SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------- FORM 10-Q X - QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO _________ Commission File Number: 00027527 PLUG POWER INC. (Exact name of registrant as specified in its charter) 968 ALBANY-SHAKER ROAD, LATHAM, NEW YORK 12110 (Address of registrant's principal executive office) (518) 782-7700 (Registrant's telephone number, including area code) DELAWARE 22-3672377 (State or other jurisdiction (I.R.S. Employer of Incorporation) Identification Number) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- The number of shares of common stock outstanding as of July 31, 2000 was 43,525,785 with a par value of $.01 per share. 1
PLUG POWER INC. INDEX to FORM 10-Q PART I. FINANCIAL INFORMATION Page Item 1 - Financial Statements Condensed Consolidated Balance Sheets - June 30, 2000 and December 31, 1999 3 Condensed Consolidated Statements of Operations - Three Month and Six Month Periods ended June 30, 2000 and June 30, 1999 and Cumulative Amounts from Inception 4 Condensed Consolidated Statements of Cash Flows - Six Month Periods ended June 30, 2000 and June 30, 1999 and Cumulative Amounts from Inception 5 Notes to Condensed Consolidated Financial Statements 6 - 9 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 10 - 17 PART II. OTHER INFORMATION Item 1 - Legal Proceedings 18 Item 4 - Submission of Matters to a Vote of Security Holders 18 Item 6 - Exhibits and Reports on Form 8-K 18 - 21 Signature 21 2
PLUG POWER INC. (A DEVELOPMENT STAGE ENTERPRISE) CONDENSED CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> (Unaudited) June 30, 2000 December 31, 1999 ------------------ -------------------- <S> <C> <C> ASSETS Current assets: Cash and cash equivalents $110,797,623 $171,496,286 Restricted cash 275,000 275,000 Marketable securities 11,242,180 -- Accounts receivable 4,632,854 5,212,943 Inventory 2,606,335 304,711 Prepaid development costs 2,166,667 -- Other current assets 466,898 124,380 ------------ ------------ Total current assets 132,187,557 177,413,320 Restricted cash 5,600,274 5,600,274 Property, plant and equipment, net 28,747,562 23,333,791 Intangible assets 8,505,528 -- Investment in affiliates 11,142,696 9,778,250 Prepaid development costs 4,208,333 -- ------------ ------------ Total assets $190,391,950 $216,125,635 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 4,543,264 $ 4,644,496 Accrued expenses 5,016,380 3,004,126 Deferred grant revenue 200,000 200,000 Current portion of capital lease obligation and long-term debt 356,103 353,175 ------------ ------------ Total current liabilities 10,115,747 8,201,797 Long-term debt 5,600,274 5,600,274 Deferred grant revenue 700,000 800,000 Capital lease obligation 66,544 117,030 ------------ ------------ Total liabilities 16,482,565 14,719,101 ------------ ------------ Commitments and contingencies (see footnote 6) Stockholders' equity: Preferred stock, $0.01 par value per share; 5,000,000 shares authorized; none issued and outstanding -- -- Common stock, $0.01 par value per share; 245,000,000 shares authorized at June 30, 2000 and 95,000,000 shares authorized at December 31, 1999; 43,515,935 shares issued and outstanding, June 30, 2000 and 43,015,508 shares issued and outstanding, December 31, 1999 435,159 430,155 Paid-in capital 257,741,859 249,964,994 Deficit accumulated during the development stage (84,267,633) (48,988,615) ------------ ------------ Total stockholders' equity 173,909,385 201,406,534 ------------ ------------ Total liabilities and stockholders' equity $190,391,950 $216,125,635 ============ ============ </TABLE> The accompanying notes are an integral part of the financial statements. 3
PLUG POWER INC. (A Development Stage Enterprise) Condensed Consolidated Statements of Operations (Unaudited) <TABLE> <CAPTION> --------------------------------- ------------------------------- Three months ended June 30, Six months ended June 30, Cumulative --------------------------------- ------------------------------- Amounts 2000 1999 2000 1999 from Inception --------------------------------- ------------------------------- ---------------- <S> <C> <C> <C> <C> <C> Contract revenue $ 2,417,764 $ 1,957,778 $ 5,350,557 $ 3,695,535 $ 24,085,471 Cost of contract revenue 3,491,553 2,934,430 7,390,300 5,117,834 32,978,425 -------------- ------------ -------------- ------------- -------------- Loss on contracts (1,073,789) (976,652) (2,039,743) (1,422,299) (8,892,954) In-process research and development -- -- 4,984,000 -- 9,026,640 Research and development expense 16,932,662 4,799,472 28,376,834 7,780,246 54,816,596 General and administrative 1,696,570 2,670,636 3,253,000 5,599,736 16,564,960 Interest expense 59,145 -- 154,615 -- 344,201 -------------- ------------ -------------- ------------- -------------- Operating loss (19,762,166) (8,446,760) (38,808,192) (14,802,281) (89,645,351) Interest income 2,184,312 174,283 4,492,478 218,033 7,812,772 -------------- ------------ -------------- ------------- -------------- Loss before equity in losses of affiliates (17,577,854) (8,272,477) (34,315,714) (14,584,248) (81,832,579) Equity in losses of affiliates (455,304) (312,948) (963,304) (500,448) (2,435,054) -------------- ------------ -------------- ------------- -------------- Net loss $ (18,033,158) $ (8,585,425) $ (35,279,018) $ (15,084,696) $ (84,267,633) ============== ============ ============== ============= ============== Loss per share: Basic and diluted $ (0.42) $ (0.37) $ (0.82) $ (0.71) ============== ============ ============== ============= Weighted average number of common shares outstanding 43,151,810 23,468,613 43,053,998 21,299,034 ============== ============ ============== ============= </TABLE> The accompanying notes are an integral part of the financial statements. 4
