# Plug Power Inc: Form 10-Q for the period ended Mar 31, 2018

- Company: [Plug Power Inc](/companies/plug.md) (CIK 1093691)
- Form: 10-Q
- Filed: 2018-05-10
- Accepted by EDGAR: May 10, 2018, 21:16 ET
- Period: 2018-03-31
- Accession: 0001558370-18-004683
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1093691/000155837018004683/plug-20180331x10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1093691/000155837018004683/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2018-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2018-01-01 to 2018-03-31 | $27.2m | us-gaap:Revenues |
| Cost of revenue | 3 months, 2018-01-01 to 2018-03-31 | $31.2m | us-gaap:CostOfRevenue |
| Gross profit | 3 months, 2018-01-01 to 2018-03-31 | −$4.0m | us-gaap:GrossProfit |
| Research and development | 3 months, 2018-01-01 to 2018-03-31 | $8.6m | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2018-01-01 to 2018-03-31 | $8.3m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2018-01-01 to 2018-03-31 | −$20.9m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2018-01-01 to 2018-03-31 | −$3.0m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2018-01-01 to 2018-03-31 | −$19.8m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2018-01-01 to 2018-03-31 | −$0.09 | us-gaap:EarningsPerShareBasicAndDiluted |
| Operating cash flow | 3 months, 2018-01-01 to 2018-03-31 | −$24.0m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2018-01-01 to 2018-03-31 | $1.0m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2018-03-31 | $46.7m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2018-03-31 | $145.5m | us-gaap:AssetsCurrent |
| Total assets | at 2018-03-31 | $298.3m | us-gaap:Assets |
| Current liabilities | at 2018-03-31 | $113.3m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2018-03-31 | $248.1m | us-gaap:Liabilities |
| Long-term debt | at 2018-03-31 | $12.9m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2018-03-31 | $14.8m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2018-03-31 | $49.5m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 56,354 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, 2017. 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 anticipate continuing to incur losses; the risk that we will need to raise additional capital to fund our operations and such capital may not be available to us; 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 volatility of our stock price; 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 a loss of one or more of our major customers could result in a material adverse effect on our financial condition; 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; the risk of potential losses related to any product liability claims or contract disputes; competitive factors, such as price competition and competition from other traditional and alternative energy companies; the cost and availability of components and parts for our products; 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 risk that pending orders may not convert to purchase orders, in whole or in part; the risk that unit orders will not ship, be installed and/or converted to revenue, in whole or in part; the risks related to the use of flammable fuels in our products; our ability to protect our intellectual property; 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 cost and timing of developing, marketing and selling our products and our ability to raise the necessary capital to fund such costs; market acceptance of our products and services, including GenDrive units; 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; 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 associated with potential future acquisitions; the cost of complying with current and future federal, state and international governmental regulations; the risk the accounting method for convertible debt securities that may be settled in cash, such as the Convertible Senior Notes, could have a material effect on our reported financial results; the risk the convertible note hedges may affect the value of the Convertible Senior Notes and our common stock; the risk that we are subject to counterparty risk with respect to the convertible note hedge transactions 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, 2017, as filed March 9, 2018. 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 and fuel cell systems used primarily for the material handling and stationary power markets. As part of the global drive to electrification, Plug Power has recently entered new electric vehicle markets, specifically ground support equipment and electric delivery vans. These applications promote the advancement of hydrogen fueling and accelerate commercialization of hydrogen-fueled products.

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 generation, delivery, storage and refueling solutions for customer locations. Currently the Company obtains the majority of its hydrogen by purchasing it from fuel suppliers for resale to customers.

In our core business, we provide and continue to develop commercially-viable hydrogen and fuel cell product solutions to replace lead‑acid batteries in electric material handling vehicles and industrial trucks for some of the world’s largest distribution and manufacturing businesses. We are focusing our efforts on industrial mobility applications (electric forklifts and electric industrial vehicles) at multi‑shift high volume manufacturing and high throughput distribution sites where our products and services provide a unique combination of productivity, flexibility and environmental benefits. Additionally, we manufacture and sell fuel cell products to replace batteries and diesel generators in stationary backup power applications. These products prove valuable with telecommunications, transportation and utility customers as robust, reliable and sustainable power solutions.

