Plug Power - Shares Continue To Rally Despite Weak Core Business Trends And Newly Disclosed Debt Issues

About: Plug Power Inc. (PLUG), Includes: FCEL
by: Henrik Alex

Company discloses the surprise requirement to refinance a large amount of short-term debt in Q2/2019 without providing much further details.

Highly disappointing new order performance with bookings down more than 20% year-over-year and overall backlog up just slightly.

Reverted to upfront revenue recognition for Wal-Mart operating leases in Q3/2018 which seems to be the main reason behind the company's guidance increase in mid-October.

Units deployed in 2018 also down year-over-year. Reported increase in product revenue solely a function of favorable lease accounting changes and better pricing mix.

Management's advertising of upcoming major business announcements has sparked renewed momentum in the stock which is much needed to support short-term debt refinancing efforts and avoid potentially material dilution from the November 2018 toxic financing transaction.


I have covered Plug Power (PLUG) previously, so investors should view this as an update to my earlier articles on the company.

Plug Power's recent Q4/2018 earnings release and the company's subsequent 10-K filing with the SEC, as usual, contained material changes in accounting and reporting as well as the calculation and use of key metrics.

Photo: Plug Power-powered FedEx Delivery Van Prototype - Source:

1. Cash Flows

In its shareholder letter, the company no longer uses its own, highly favorable definition of free cash flow as it has done in the first three quarters of 2018:

Free cash flow is defined as the sum of cash flows from operating and investing activities, plus inflows from project financing for PPA deployments where these programs have been monetized; the metric excludes principal payments for all debt service and equity transactions to provide a true measure of ongoing operating performance.

Instead, the Q4 release only states the cash used in operating activities which came in at a disappointing $16.0 million (partially due to unfavorable working capital movements) compared to cash flow generation of 3.5 million in the preceeding quarter and $21.1 million in Q4/2017. As a result, cash used in operations for the full year 2018 decreased just slightly to $57.6 million from $60.1 million in FY2017.

Given the once again disappointing cash flow performance in 2018, the company has quietly removed its previously stated expectations for the business to turn cash flow positive in 2019 from the quarterly shareholder letter.


Starting in Q4, the company has also abandoned its adjusted EBITDAS metric (Earnings Before Interest, Taxes, Depreciation, Amortization and Stock-based Compensation) and instead is now referring to adjusted EBITDA which came in slightly positive for the first time in the company's history, even causing Bloomberg to pick up the story, sparking another round of momentum buying this way. In fact, the company actually overdelivered on its originally stated target to achieve EBITDAS breakeven in the second half of 2018 as EBITDAS in Q3 calculated to a loss of $1.6 million but swung to a profit of $2.9 million in Q4, resulting in an overall EBITDAS profit of $1.3 million for H2/2018.

That said, Plug Power's H2/2018 results were impacted very favorably by the company's early adoption of ASC Topic 842 (emphasis added by author):

In September 2018, the Company early adopted ASC Topic 842, as amended, effective January 1, 2018 and elected the available practical expedients. This adoption had a material impact on the Company’s consolidated statements of operations in that it allowed the Company to recognize gross profit on sale/leaseback transactions of $16.4 million. The previous accounting standard only allowed revenue on sale/leaseback transactions to be recognized up to the amount of cost of goods sold and gross profit was deferred. Under ASC Topic 842, revenue can be recognized in full.

Without the favorable accounting impact, the company would have missed its stated EBITDA target by a mile.

Moreover, Plug Power is increasingly running into problems with the "I" in EBITDA as cash interest expense was up by almost 50% to $13.1 million in 2018. I will discuss the company's debt issues in more detail below.

3. Reported Revenues and Gross Margins

As investors might remember, back in 2017, Plug Power was forced to issue a combined 110.6 million of common stock warrants to its main customers Amazon (AMZN) and Wal-Mart (WMT) in return for favorable payment terms and improved refinancing conditions. To reflect the volume discount character of the transactions, the company is required to record a portion of the estimated fair value of the warrants as a reduction of revenue in each given quarter. This way, FY2018 revenues were reduced by $10.2 million compared to a reduction of $29.7 million in FY2017.

Since Q3/2018, Plug Power no longer reports gross revenues and retroactively adjusted 2017 figures to the new reporting standard, skewing year-over-year top-line comparisons this way and making it more difficult to reconcile reported gross margins to the previous calculation method, particularly as the company recently made further changes by removing the "interest component of operating lease expense" from the equation. In Q4/2018, the company changed its calculation of adjusted gross margin again by removing the add-back of the provision for common stock warrants.