PLUG POWER INC. (A Development Stage Enterprise) Condensed Consolidated Statements of Cash Flows (Unaudited) <TABLE> <CAPTION> Six months ended June 30, Cumulative ----------------------------------- Amounts from 2000 1999 Inception ----------------------------------- --------------------- <S> <C> <C> <C> Cash Flows From Operating Activities: Net loss $ (35,279,018) $ (15,084,696) $ (84,267,633) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 1,770,000 224,217 3,809,036 In-process research and development -- -- 4,042,640 Equity in losses of affiliate 963,304 500,448 2,435,054 Amortization of intangible assets 1,118,971 -- 1,118,971 Amortization of deferred rent -- 100,000 150,000 Write-off of deferred rent -- 1,850,000 1,850,000 In-kind services -- -- 500,000 Stock based compensation 253,924 2,406,250 2,503,924 Compensatory options 63,400 80,400 1,254,200 Changes in assets and liabilities: Accounts receivable 580,089 (416,447) (4,632,854) Inventory (2,301,624) -- (2,606,335) Due from investor -- 685,306 286,492 Prepaid development costs (1,375,000) -- (1,375,000) Other current assets (342,518) (45,053) (444,984) Accounts payable and accrued expenses 1,911,022 2,359,206 9,511,536 Deferred grant revenue (100,000) -- 900,000 Due to investor -- (278,882) (286,492) ------------- -------------- --------------- Net cash used in operating activities (32,737,450) (7,619,251) (65,251,445) ------------- -------------- --------------- Cash Flows From Investing Activities: Purchase of property, plant and equipment (7,183,771) (5,498,919) (20,703,820) Purchase of intangible assets (9,624,500) -- (9,624,500) Investment in affiliate (1,500,000) -- (1,500,000) Marketable securities (11,242,180) -- (11,242,180) ------------- -------------- --------------- Cash used in investing activities (29,550,451) (5,498,919) (43,070,500) ------------- -------------- --------------- Cash Flows From Financing Activities: Proceeds from issuance of common stock -- 26,367,782 130,742,782 Proceeds from initial public offering, net -- -- 94,611,455 Stock issuance costs -- -- (1,639,577) Proceeds from stock option exercises 1,636,796 -- 1,678,703 Cash placed in escrow -- -- (5,875,274) Principal payments on capital lease obligations (47,558) -- (113,521) Principal payments on long-term debt -- -- (285,000) ------------- -------------- --------------- Net cash provided by financing activities 1,589,238 26,367,782 219,119,568 ------------- -------------- --------------- (Decrease) increase in cash and cash equivalents (60,698,663) 13,249,612 110,797,623 Cash and cash equivalents, beginning of period 171,496,286 3,993,122 -- ------------- -------------- --------------- Cash and cash equivalents, end of period $ 110,797,623 $ 17,242,734 $ 110,797,623 ============= ============== =============== </TABLE> The accompanying notes are an integral part of the financial statements. 5
PLUG POWER INC. Notes to Condensed Consolidated Financial Statements 1. NATURE OF OPERATIONS Plug Power Inc. (Company) was originally formed as a joint venture between Edison Development Corporation (EDC) and Mechanical Technology Incorporated (MTI) on June 27, 1997 and succeeded by merger to all of the assets, liabilities and equity of Plug Power, L.L.C. in November 1999. The Company is a development stage enterprise formed to research, develop, manufacture and distribute fuel cells for electric power generation. 2. BASIS OF PRESENTATION The condensed consolidated balance sheet as of June 30, 2000, the condensed consolidated statements of operations for the three and six month periods ended June 30, 2000 and 1999 and the condensed consolidated statements of cash flows for the six month periods ended June 30, 2000 and 1999 have been prepared by the Company without audit. In the opinion of management, all adjustments, which consist solely of normal recurring adjustments, necessary to present fairly in accordance with generally accepted accounting principles, the financial position, results of operations and cash flows for all periods presented, have been made. The results of operations for the interim periods presented are not necessarily indicative of the results that may be expected for the full year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the Company's audited financial statements and notes thereto included in the Company's Annual Report on Form 10-K filed for the fiscal year ended December 31, 1999. Marketable Securities: Marketable securities includes investments in corporate debt securities which are carried at fair value. These investments are considered available for sale, and the difference between the cost and the fair value of these securities will be reflected in other comprehensive income and as a separate component of stockholders' equity. There was no significant