Our current products and services include:

GenDrive: GenDrive is our hydrogen fueled PEM fuel cell system providing power to material handling electric vehicles, including class 1, 2, 3 and 6 electric forklifts and ground support equipment;

GenFuel: GenFuel is our hydrogen fueling delivery, generation, storage and dispensing systems;

GenCare: GenCare is our ongoing maintenance program for GenDrive fuel cells, GenSure products, GenFuel products and ProGen engines;

GenSure: GenSure is our stationary fuel cell solution providing scalable, modular PEM fuel cell power to support the backup and grid-support power requirements of the telecommunications, transportation, and utility sectors;

GenKey: GenKey is our turn-key solution combining either GenDrive or GenSure power with GenFuel fuel and GenCare aftermarket service, offering complete simplicity to customers transitioning to fuel cell power;

ProGen: ProGen is our fuel cell stack and engine technology currently used globally in mobility and stationary fuel cell systems, and as engines in electric delivery vans; and

GenFund: GenFund is a collaboration with leasing organizations to provide cost efficient and seamless financing solutions to customers.

We provide our products worldwide through our direct product sales force, and by leveraging relationships with original equipment manufacturers, or OEMs, and their dealer networks.

### Results of Operations

Revenue, cost of revenue, gross (loss)/profit and gross margin for the three months ended March 31, 2018 and 2017, were as follows (in thousands):

| For the period ended March 31, 2018: | Three Months Ended March 31, Net Revenue | Cost of Revenue | Gross (Loss)/Profit | Gross Margin |
| --- | ---: | ---: | ---: | ---: |
| Sales of fuel cell systems and related infrastructure | $11,458 | $10,122 | $1,336 | 11.7% |
| Services performed on fuel cell systems and related infrastructure | 6,598 | 6,870 | (272) | (4.1)% |
| Power Purchase Agreements | 5,489 | 8,291 | (2,802) | (51.0)% |
| Fuel delivered to customers | 5,535 | 5,896 | (361) | (6.5)% |
| Provision for common stock warrants | (1,885) | — | (1,885) | — |
| Total | $27,195 | $31,179 | $(3,984) | (14.6)% |
| For the period ended March 31, 2017: |  |  |  |  |
| Sales of fuel cell systems and related infrastructure | $2,197 | $2,286 | $(89) | (4.1)% |
| Services performed on fuel cell systems and related infrastructure | 5,149 | 6,566 | (1,417) | (27.5)% |
| Power Purchase Agreements | 4,311 | 6,615 | (2,304) | (53.4)% |
| Fuel delivered to customers | 3,491 | 4,149 | (658) | (18.8)% |
| Other | 87 | 98 | (11) | (12.6)% |
| Total | $15,235 | $19,714 | $(4,479) | (29.4)% |

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 (PPAs), and fuel delivered to customers. Revenue from sales of fuel cell systems and related infrastructure represents sales of our GenDrive units, GenSure stationary backup power units, as well as hydrogen fueling 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 PPAs primarily represents payments received from customers who make monthly payments to access the Company’s GenKey solution. 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 or generated on site.

*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 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, 2018 increased $9.3 million, or 421.5%, to $11.5 million from $2.2 million for the three months ended March 31, 2017. The main driver for the increased revenue was an increase in GenDrive deployment volume and infrastructure site increases, as well as mix of fuel cells versus infrastructure. There were 304 units recognized as revenue during the three months ended March 31, 2018, compared to 34 for the three months ended March 31, 2017. An additional 43 units were shipped in 2018 and held as leased assets. As such, the Company will recognize revenue on these units over the life of the related PPA under “Power Purchase Agreements” in the unaudited interim Consolidated Statement of Operations. Three hydrogen installations during the three months ended March 31, 2018, were recognized as revenue, compared to none during the three months ended March 31, 2017. In addition, no additional sites were constructed and held as leased property during the three months ended March 31, 2018, compared to two during the three months ended March 31, 2017.

*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. At March 31, 2018, there were 11,191 fuel cell units and 43 hydrogen installations under extended maintenance contracts, an increase from 8,818 fuel cell units and 30 hydrogen installations at March 31, 2017, respectively.

Revenue from services performed on fuel cell systems and related infrastructure for the three months ended March 31, 2018 increased $1.4 million, or 28.1%, to $6.6 million from $5.1 million for the three months ended March 31, 2017. The increase in service revenues was due to the increase in units under service contracts. The average number of units under extended maintenance contracts during the three months ended March 31, 2018 was 11,243, compared to 8,884 during the three months ended March 31, 2017. This 26.6% increase in average units serviced throughout the three months corresponds with the increase in revenue, as compared to the prior year period.

*Revenue – Power Purchase Agreements.* Revenue from PPAs represents payments received from customers for power generated through 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 PPAs with the Company. Alternatively, the Company can retain the equipment as leased property and provide it to customers under PPAs. At March 31, 2018, there were 33 GenKey sites associated with PPAs, as compared to 27 at March 31, 2017.

Revenue from Power Purchase Agreements for the three months ended March 31, 2018 increased $1.2 million, or 27.3%, to $5.5 million from $4.3 million for the three months ended March 31, 2017. The increase is due to the increased number of sites the Company has deployed with these types of arrangements. The average number of sites under PPA arrangements was 33 in the first quarter of 2018, as compared to 26 in 2017. This 26.9% increase in average sites under PPAs throughout the three months corresponds with the increase in revenue, as compared to the prior year period.