Despite all these recent changes, a deep dive into the company's SEC-filings finally allowed for an apples-to-apples gross margin comparison:

Source: Company's SEC-Filings, Author's own calculations

As evidenced by the numbers, Q4/2018 was nothing to write home about from a gross margin perspective as consolidated gross margin was down slightly from the preceeding quarter. According to management, product gross margins were impacted somewhat by a higher number of GenKey hydrogen infrastructure and GenSure stationary backup power systems in the mix. Services margins turned negative for the second time in 2018 while GenFuel hydrogen delivery margins deteriorated further to its worst levels since Q3/2017. Margins for the Wal-Mart leasing business (accounted for under "Power Purchase Agreements") continued to improve, likely due to materially improved refinancing conditions since securing a partial guarantee from Wal-Mart for outstanding lease payments back in 2017 and the retroactive reinstatement of the fuel cell investment tax credit in 2018.

4. Accounting for Operating Leases

Starting in Q3/2018, the company adopted a new lease accounting standard (see above) which has inflated both the amount of leased property on the asset side and finance obligations on the liability side of the balance sheet by a meaningful amount.

Even more important, Plug Power recently amended its existing Master Lease Agreement with Wells Fargo (WFC) which allowed the company to revert to upfront revenue recognition for sale-and-leaseback transactions in conjunction with Wal-Mart GenKey site deployments. In fact, the regained ability to recognize Wal-Mart-related sales upfront, seems to be the main or even sole reason behind the company's increased revenue guidance in mid-October 2018. As a result, Wal-Mart has reclaimed the top spot on Plug Power's customer list, accounting for a whopping 44.6% of the company's entire revenues in 2018, up from 29.4% in 2017, almost solely due to the change in revenue recognition. Reported sales to Amazon decreased to 22.1% of revenues, down from 42.4% stated in the company's 10-K for fiscal year 2017.

And while management touted a 42% increase in "gross billings" in the Q4 shareholder letter and net product sales even showed a more than 70% increase relative to the retroactively adjusted 2017 figure, the numbers are, in fact, very misleading.

In reality, the company's core, high-margin product business was flat to down relative to 2017, with GenDrive unit shipments slightly lower than last year and GenKey sites flat. Only the above discussed upfront revenue recognition of new Wal-Mart sites and a better pricing mix caused the eye-catching increase in reported numbers, as also admitted by the company in the 10-K:

The main driver for the increased revenue was an increase in GenDrive and infrastructure sites, recognized as revenue, as well as pricing mix. The number of GenDrive units shipped and hydrogen installations remained flat at approximately 5,000 and 17 for the years ended December 31, 2018 and 2017, respectively. The inconsistency between the increase in fuel cells and infrastructure recognized as revenue, as compared to the flat trend in shipments, as mentioned above, is due to sale/leaseback transactions accounted for as operating leases in 2018 as opposed to finance lease in 2017.

The renewed ability to recognize Wal-Mart operating leases upfront will also have a large impact on the company's 2019 top-line performance given that during the first half of 2018, Wal-Mart leases were still recognized ratably over the lifetime of the agreement. But this year, Plug Power will likely recognize ALL Wal-Mart-related revenues upfront. In combination with an estimated growth of 20% in the company's adjacent business segments (all operating at negative gross margins in Q4/2018), the company's guidance for 30% growth in "gross billings" actually translates to another year of flat to down unit shipments. Honestly speaking, given the reported 42% gross billings increase among flat unit shipments in 2018, this year might actually see a measureable decrease in unit shipments.

The issue is also very much evidenced by the company's highly disappointing bookings performance in 2018. New orders were down by approximately 20% from 2017 levels ($225 million vs. $280 million). As a result, overall backlog increased just slightly (approximately 8%) compared to more than 30% in 2017.

Surprise disclosure of short-term debt refinancing needs

While the company's weak underlying business trends are certainly worrisome, the company is actually facing much tougher headwinds right now given the surprise disclosure of material short-term debt refinancing needs in Q2/2019 (emphasis added by author):

As of December 31, 2018, the Company has approximately $91.1 million of finance obligations and long-term debt classified as current liabilities, approximately $50.0 million of which is due in the second quarter of 2019. The Company is in the process of negotiating a refinance of a majority of these current liabilities with its primary lender in order to consolidate some of these facilities and extend the repayment schedule. Should the Company not come to an agreement with this lender, it will need to seek an extension and other capital sources in the near term, such as debt facilities with other lenders and/or equity solutions, which may include the At Market Issuance Sales Agreement.

Frankly speaking, I was perplexed by the disclosure as I was assuming the company's finance obligations to be matched against customer lease payments. I tried to contact the company's CFO, Paul Middleton, to provide further details on the issue but have received no response so far.