difference between cost and fair value of these investments at June 30, 2000. Recent Accounting Pronouncements: In March 2000, the Financial Accounting Standards Board issued FASB Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving Stock Compensation -- an Interpretation of APB Opinion No. 25". FIN 44 clarifies the application of APB Opinion No. 25 including the following: the definition of an employee for purposes of applying APB Opinion No. 25; the criteria for determining whether a plan qualifies as a non compensatory plan; the accounting consequence of various modifications to the terms of previously fixed stock options or awards; and the accounting for an exchange of stock compensation awards in a business combination. FIN 44 is generally effective July 1, 2000. The Company does not expect the application of FIN 44 to have a material impact on the Company's financial position or results of operations. In December, 1999, the SEC issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 summarizes certain of the SEC's views in applying generally accepted accounting principles to revenue recognition. The Company is required to apply the provisions of SAB 101 in the fourth quarter of 2000, however, the Company does not expect the application of SAB 101 to have a material impact on the Company's financial position or results of operations. 6
3. LOSS PER SHARE Loss per share for the Company is as follows: <TABLE> <CAPTION> Three Months Three Months Six Months Six Months Ended June 30, Ended June 30, Ended June 30, Ended June 30, 2000 2000 2000 2000 ---------------- ---------------- ---------------- ---------------- <S> <C> <C> <C> <C> Numerator Net loss $(18,033,158) $(8,585,425) $(35,279,018) $(15,084,696) Denominator Weighted average number of Common shares 43,151,810 23,468,613 43,053,998 21,299,034 </TABLE> No options or warrants outstanding were included in the calculation of diluted loss per share because their impact would have been anti-dilutive. The calculation also excludes 111,851 contingently returnable shares. 4. INCOME TAXES The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109 (SFAS 109), "Accounting for Income Taxes." No benefit for federal or state income taxes has been reported in these condensed consolidated statements of operations as they have been offset by a full valuation allowance because it is more likely than not that the tax benefits of the net operating loss carryforward may not be realized. 5. INVESTMENTS IN AFFILIATES In February 1999, the Company entered into an agreement with GE MicroGen, Inc. (formerly GE On-Site Power, Inc.) a wholly owned subsidiary of General Electric Co. to create GE Fuel Cell Systems, L.L.C. (GEFCS) a limited liability company created to market and distribute fuel cell systems world- wide. GE MicroGen owns 75% of GEFCS and the Company owns 25% of GEFCS. The Company accounts for its interest in GEFCS on the equity method of accounting and adjusts its investment by its proportionate share of income or losses. During the six months ended June 30, 2000, GEFCS had revenues (fee income) of approximately $1,329,000 and an operating and net loss of approximately $147,000. The company recently completed an amendment to its distribution agreement with GE Fuel Cell Systems that defines product specifications and delivery schedules for pre-commercial and commercial model introductions. The new agreement allows GE to extend the existing 10-year agreement by an additional 5 years. Given the Company's revised product introduction schedule, which is expected to be during the first half of 2002, it does not expect any significant sales to GE before the first half of 2002. In March 2000, the Company acquired a 28% ownership interest in Advanced Energy Systems, Inc. (AES) in exchange for a combination of $1.5 million cash and Plug Power common stock valued at approximately $828,000. The Company accounts for its interest in AES on the equity method of accounting and adjusts its investment by its proportionate share of income or losses. During the six months ended June 30, 2000, AES had sales of approximately $702,000 and an operating and net loss of approximately $378,000. 7
6. GASTEC TRANSACTION In February 2000, Plug Power acquired all of Gastec's intellectual property, and certain fixed assets, related to fuel processor development for fuel cell systems capable of producing up to 100 kW of electricity. The total purchase price was $14,800,000, paid in cash. In connection with the transaction, the Company recorded in-process research and development expense in the amount of $4,984,000, fixed assets in the amount of $192,000 and intangible assets in the amount of $9,624,000 (including a trained workforce for $357,000). The in-process research and development was valued using an income approach which reflects the present value of future avoided costs the Company estimates it would otherwise have spent if it were to acquire the exclusive rights to this technology, for its remaining useful life, from another entity. The Company then discounted the net avoided cost using a 40% discount rate which the Company believes to be consistent with the risk associated this early stage technology. This amount was further adjusted to reflect the technology's stage of completion, of approximately 30%, in order to reflect the value of the in-process research and development attributable to the efforts of the seller up to the date of the transaction. Fixed assets were capitalized at their fair value and will be depreciated over their useful life. In connection with the transaction, the Company acquired the services of employees experienced in the fuel cell industry. Accordingly, the Company has capitalized the estimated cost savings associated with recruiting, relocating and training a similar workforce. The remaining $9,267,000 has been capitalized as an intangible asset. This amount together with the value attributable to the trained workforce has been capitalized and will be amortized over the next 36 months. 