*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. At March 31, 2018, there were 61 sites associated with fuel contracts, as compared to 42 at March 31, 2017. The sites generally are the same as those which had purchased hydrogen installations within the GenKey solution.

Revenue associated with fuel delivered to customers for the three months ended March 31, 2018 increased $2.0 million, or 58.6%, to $5.5 million from $3.5 million for the three months ended March 31, 2017. The increase in revenue is due to an increase in sites taking fuel deliveries in 2018, compared to 2017. The average number of sites receiving fuel deliveries was 60 during the three months ended March 31, 2018, as compared to 41 during the three months ended March 31, 2017. This 46.3% increase in average sites with molecule delivery throughout the three months corresponds with the increase in revenue and price increases, as compared to the prior year period.

*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, 2018 decreased $0.1 million, or 100.0%, to zero from $0.1 million for the three months ended March 31, 2017. During the three months ended March 31, 2018, the Company had no contract research & development activities, compared to a small amount of activity during the three months ended March 31, 2017.

*Revenue – provision for common stock warrants.* In 2017, in separate transactions, the Company issued to each of Amazon.com, Inc. (“Amazon”) and Wal-Mart Stores, Inc. (“Walmart”) warrants to purchase shares of the Company’s common stock. The Company records a portion of the estimated fair value of the warrants as a reduction of revenue based upon the projected number of shares of common stock expected to vest under the warrants, the proportion of purchases by Amazon, Walmart and their affiliates within the period relative to the aggregate purchase levels required for vesting of the respective warrants, and the then-current fair value of the warrants. The amount of provision for common stock warrants recorded as a reduction of revenue during the three months ended March 31, 2018 was $1.9 million, compared to zero during the three months ended March 31, 2017 as these transactions occurred later in 2017.

*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 materials, labor costs, and allocated overhead costs related to the manufacture of our fuel cells such as GenDrive units and GenSure 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, 2018 increased 342.8%, or $7.8 million, compared to the three months ended March 31, 2017, driven by the previously stated greater number of units recognized as revenue. Gross margin generated from sales of fuel cell systems and related infrastructure was 11.7% for the three months ended March 31, 2018, up from (4.1)% for the three months ended March 31, 2017, due to better leverage over fixed costs with higher volumes, product cost downs, and changes in product mix.

*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. At March 31, 2018, there were 11,191 fuel cell units and 43 hydrogen installations under extended maintenance contracts, an increase from 8,818 fuel cell units and 30 hydrogen installations at March 31, 2017, respectively.

Cost of revenue from services performed on fuel cell systems and related infrastructure for the three months ended March 31, 2018 increased 4.6%, or $0.3 million, to $6.9 million, compared to the three months ended March 31, 2017 of $6.6 million. Gross margin improved to (4.1%) for the three months ended March 31, 2018 from (27.5%) for the three months ended March 31, 2017. The change versus the prior three months is due to a reduction in costs resulting from changes in product configuration previously rolled out to new key accounts and leverage of the existing fixed costs in the field.

*Cost of revenue – Power Purchase Agreements.* Cost of revenue from PPAs includes payments made to financial institutions for leased equipment and service used to fulfill the PPAs, and depreciation of leased property. Leased units are 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 PPAs 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 PPAs. At March 31, 2018, there were 33 GenKey sites associated with PPAs, as compared to 27 at March 31, 2017.

Cost of revenue from Power Purchase Agreements for the three months ended March 31, 2018 increased $1.7 million, or 25.3%, to $8.3 million from $6.6 million for the three months ended March 31, 2017. The increase was a result of the increase in the number of customer sites party to these agreements. Gross margin of (51.0%) for the three months ended March 31, 2018, was relatively consistent with gross margin of (53.4%) for the three months ended March 31, 2017.

*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 when delivered or dispensed. At March 31, 2018, there were 61 sites associated with fuel contracts, as compared to 42 at March 31, 2017. The sites generally are the same as those which had purchased hydrogen installations within the GenKey solution.

Cost of revenue from fuel delivered to customers for the three months ended March 31, 2018 increased $1.7 million, or 42.1%, to $5.9 million from $4.1 million for the three months ended March 31, 2017. 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 and higher fuel costs. Gross margin percent improved to (6.5%) during the three months ended March 31, 2018 compared to (18.8%) during the three months ended March 31, 2017 due to improvements in efficiencies from changes in system design.

*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, 2018 decreased $0.1 million, or 100.0%, to zero from $0.1 million for the three months ended March 31, 2017. During the three months ended March 31, 2018, the Company had no contract research & development activities, compared to a small amount of activity during the three months ended March 31, 2017.

