease obligations to the Bank. Cash added to these restricted accounts was $14.2 million during 2015. No additional cash was added during the three months ended March 31, 2016, other than interest earned on restricted cash balances. Cash received from customers under the PPAs is used to make lease payments to the Bank. As the Company performs under these agreements, the required restricted cash balances are released, according to a set schedule. At March 31, 2016, the Company had seven PPA deployments related to these sale/leaseback agreements. At March 31, 2016, the total remaining lease payments to the Bank under these agreements were $24.9 million and have been secured with restricted cash and pledged service escrows. Cash associated with sales of future revenues is required to be recorded as financing obligations on the consolidated balance sheets and accordingly represents a financing cash inflow.

The master lease agreement with the Bank requires the Company to maintain a minimum of $50 million of unrestricted cash. As mentioned above, the Company’s remaining contractual lease payments to the Bank are fully secured through a combination of restricted cash and pledges on funds escrowed for future service by the Company. The covenant is maintained in association with the residual exposure of the Bank, which stems from tax benefits taken by the Bank that could be recaptured should the underlying assets not be deployed for five years. This residual exposure at March 31, 2016 amounted to approximately $12.1 million, and the exposure decreases with the passage of time. In the event that the Company’s unrestricted cash balance falls below $50 million, the Company is entitled to cure the failure by providing additional restricted cash to secure the outstanding residual tax exposure of the Bank at that time.

In addition to the financing activities described above, we have historically funded our operations primarily through public and private offerings of common and preferred stock. The Company believes that its current working capital and cash anticipated to be generated from future operations, as well as various sources of capital from project financing platforms with various third parties that are currently being evaluated, will provide sufficient liquidity to fund operations for at least the next twelve months. This projection is based on our current expectations regarding new project financing and 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):

|  | Three months ended or at March 31, 2016 | Year ended or at December 31, 2015 |
| --- | ---: | ---: |
| Cash and cash equivalents at end of period | $66,882 | $63,961 |
| Restricted cash at end of period | 47,866 | 47,835 |
| Working capital at end of period | 62,755 | 88,524 |
| Net loss attributable to common shareholders | 11,780 | 55,795 |
| Net cash used in operating activities | 6,916 | 47,274 |
| Purchases of property, plant and equipment and leased property | 13,636 | 3,520 |
| Net cash provided by (used in) financing activities | 23,396 | (32,923) |

24

### Operating Leases

As of March 31, 2016, the Company has several non-cancelable operating leases (as lessor and as lessee), primarily associated with sale/leaseback transactions that are partially secured by restricted cash as summarized below. These leases 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. Leases where the Company is the lessor contain termination clauses with associated penalties, the amount of which cause the likelihood of cancelation to be remote.

Future minimum lease payments under non-cancelable operating leases (with initial or remaining lease terms in excess of one year) as of March 31, 2016 are (in thousands):

|  | As Lessor | As Lessee |
| --- | ---: | ---: |
| Remainder of 2016 | $9,380 | $9,029 |
| 2017 | 12,507 | 12,036 |
| 2018 | 12,507 | 11,811 |
| 2019 | 12,507 | 10,622 |
| 2020 | 11,351 | 9,488 |
| Thereafter | 7,441 | 5,876 |
| Total future minimum lease payments | $65,693 | $58,862 |

### 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 revenue recognition for multiple element arrangements, bad debts, inventories, intangible assets, valuation of long-lived assets, accrual for loss contracts on service, product warranty reserves, unbilled revenue, common stock warrants, income taxes, stock-based compensation, 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 (1) the carrying values of assets and liabilities and (2) the amount of revenue and expenses realized 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”, 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, 2015.

### Recent Accounting Pronouncements

In March 2016, an accounting update was issued to simplify various aspects related to how share-based payments are accounted for and presented. This accounting update is effective for annual periods beginning after December 15, 2016 and interim periods within those years. Early adoption is permitted in any interim or annual period, with any adjustments reflected as of the beginning of the fiscal year of adoption. The Company is evaluating the impact this update will have on the consolidated financial statements.

In February 2016, an accounting update was issued which requires balance sheet recognition for operating leases, among other changes to previous lease guidance. This accounting update is effective for fiscal years beginning after December 15, 2018. The Company is evaluating the impact this update will have on the consolidated financial statements.

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). This accounting update is effective for the annual reporting periods beginning after December 15, 2016, and interim periods within those years. The Company does not expect the adoption of this update to have a significant effect on the 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 15, 2016, and for annual and interim periods thereafter. The Company does not expect the adoption of this update to have a significant effect on the 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. The Company is evaluating the effect this update will have on the consolidated financial statements and has not yet selected a transition method.

## Market risk

As filed, 1,196 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 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, 1,019 characters.

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, 2015, 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 May 10, 2016.
Source: SEC EDGAR, the filing index for accession 0001558370-16-005803. Last ingested by Listed: Oct 24, 2026, 15:02 ET. No prices; not investment advice.