7. STOCKHOLDERS' EQUITY Changes in stockholders' equity for the six months ended June 30, 2000 is as follows: <TABLE> <CAPTION> Deficit Accumulated During the Total Common Stock Additional Development Stockholders' Shares Amount Paid-in Capital Stage Equity ------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> BALANCE, JANUARY 1, 2000 43,015,508 $ 430,155 $ 249,964,994 $ (48,988,615) $ 201,406,534 Stock issued for equity in 7,000 70 827,680 827,750 affiliate Stock issued for development 104,869 1,048 4,998,952 5,000,000 agreement Stock issued to employees 3,041 31 253,893 253,924 Compensatory stock options 63,400 63,400 Stock option exercises 385,517 3,855 1,632,940 1,636,795 Net loss (35,279,018) (35,279,018) ------------------------------------------------------------------------------------------- BALANCE, JUNE 30, 2000 43,515,935 $ 435,159 $ 257,741,859 $ (84,267,633) $ 173,909,385 =========================================================================================== </TABLE> 8
8. COMMITMENTS AND CONTINGENCIES Development agreements: In April, 2000, the Company finalized a joint development agreement with AXIVA GmbH, to develop a high temperature membrane electrode unit (MEU). Under the agreement, Plug Power and Axiva will exclusively work together on the development of a high temperature MEU for Plug Power's stationary fuel cell system applications. As part of the agreement Plug Power will contribute an estimated $4.1 million (not to exceed $4.5 million) to fund its share of the development efforts over the next twelve months. As of June 30, 2000, the Company has contributed $1.5 million under the terms of the agreement. In connection with the transaction, the Company has recorded $1.5 million under the balance sheet caption "Prepaid development costs" and will amortize these costs as they are incurred. In June 2000, the Company finalized a joint development agreement with Engelhard Corporation for development and supply of advanced catalysts to increase the overall performance and efficiency of Plug Power's fuel processor - the front end of the fuel cell system. As part of the agreement, over the next three years, Plug Power will contribute $10 million to fund Engelhard's development efforts and Engelhard will purchase $10 million of Plug Power's common stock. The agreements also specify rights and obligations for Engelhard to supply product to Plug Power over the next 10 years. As of June 30, 2000, the Company has contributed $5 million under the terms of the agreement while Engelhard has purchased $5 million of Plug Power common stock. In connection with the transaction, the Company has recorded $5 million under the balance sheet caption "Prepaid development costs" and will amortize these costs as they are incurred. Litigation: The Company has disclosed on a Form 8-K filed January 25, 2000, with the Securities and Exchange Commission, that a legal complaint was filed against the Company, The Detroit Edison Company and EDC alleging the entities misappropriated business and technical trade secrets, ideas , know-how and strategies relating to fuel cell systems and breached certain contractual obligations owed to DCT, Inc. The Company continues to believe the allegations made against it are without merit and intends to vigorously contest the litigation, but the ultimate outcome is of course uncertain. Due to the early stage of this litigation, we cannot determine whether any loss will result from the ultimate outcome. 9
MANAGEMENT'S DISCUSSION AND ANAYLSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the accompanying Condensed Consolidated Financial Statements and Notes thereto included within this report, and our audited financial statements and notes thereto included in our Annual Report on Form 10-K filed for the fiscal year ended December 31, 1999. In addition to historical information, this Form 10-Q and the following discussion contain forward-looking statements that reflect our plans, estimates, intentions, expectations and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those set forth under the caption "Risk Factors" in our Annual Report on Form 10-K filed for the fiscal year ended December 31, 1999. OVERVIEW Plug Power is a designer and developer of on-site, electricity generation systems utilizing proton exchange membrane (PEM) fuel cells for residential applications. GE Fuel Cell Systems, LLC, a joint venture 75% owned by General Electric's GE Power Systems business and 25% owned by Plug Power, will market, sell, service, and install our product. Plug