*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 increased $2.7 million, or 44.2% to $8.6 million, from $6.0 million for the three months ended March 31, 2017. The increase was primarily related to an increase in programs associated with improving product reliability to reduce ongoing service costs.

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, 2018, decreased $0.8 million, or 9.1%, to $8.3 million from $9.1 million for the three months ended March 31, 2017. This decrease is primarily due to a decrease in legal accruals and stock based compensation expense, offset by increases due to severance payments due to targeted restructuring actions.

*Interest and other expense (income), net*. Interest and other expense, net consists of interest and other expenses related to interest on our short-term borrowing, long-term debt, convertible senior notes, obligations under capital lease and our finance obligations, as well as foreign currency exchange losses, offset by interest and other income consisting primarily of interest earned on our cash and cash equivalents, note receivable, foreign currency exchange gains and other income. Since 2016, the Company entered into a series of capital leases with Generate Lending LLC and Wells Fargo. In December 2016, the Company entered into a loan and security agreement with NY Green Bank, which was amended in 2017.

Net interest and other expense for the three months ended March 31, 2018 increased $1.0 million, or 45.3% as compared to the three months ended March 31, 2017. The 45.3% increase is relatively consistent with increase in interest bearing liabilities of 47.0%.

*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, 2018 resulted in a decrease in the associated warrant liability of $1.3 million as compared to an increase of $2.3 million for the three months ended March 31, 2017. These variances are primarily due to changes in the average remaining term, 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.

*Income taxes.* The Company recognized an income tax benefit in the current period of $3.0 million as a result of the intraperiod tax allocation rules under ASC Subtopic 740-20, Intraperiod Tax Allocation, under which the Company recognized a benefit for current losses as a result of an entry to additional paid-in capital related to the issuance of the Convertible Senior Notes. The Company has not changed its overall conclusion with respect to the need for a valuation allowance against its net deferred tax assets, which remain fully reserved.

The remaining net 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, if any, 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, 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 customers’ hydrogen infrastructure as well as delivery of the hydrogen fuel, continued development and expansion of our products, payment of lease/financing obligations under sale/leaseback financings, and the repayment or refinancing of our long-term debt. 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 and expanding positive gross margins across all product lines; 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 to repay or refinance our long-term debt, 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 $19.8 million for the three months ended March 31, 2018 and $130.2 million, $57.6 million, and $55.8 million for the years ended December 31, 2017, 2016, and 2015, respectively, and has an accumulated deficit of $1.2 billion at March 31, 2018.

During the three months ended March 31, 2018, cash used in operating activities was $24.0 million, consisting primarily of a net loss attributable to the Company of $19.8 million and net outflows from fluctuations in working capital and other assets and liabilities of $7.2 million, offset by the impact of noncash charges/gains of $3.0 million. The changes in working capital primarily were related to an increase in accounts receivable and a decrease in accounts payable, accrued expenses and other liabilities, offset by decreases in inventory, prepaid expenses and other current assets. As of March 31, 2018, we had cash and cash equivalents of $46.7 million and net working capital of $32.2 million. By comparison, at December 31, 2017, we had cash and cash equivalents of $24.8 million and net working capital of $3.9 million.

Net cash used in investing activities for the three months ended March 31, 2018, totaled $4.3 million and included purchases of property, plant and equipment and outflows associated with materials, labor, and overhead necessary to construct new leased property. 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, 2018 totaled $49.2 million and primarily resulted from net proceeds of $96.1 million from the issuance of Convertible Senior Notes and a $1.2 million increase in finance obligations, offset by $43.5 million of purchases of a capped call and a common stock forward associated with the Convertible Senior Notes, and $4.6 million of principal payments on long-term debt.

In March 2018, we issued $100.0 million in aggregate principal amount of 5.5% Convertible Senior Notes due in 2023 (Convertible Senior Notes). The total net proceeds from this offering, after considering costs of the issuance, were approximately $96.1 million. Approximately $43.5 million of the proceeds were used for the cost of a capped call and a common stock forward, both of which are hedges related to the Convertible Senior Notes. The remaining net proceeds from the Convertible Senior Notes will be used for general corporate purposes, including working capital.

In previous years, the Company entered into sale/leaseback agreements with various financial institutions to facilitate the Company’s commercial transactions with key customers. The Company sold certain fuel cell systems and hydrogen infrastructure to the financial institutions, and leased the equipment back to support certain customer locations and to fulfill its varied PPAs. In connection with these operating leases, the financial institutions require the Company to maintain cash balances in restricted accounts securing the Company’s lease obligations. Cash received from customers under the PPAs is used to make lease payments. As the Company performs under these agreements, the required restricted cash balances are released, according to a set schedule. The total remaining lease payments to financial institutions under these agreements was $30.8 million, which has been fully secured with restricted cash and pledged service escrows.