For example, if we assume the "primary lender" to be Wells Fargo, what would be the potential impact on the company's favorable Master Lease Agreement with this institution if the parties won't come to terms?

Moreover, which are the counterparties to the $50 million of finance obligations due in Q2? Is this solely Wells Fargo or are there other lenders involved?

Lastly, are these regular debt maturities or did something cause an acceleration?

Depending on the answers, the outcome of the ongoing negotiations could have a very material impact on the company.

Consolidating legacy debt facilities with potentially unfavorable terms and extending maturity dates could very well result in reduced interest obligations going forward.

On the flipside, beggars can't be chosers. The debt is obviously due until June 30 at the latest point and we don't know if the refinancing requirement is due to regular or potentially accelerated debt maturities. Taking into account the company's ongoing large cash requirements and the weak underlying business trends, refinancing conditions might actually not be favorable at all.

If the parties don't come to terms, will this have an impact on the company's ability to refinance new Wal-Mart leases? And will Plug Power indeed make further use of its so-called "At Market Issuance Sales Agreement" ("the ATM agreement") with B. Riley FBR (RILY)?

The company has roughly $45 million left under the ATM agreement and given the ongoing strong momentum in the company's common stock, Plug Power might very well issue further shares anyway as it has already done during Q3 and Q4/2018. In fact, I would appreciate such a move as the stock price has increased by more than 150% from its December 2018 lows. Even better, it has already eclipsed the regular $2.31 conversion price of the company's November 2018 convertible preferred equity financing, a transaction that otherwise has the potential of diluting common equityholders materially given its toxic terms which I have discussed previously. In fact, FuelCell Energy (FCEL) has entered into similar transactions with the very same hedge fund counterparties (CVI Investments and Tech Opportunities LLC, a subsidiary of Hudson Bay Capital) over the past couple of quarters and the share price has been absolutely killed due to the massive incentive for preferred equityholders to short the shares ahead of scheduled bi-monthly installments to be paid in common stock. Investors interested in reading more about the potentially disastrous effects of toxic financing transactions should take a look at my ongoing coverage of the evolving situation at FuelCell Energy.

Liquidity and Debt

Plug Power reported unrestricted cash of $38.6 million at the end of FY2018, up from 13.8 million sequentially as the above discussed operating cash burn and a major increase in restricted cash was more than offset by a combined $74.2 million in proceeds from the issuance of convertible preferred stock and the refinancing of Wal-Mart leases with Wells Fargo. Restricted cash of $71.6 million increased by almost 50% quarter-over-quarter, mostly due to the requirement to provide collateral for a $20.1 million letter of credit related to the unguaranteed portion of the company's outstanding sale-and-leaseback agreements.

On the liability side, the company reported $91.1 million of short-term debt and finance obligations, up 50% sequentially (as discussed above) and another $181.5 million of long-term finance obligations and convertible debt. Keep in mind that due to accounting requirements only $63.2 million of the company's $100 million convertible senior notes issued in March 2018 are recorded as debt obligation but without the stock price eclipsing the effective $3.82 conversion price achieved by utilizing capped call transactions, the notes will likely have to be paid back in cash.

And while long-term finance obligations also increased by more than 36% sequentially, this seems largely due to the adoption of the new lease accounting standard which requires the company to recognize a right of use asset and a corresponding finance obligation on its balance sheet (as discussed above).

Looking at year-over-year comparisons, short-term debt obligations have increased by more than 70%, from $53.3 million to $91.1 million while long-term obligations are up by a whopping 260%, from $50.4 million to $181.5 million. In combination, the company's debt and finance obligations have increased by more than 160% year-over-year and this actually excludes $37.2 million of the convertible senior notes and $35 million of convertible preferred equity issued in November 2018 which is repayable in monthly installments starting in May (given the fact that the current share price is substantially above the conversion price of $2.31, preferred equityholders might have already converted some or even all of their holdings into common shares, potentially putting this issue to rest).

Suffice to say, Plug Power's balance sheet has weakened considerably over the course of 2018 and it remains to be seen how the company will address its current short-term debt refinancing issues.

Momentum rally in anticipation of upcoming "Major Business Announcements"

The stock has performed admirably since my last article suggested a short-term trading opportunity in the shares and added another 50% on strong trading volume after the Q4 earnings release as investors and momentum traders are bidding up the stock price in anticipation of "four major business announcements in 2019 in varied adjacent markets" with the first of these announcements expected to be made soon. On the call, management hinted to an agreement related to e-mobility which is a move the company has been contemplating for quite some time already.