Power was formed in June 1997 as a joint venture to further the development of fuel cells for electric power generation in residential and other applications. We are a development stage company and expect to bring our first commercial product to market in 2002. We recently completed an amendment to our distribution agreement with GE Fuel Cell Systems that defines product specifications and delivery schedules for pre-commercial and commercial model introductions. The new agreement also allows GE to extend the existing 10-year agreement by an additional 5 years. We continue to advance the development of our product. As a result of the continuous review of our development progress we have adjusted our production schedule for the remainder of this year and now plan to manufacture a total of 125 pre-commercial systems in year 2000. Through the first half of the year we have produced 61 pre-commercial systems for both onsite and offsite testing. At the end of the second quarter we had 27 field test systems, fueled by natural gas, providing power to homes and other buildings. These field systems, combined with others installed in Plug Power's R&D facilities, have accumulated over 47,000 hours of run time during the first six months of 2000. While these systems are not our final commercial design they enable us to gather meaningful data that is critical to the design of our initial commercial product which is now expected to be available during the first half of 2002. We do not expect significant product sales until after we begin commercial production. Since inception, we have devoted substantially all of our resources toward the development of the PEM fuel cell systems and have derived substantially all of our revenue from government research and development contracts. Through June 30, 2000, our stockholders in the aggregate have contributed $225.4 million in cash, including $93.0 million in net proceeds from our initial public offering of common stock, which closed on November 3, 1999 and $25.5 million in other contributions, consisting of in-process research and development, real estate, other in-kind contributions and a 25% interest in GE Fuel Cell Systems. 10
From inception through June 30, 2000, we have incurred losses of $84.3 million and expect to continue to incur losses as we expand our product development and commercialization program and prepare for the commencement of manufacturing operations. We expect that losses will fluctuate from quarter to quarter and that such fluctuations may be substantial as a result of, among other factors, the number of systems we produce and install for internal and external testing, the related service requirements necessary to monitor those systems and potential design changes required as a result of field testing. There can be no assurance that we will manufacture or sell residential fuel cell systems successfully or achieve or sustain product revenues or profitability. ALLIANCES AND DEVELOPMENT AGREEMENTS Since our inception in June 1997, we have formed strategic alliances with suppliers of key components, developed distributor and customer relationships, and entered into development and demonstration programs with electric utilities, government agencies and other energy providers. GASTEC: In February 2000, Plug Power acquired all of Gastec's intellectual property, and certain fixed assets, related to fuel processor development for fuel cell systems capable of producing up to 100 kW of electricity. The total purchase price was $14,800,000, paid in cash. In connection with the transaction, the Company recorded in-process research and development expense in the amount of $4,984,000, fixed assets in the amount of $192,000 and intangible assets in the amount of $9,624,000 (including a trained workforce for $357,000). The in-process research and development was valued using an income approach which reflects the present value of future avoided costs the Company estimates it would otherwise have spent if it were to acquire the exclusive rights to this technology, for its remaining useful life, from another entity. The Company then discounted the net avoided cost using a 40% discount rate which the Company believes to be consistent with the risk associated this early stage technology. This amount was further adjusted to reflect the technology's stage of completion, of approximately 30%, in order to reflect the value of the in- process research and development attributable to the efforts of the seller up to the date of the transaction. Fixed assets were capitalized at their fair value and will be depreciated over their useful life. In connection with the transaction, the Company acquired the services of employees experienced in the fuel cell industry. Accordingly, the Company has capitalized the estimated cost savings associated with recruiting, relocating and training a similar workforce. The remaining $9,267,000 has been capitalized as an intangible asset. This amount together with the value attributable to the trained workforce has been capitalized and will be amortized over the next 36 months. AXIVA: In April, 2000, the Company finalized a joint development agreement with AXIVA GmbH, to develop a high temperature membrane electrode unit (MEU). Under the agreement, Plug Power and