We have historically funded our operations primarily through public and private offerings of common and preferred stock, as well as short-term borrowings, long-term debt and project financing, and recently with Convertible Senior Notes. The Company believes that its current working capital and cash anticipated to be generated from future operations, as well as borrowings from lending and project financing sources and proceeds from equity offerings, will provide sufficient liquidity to fund operations for at least one year after the date that the financial statements are issued. There is no guarantee that future funding will be available if and when required or at terms acceptable to the Company. 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. Additionally, the Company has other capital sources available, including the At Market Issuance Sales Agreement.

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

|  | Three months ended or at March 31, 2018 | Year ended or at December 31, 2017 |
| --- | ---: | ---: |
| Cash and cash equivalents at end of period | $46,746 | $24,828 |
| Restricted cash at end of period | 42,223 | 43,227 |
| Working capital at end of period | 32,191 | 3,886 |
| Net loss attributable to common shareholders | 19,848 | 130,178 |
| Net cash used in operating activities | 24,028 | 60,182 |
| Purchases of property, plant and equipment and leased property | 4,303 | 44,363 |
| Net cash provided by financing activities | 49,199 | 71,616 |

### Convertible Senior Notes

In March 2018, the Company issued $100.0 million in aggregate principal amount of 5.5% Convertible Senior Notes due on March 15, 2023, in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. There are no required principal payments prior to maturity of the Convertible Senior Notes. The total net proceeds from the Convertible Senior Notes are as follows:

*(in thousands)*

|  | Amount |
| --- | ---: |
| Principal amount | $100,000 |
| Less initial purchasers' discount | (3,250) |
| Less cost of the capped call and common stock forward | (43,500) |
| Less other issuance costs | (693) |
| Net proceeds | $52,557 |

39

The Convertible Senior Notes bear interest of 5.5%, payable semi-annually in cash on March 15 and September 15 of each year. The Convertible Senior Notes will mature on March 15, 2023, unless earlier converted or repurchased in accordance with their terms. The Convertible Senior Notes are unsecured and do not contain any financial covenants or any restrictions on the payment of dividends, or the issuance or repurchase of common stock by the Company.

Each $1,000 of principal of the Convertible Senior Notes will initially be convertible into 436.3002 shares of the Company’s common stock, which is equivalent to an initial conversion price of approximately $2.29 per share, subject to adjustment upon the occurrence of specified events. Holders of these Convertible Senior Notes may convert their Convertible Senior Notes at their option at any time prior to the close of the last business day immediately preceding September 15, 2022, only under the following circumstances:

1\) during any fiscal quarter commencing after the fiscal quarter ending on June 30, 2018 (and only during such fiscal quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the conversion price on each applicable trading day;

1\) during the five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate for the notes on each such trading day; or

1\) upon the occurrence of certain specified corporate events, such as a beneficial owner acquiring more then 50% of the total voting power of the Company’s common stock, recapitalization of the Company, dissolution or liquidation of the Company, or the Company’s common stock ceases to be listed on an active market exchange.

On or after September 15, 2022, holders may convert all or any portion of their Convertible Senior Notes at any time prior to the close of business on the second scheduled trading day immediately preceding the maturity date regardless of the foregoing conditions.

Upon conversion of the Convertible Senior Notes, the Company will pay or deliver, as the case may be, cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, at the Company’s election. The Company currently intends, if possible, to settle the principal of the Convertible Senior Notes in cash.

The conversion rate will be subject to adjustment in some events but will not be adjusted for any accrued or unpaid interest. A holder who converts their Convertible Senior Notes in connection with certain corporate events that constitute a “make-whole fundamental change” per the indenture governing the Convertible Senior Notes are, under certain circumstances, entitled to an increase in the conversion rate. In addition, if the Company undergoes a fundamental change prior to the maturity date, holders may require the Company to repurchase for cash all or a portion of its Convertible Senior Notes at a repurchase price equal to 100% of the principal amount of the repurchased Convertible Senior Notes, plus accrued and unpaid interest.

The Company may not redeem the Convertible Senior Notes prior to the maturity date, and no sinking fund is provided for the Convertible Senior Notes.

In accounting for the issuance of the Convertible Senior Notes, the Company separated the Convertible Senior Notes into liability and equity components. The initial carrying amount of the liability component of approximately $58.3 million was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component of approximately $37.8 million, representing the conversion option, was determined by deducting the fair value of the liability component from the par value of the Convertible Senior Notes. The difference between the principal amount of the Convertible Senior Notes and the liability component (the “debt discount”) is amortized to interest expense using the effective interest method over the term of the Convertible Senior Notes. The effective interest rate is approximately 16.0%. The equity component of the Convertible Senior Notes is included in additional paid-in capital in the consolidated balance sheet and is not remeasured as long as it continues to meet the conditions for equity classification.