In fact, management has also provided some context regarding the potential direction of the anticipated subsequent announcements:

  • Ground support equipment as discussed on the company's business update call in January
  • Delivery vans (investors are clearly betting on Amazon here given the existing technology collaboration)
  • Global distribution agreement for material handling equipment with a large multinational company
  • Partnership with a large industrial gas company (remember, Air Liquide still holds an equity stake in Plug Power)

On the conference call, management already cautioned analysts and investors that the upcoming deals will have more implications for next year.

While I have no doubt that each of these upcoming announcements might cause a very nice pop to the share price, the real impact of these agreements will only show up over time.

Also keep in mind that management is currently under pressure to move the share price up given weak underlying core business trends, short-term debt refinancing issues and to allow for conversion of the recently issued Series E convertible preferred stock before scheduled installment payments start in May.

In fact, they have done a great job with this regard as of late. After the stock fell to 52-week-lows in December due to general market weakness and tax loss selling, the company moved up the time of the company's business update call and, in addition, CEO Andy Marsh announced his intent to purchase shares on the open market:

Because we are a public company, management and the Board of Directors (BOD) are blocked to buy shares. I WILL BUY WHEN ALLOWED AFTER JANUARY 9TH, and I know other board members and managers feel the same. As one BOD member said, “this stock is too cheap to pass up.

Admittedly, this bold announcement wasn't exactly followed up by the type of bold action investors might have expected as on January 17, Mr. Marsh only stated that he plans to buy a maximum of $30,000 of the company's common stock over the next 12 months utilizing a yet to be set up Rule10b5-1 trading plan. As of this date, no insider buys have been reported, neither by the CEO nor by other members of senior management or the company's board of directors.

But the real treat was the "four major business announcements in 2019" statement at the very end of the Q4/2018 shareholder letter in combination with management's teasers on the subsequent conference call.

The highly successful promotion could result in the company improving its stricken balance sheet considerably as the current stock price now allows for the conversion of the November 2018 Series E preferred convertible stock at the lowest possible dilution to common shareholders. Moreover, with the stock now trading at 52-week-highs, Plug Power might have other avenues available to deal with the company's newly disclosed short-term debt issues. In fact, I would strongly support utilizing the remaining $45 million under the current ATM agreement with B. Riley FBR and potentially even pursue a secondary offering to put short-term debt issues to rest, lower the company's overall leverage and add more liquidity to deal with anticipated ongoing operating cash usage.

Bottom Line

Management has been highly successful to re-ignite investor enthusiasm by painting a rosy picture for the future of Plug Power with the company finally expanding into adjacent markets via anticipated partnerships with industry leaders. In fact, the ongoing move in the stock price might help the company to deal with its newly disclosed short-term debt issues as well as converting the Series E preferred stock at minimal dilution instead of being required to start with scheduled installment payments in May.

In fact, I strongly support the company raising a major amount of new equity at current share prices as the underlying trends in the core business are weak, as evidenced by a 20% year-over-year decline in new orders and overall backlog growing just slightly.

Moreover, the core business isn't growing as suggested by the company's reported numbers. In fact, GenDrive unit shipments were down slightly from 2017 levels with reported revenue growth being solely a function of favorable changes in lease accounting, growth in the company's margin-dilutive adjacent business segments and a better pricing mix.

Without the regained ability to recognize Wal-Mart-related revenues (and associated margins) upfront in H2/2018, the company would have actually missed its stated EBITDAS target by a mile.

The recent, favorable change in revenue recognition will also benefit the company's reported revenues in 2019. Depending on Wal-Mart sites in the mix and timing of sale-and-leaseback refinancing, H1/2019 revenues could be positively impacted.

But given that the reported 42% increase in gross billings over 2017 wasn't enough to keep GenDrive unit sales at least flat in 2018, the company's guidance of 30% gross billings growth for 2019 (at the mid-point of the provided range) actually points to underlying unit sales to decrease further, perhaps even in a more pronounced way.

In light of seemingly weakening demand for the company's core material handling technology, it shouldn't be viewed as a surprise that Plug Power is finally looking to partner with large, multinational companies to open up new regions and avenues for the company's PEM fuel cell technology.

From a strictly fundamental perspective, the recent rally in the company's shares should be sold as, contrary to what management wants investors to believe, the core business appears to be in decline.

That said, never underestimate the power of the momentum crowd, particularly in combination with anticipated major business announcements seemingly close at hand. I expect the stock to remain volatile for the foreseeable future with momentum traders leading the way.

Without the company delivering on its promised improvements in gross margins, cash flow and adjusted EBITDA in 2019, the renewed rally in the company's shares will inevitably reverse, as evidenced already many times in the past.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: As a daytrader, I might chose to trade all stocks mentioned in the article at any given time, both long and short.

Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.