Axiva will exclusively work together on the development of a high temperature MEU for Plug Power's stationary fuel cell system applications. As part of the agreement Plug Power will contribute an estimated $4.1 million (not to exceed $4.5 million) to fund its share of the development efforts over the next twelve months. As of June 30, 2000, the Company has contributed $1.5 million under the terms of the agreement. In connection with the transaction, the Company has recorded $1.5 million under the balance sheet caption "Prepaid development costs" and will amortize these costs as they are incurred. ENGELHARD: In June 2000, the Company finalized a joint development agreement with Engelhard Corporation for development and supply of advanced catalysts to increase the overall performance and efficiency of Plug Power's fuel processor - the front end of the fuel cell system. As part of the agreement, 11
over the next three years, Plug Power will contribute $10 million to fund Engelhard's development efforts and Engelhard will purchase $10 million of Plug Power's common stock. The agreements also specify rights and obligations for Engelhard to supply product to Plug Power over the next 10 years. As of June 30, 2000, the Company has contributed $5 million under the terms of the agreement while Engelhard has purchased $5 million of Plug Power common stock. In connection with the transaction, the Company has recorded $5 million under the balance sheet caption "Prepaid development costs" and will amortize these costs as they are incurred. ADVANCED ENERGY SYSTEMS: In March 2000, the Company acquired a 28% ownership interest in Advanced Energy Systems, Inc. (AES) in exchange for a combination of $1.5 million cash and Plug Power stock valued at approximately $828,000. The Company accounts for its interest in AES on the equity method of accounting and adjusts its investment by its proportionate share of income or losses. During the six months ended June 30, 2000, AES had sales of approximately $702,000 and an operating and net loss of approximately $378,000. RESULTS OF OPERATIONS Comparison of the Three Months Ended June 30, 2000 and June 30, 1999. Revenues. Our revenues during this period were derived primarily from cost reimbursement government contracts relating to the development of PEM fuel cell technology and contract revenue generated from the delivery of PEM fuel cells and related engineering and testing support services for other customers. Our government contracts provide for the partial recovery of direct and indirect costs from the specified government agency, generally requiring us to absorb from 25% to 50% of contract costs incurred. Total revenues for the second quarter ended June 30, 2000, were $2.4 million as compared to $2.0 million for the second quarter of 1999. This is the result of increased commercial contract revenue in the amount of $0.4 million, while the overall level of government contract revenue earned remained consistent. Government contract revenue represents approximately 80% of our total revenue. As a result of our cost sharing requirements for government contracts, we will report losses on these contracts as well as any future government contracts awarded. During the second quarter of 2000, the Company manufactured 39 pre- commercial residential fuel cell systems. The specifications of our current pre- commercial systems do not conform to the specifications originally agreed upon with GE in February 1999. As a result, GE is no longer contractually obligated to purchase the 485 units under its take or pay commitment and we no longer anticipate the projected $10.3 million in revenue from GE in 2000. Additionally, we do not expect any significant sales to GE until our commercial product is available during the first half of 2002. Cost of revenues. Cost of contract revenue includes compensation and benefits for the 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. Cost of contract revenue was $3.5 million for the three months ended June 30, 2000, as compared to $2.9 million for the same period last year. The increase in contract costs were related to increased effort on those contracts with greater cost sharing requirements, combined with the additional staff and related support costs necessary to earn the additional commercial contract revenue. The result was a loss on 12
contracts of $1.1 million for the three months ended June 30, 2000 compared to a loss on contracts of $1.0 million last year. We expect the cost to produce our initial systems to be higher than their sales price under the terms of our arrangements with our two distributors, GE Fuel Cell Systems and Edison Development and expect to continue to experience costs in excess of product revenues until we achieve higher production levels, which we do not anticipate until after 2003. Research and Development. Research and development expense includes compensation and benefits for the engineering and related staff, expenses for contract engineers, materials to build prototype units, fees paid to outside suppliers for subcontracted components and services, supplies used, facility related costs, such as computer and network services and other general overhead costs. Research and development expenses increased to $16.9 million for the