We incurred transaction costs related to the issuance of the Convertible Senior Notes of approximately $3.9 million, consisting of initial purchasers' discount of $3.3 million and other issuance costs of approximately $0.6 million. In accounting for the transaction costs, we allocated the total amount incurred to the liability and equity components using the same proportions as the proceeds from the Convertible Senior Notes. Transaction costs attributable to the liability component were approximately $2.3 million, were recorded as debt issuance cost (presented as contra debt in the unaudited interim consolidated balance sheet) and are being amortized to interest expense over the term of the Convertible Senior Notes. The transaction costs attributable to the equity component were approximately $1.6 million and were netted with the equity component in stockholders’ equity.

The Convertible Senior Notes consisted of the following:

| Principal amounts: | At March 31, 2018 |
| --- | ---: |
| Principal | $100,000 |
| Unamortized debt discount (1) | (39,438) |
| Unamortized debt issuance costs (1) | (2,287) |
| Net carrying amount | $58,275 |
| Carrying amount of the equity component (2) | $37,782 |

1\) Included in the unaudited interim consolidated balance sheet within Convertible Senior Notes, net and amortized over the remaining life of the Convertible senior notes using the effective interest rate method.

1\) Included in the unaudited interim consolidated balance sheet within additional paid-in capital, net of $1.6 million in equity issuance costs.

As of March 31, 2018, the remaining life of the Convertible Senior Notes is approximately 60 months.

Based on the closing price of the Company’s common stock of $1.89 on March 31, 2018, the if-converted value of the Convertible Senior Notes was less than the principal amount.

### Capped Call and Common Stock Forward

#### Capped Call

In conjunction with the issuance of the Convertible Senior Notes, the Company entered into capped call options (Capped Call) on the Company’s stock with certain counterparties at a price of $16.0 million. The net cost incurred in connection with the Capped Call was recorded as a reduction to additional paid-in capital in the unaudited interim consolidated balance sheet as of March 31, 2018.

The Capped Call is generally expected to reduce or offset the potential dilution to the Company’s common stock upon any conversion of the Convertible Senior Notes and/or offset any cash payments the Company is required to make in excess of the principal amount of converted Convertible Senior Notes, as the case may be, with such reduction and/or offset subject to a cap based on the cap price. The cap price of the capped call transactions will initially be $3.82 per share, which represents a premium of 100% over the last reported sale price of the Company’s common stock of $1.91 per share on the date of the transaction, and is subject to certain adjustments under the terms of the Capped Call. The Capped Call becomes exercisable if the conversion option is exercised.

By entering into the Capped Call, the Company expects to reduce the potential dilution to its common stock (or, in the event the conversion is settled in cash, to reduce its cash payment obligation) in the event that at the time of conversion its stock price exceeds the conversion price under the Convertible Senior Notes.

#### Common Stock Forward

In connection with the sale of the Convertible Senior Notes, the Company also entered into a forward stock purchase transaction (Common Stock Forward), pursuant to which the Company agreed to purchase 14,397,906 shares of its common stock for settlement on or about March 15, 2023. The number of shares of common stock that the Company will ultimately repurchase under the Common Stock Forward is subject to customary anti-dilution adjustments. The Common Stock Forward is subject to early settlement or settlement with alternative consideration in the event of certain corporate transactions.

The net cost incurred in connection with the Common Stock Forward of $27.5 million was recorded as an increase in treasury stock in the unaudited interim consolidated balance sheet as of March 31, 2018. The related shares were accounted for as a repurchase of common stock.

The fair values of the Capped Call and Common Stock Forward are not remeasured each reporting period.

### Operating Leases

As of March 31, 2018 and December 31, 2017, 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, 2018 are (in thousands):

|  | As Lessor | As Lessee |
| --- | ---: | ---: |
| Remainder of 2018 | $17,408 | $9,854 |
| 2019 | 23,079 | 12,059 |
| 2020 | 21,388 | 10,903 |
| 2021 | 16,796 | 6,571 |
| 2022 | 8,545 | 1,245 |
| 2023 and thereafter | 7,316 | 1,031 |
| Total future minimum lease payments | $94,532 | $41,663 |

### Finance Obligations

During the three months ended March 31, 2018, the Company entered into a sale/leaseback transaction, which was accounted for as a capital lease and reported as part of finance obligations on the Company’s unaudited interim consolidated balance sheet. The outstanding balance of finance obligations related to sale/leaseback transactions at March 31, 2018 was $62.9 million. The fair value of the finance obligation approximates the carrying value as of March 31, 2018.

Future minimum lease payments under non-cancelable capital leases related to sale/leaseback transactions (with initial or remaining lease terms in excess of one year) as of March 31, 2018 are (in thousands):

|  | Total Payments | Imputed Interest | Net Present Value |
| --- | ---: | ---: | ---: |
| 2018 | $36,994 | $2,996 | $33,998 |
| 2019 | 6,042 | 2,223 | 3,819 |
| 2020 | 6,042 | 1,800 | 4,242 |
| 2021 | 6,043 | 1,316 | 4,727 |
| 2022 | 4,296 | 705 | 3,591 |
| 2023 and thereafter | 11,510 | 1,021 | 10,489 |
| Total future minimum lease payments | $70,927 | $10,061 | $60,866 |

42

In prior years, the Company received cash for future services to be performed associated with certain sale/leaseback transactions and recorded the balance as a finance obligation. The outstanding balance of this obligation at March 31, 2018 and December 31, 2017 is $9.8 million and $10.4 million, respectively. The amount is amortized using the effective interest method. The fair value of this finance obligation approximates the carrying value as of March 31, 2018.

The Company has a capital lease associated with its property in Latham, New York. Liabilities relating to this agreement of $2.3 million and $2.3 million have been recorded as a finance obligation, in the accompanying unaudited interim consolidated balance sheets as of March 31, 2017 and December 31, 2017, respectively. The fair value of this finance obligation approximates the carrying value as of March 31, 2018.

### Restricted Cash

The Company has entered into sale/leaseback agreements associated with its products and services. In connection with these agreements, cash of $41.2 million is required to be restricted as security and will be released over the lease term. The Company has additional letters of credit backed by security deposits as disclosed in the Operating Leases section above.

The Company also has letters of credit in the aggregate amount of $1.0 million associated with an agreement to provide hydrogen infrastructure and hydrogen to a customer at its distribution center and with a finance obligation from the sale/leaseback of its building. Cash collateralizing these letters of credit is also considered restricted cash.

### 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, 2017, except for the policy on Convertible Senior Notes described below.

The Company accounts for the issued Convertible Senior Notes with separate liability and equity components. The carrying amount of the liability component was initially determined by estimating the fair value of a similar debt instrument that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was determined by deducting the estimated fair value of the liability component from the par value of the Convertible Senior Notes as a whole as of the date of issuance. This difference represents a debt discount that is amortized to interest expense, with a corresponding increase to the carrying amount of the liability component, over the term of the Convertible Senior Notes using the effective interest rate method. The equity component is not remeasured as long as it continues to meet the conditions for equity classification. The Company has allocated issuance costs incurred to the liability and equity components. Issuance costs attributable to the liability component are being amortized to expense over the respective term of the Convertible Senior Notes, and issuance costs attributable to the equity components were netted with the respective equity component in additional paid-in capital.

### Recent Accounting Pronouncements

#### Recently Adopted Accounting Pronouncements

In June 2014, an accounting update was issued that replaces the existing revenue recognition framework regarding contracts with customers. The Company adopted this accounting update as of January 1, 2018. The standard outlines a five-step model whereby revenue is recognized as performance obligations within a contract are satisfied. The standard also requires new, expanded disclosures regarding revenue recognition. The Company did not experience a significant effect on the timing and amount of revenue recognized or the amount of revenue allocated to the identified performance obligations. There is an insignificant amount of historical contract acquisition costs that were expensed under prior guidance and were not capitalized upon adoption of ASC Subtopic 606. However, in subsequent periods, contract acquisition costs are capitalized in accordance with ASC Subtopic 606.

In October 2016, an accounting update was issued to simplify how an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. Consequently, the amendments in this update eliminate the exception for an intra-entity transfer of an asset other than inventory. Two common examples of assets included in the scope of this update are intellectual property and property, plant, and equipment. The Company adopted this update on January 1, 2018 and it did not have any effect on the consolidated financial statements because our net tax position is zero.

In November 2016, an accounting update was issued to reduce the existing diversity in the classification and presentation of changes in restricted cash on the statement of cash flows. This accounting update was adopted retrospectively by the Company on January 1, 2018. The adoption of this update impacts the cash flows from financing activities due to the change in the presentation of restricted cash within the consolidated statement of cash flows. Net cash flows from financing activities and change in cash and cash equivalents, which now includes restricted cash, for the three months ended March 31, 2018 and 2017, decreased by $1.0 million and $0.7 million, respectively.

#### Recently Issued and Not Yet Adopted Accounting Pronouncements

In January 2017, an accounting update was issued to simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. This accounting update is effective for years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is evaluating the impact this update will have on the consolidated financial statements.

In August 2016, an accounting update was issued to reduce the existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This accounting update is effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period. 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 has established an internal implementation team to oversee the adoption of the new standard. While the Company is evaluating the impact this update will have on the consolidated financial statements, it is expected that the future minimum lease payments under non-cancelable leases, as lessee, will be recorded on the Company’s consolidated balance sheets, as well as a right-of-use asset.

## Market risk

As filed, 1,323 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, except for a capped call and common stock forward purchased in March 2018 related to the issuance of Convertible Senior Notes. 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, 1,545 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, except for new controls put in place associated with accounting for Convertible Senior Notes and the adoption of and accounting and presentation required by ASC Subtopic 606, *Contracts with Customers.*

## Risk factors

As filed, 5,880 characters.

The following Risk Factors are 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, 2017, which 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 making any investment decision with respect to our securities.

***Convertible debt securities that may be settled in cash, such as the Convertible Senior Notes, will have a material effect on our reported financial results.***

Under Accounting Standards Codification 470-20, Debt with Conversion and Other Options, or ASC 470-20, an entity must separately account for the liability and equity components of the convertible debt instruments (such as the Convertible Senior Notes) that may be settled entirely or partially in cash upon conversion in a manner that reflects the issuer’s economic interest cost. The effect of ASC 470-20 on the accounting for the Convertible Senior Notes is that the equity component is required to be included in the additional paid-in capital section of stockholders’ equity on our consolidated balance sheet at the issuance date and the value of the equity component would be treated as debt discount for purposes of accounting for the debt component of the Convertible Senior Notes. As a result, we are required to record a non-cash interest expense as a result of the amortization of the discounted carrying value of the Convertible Senior Notes to their face amount over the term of the Convertible Senior Notes. We will report larger net losses (or lower net income) in our financial results because ASC 470-20 will require interest to include the amortization of the debt discount, which could adversely affect our reported or future financial results or the trading price of our common stock.

While the Company plans to settle the principal amount of the Convertible Senior Notes in cash subject to available funding at time of settlement, we currently use the if-converted method for calculating any potential dilutive effect of the conversion option on diluted net income per share, subject to meeting the criteria for using the treasury stock method in future periods. We cannot be sure that the accounting standards in the future will permit the use of the treasury stock method. If we are unable or otherwise elect not to use the treasury stock method in accounting for the shares issuable upon conversion of the Convertible Senior Notes, then our diluted earnings per share could be adversely affected.

***The convertible note hedges may affect the value of the Convertible Senior Notes and our common stock.***

In connection with the pricing of the Convertible Senior Notes, we entered into convertible note hedge transactions with one or more of the initial purchasers of the Convertible Senior Notes and/or their respective affiliates or other financial institutions, or the option counterparties. The convertible note hedge transactions are generally expected to reduce the potential dilution upon any conversion of Convertible Senior Notes and/or provide a source of cash to settle a portion of its cash payments related to any excess over the principal amount upon conversion of any Convertible Senior Notes.

The option counterparties and/or their respective affiliates may modify their hedge positions by entering into or unwinding various derivatives with respect to our common stock and/or purchasing or selling our common stock in secondary market transactions prior to the maturity of the Convertible Senior Notes (and are likely to do so during any observation period related to a conversion of Convertible Senior Notes or following any repurchase of Convertible Senior Notes by us on any fundamental change repurchase date or otherwise). This activity could also cause or avoid an increase or a decrease in the market price of our common stock. In addition, if any such convertible note hedge transaction fails to become effective, the option counterparties may unwind their hedge positions with respect to our common stock, which could adversely affect the value of our common stock.

The potential effect, if any, of these transactions and activities on the market price of our common stock will depend in part on market conditions and cannot be ascertained at this time. Any of these activities could adversely affect the value of our common stock.

***We are subject to counterparty risk with respect to the convertible note hedge transactions.***

The option counterparties will be financial institutions or affiliates of financial institutions, and we will be subject to the risk that one or more of such option counterparties may default under the convertible note hedge transactions. Our exposure to the credit risk of the option counterparties will not be secured by any collateral. If any option counterparty becomes subject to bankruptcy or other insolvency proceedings, we will become an unsecured creditor in those proceedings with a claim equal to our exposure at that time under our transactions with that option counterparty. Our exposure will depend on many factors but, generally, an increase in our exposure will be correlated to an increase in our common stock market price and in the volatility of the market price of our common stock. In addition, upon a default by an option counterparty, we may suffer adverse tax consequences and dilution with respect to our common stock. We can provide no assurance as to the financial stability or viability of any option counterparty.

Filed May 10, 2018.
Source: SEC EDGAR, the filing index for accession 0001558370-18-004683. Last ingested by Listed: Oct 24, 2026, 15:02 ET. No prices; not investment advice.