three months ended June 30, 2000 from $4.8 million for the three months ended June 30, 1999. The increase was primarily attributable to the growth of our research and development activities, $11.5 million, including the production of 39 test and evaluation residential PEM fuel cell systems and amortization in the amount of $0.6 million related to the portion of the Gastec purchase price which has been capitalized and recorded on our balance sheet under the caption "Intangible assets." General and Administrative. General and administrative expense includes compensation, benefits and related costs in support of our general corporate functions, including general management, finance and accounting, human resources, business development, information and legal services. General and administrative expenses decreased to $1.7 million for the three months ended June 30, 2000 from $2.7 million for the three months ended June 30, 1999. The decrease is due to a one-time charge, in 1999, in the amount of $1.9 million for write off of deferred rent expense offset by an increase of $0.9 million for increased personnel cost and general expenses associated with expanding business operations. In June 1999, the Company entered into a real estate purchase agreement with Mechanical Technology to acquire our current facility, a portion of which we previously leased from them. As a result, we wrote off deferred rent expense in the amount of $1.9 million during the quarter ended June 30, 1999. Interest Expense. Interest expense of $59,000 for the three months ended June 30, 2000 consists of interest on a long-term obligation related to a real estate purchase agreement with Mechanical Technology in June, 1999, and interest paid on capital lease obligations. Interest Income. Interest income consists of interest earned on our cash and cash equivalents and increased to $2.2 million for the three months ended June 30, 2000 from $174,000 for the same period last year. The increase was due to interest earned on higher balances of cash and cash equivalents available throughout the second quarter of 2000, which is result of our initial public offering of common stock and the exercise of warrants and stock purchase commitments by our existing stockholders. Equity in losses of affiliates. Equity in losses of affiliate increased to $455,000 for the three months ended June 30, 2000 from $313,000 last year. Equity in losses of affiliates for the period ended June 30, 2000 in the amount of $455,000 is our proportionate share of the losses of GE 13
Fuel Cell Systems and Advanced Energy Systems in the amount of $26,000 and goodwill amortization on those investments in the amount of $429,000, which we account for under the equity method of accounting. Income Taxes. No benefit for federal and state income taxes has been reported in the financial statements because the deferred tax asset generated from our net operating loss for the three month period ended June 30, 2000 has been offset by a full valuation allowance because it is more likely than not that the tax benefits of the net operating loss carryforward may not be realized. We were taxed as a partnership prior to November 3, 1999, the effective date of our merger into a C corporation, and the federal and state income tax benefits of our losses were recorded by our stockholders. Effective on November 3, 1999, and began accounting for income taxes in accordance with Statement of Financial Accounting Standards No. 109 (SFAS 109), "Accounting for Income Taxes." Comparison of the Six Months Ended June 30, 2000 and June 30, 1999. Revenues. Our revenues during this period were derived primarily from cost reimbursement government contracts relating to the development of PEM fuel cell technology and contract revenue generated from the delivery of PEM fuel cells and related engineering and testing support services for other customers. Our government contracts provide for the partial recovery of direct and indirect costs from the specified government agency, generally requiring us to absorb from 25% to 50% of contract costs incurred. Total revenues for the six months ended June 30, 2000 were $5.4 million as compared to $3.7 million for the same period in 1999. This is primarily the result of increased commercial contract revenue in the amount of $1.1 million. Government contract revenue represents approximately 80% of our total revenue. As a result of our cost sharing requirements for government contracts, we will report losses on these contracts as well as any future government contracts awarded. During the first half of 2000, the Company manufactured 61 pre-commercial residential fuel cell systems. The specifications of our current pre-commercial systems do not conform to the specifications originally agreed upon with GE in February 1999. As a result, GE is no longer contractually obligated to purchase the 485 units under its take or pay commitment and we no longer anticipate the projected $10.3 million in revenue from GE in 2000. Additionally, we do not expect any significant sales to GE until our commercial product is available during the first half of 2002. Cost of revenues. Cost of contract revenue includes compensation and benefits for the 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 government contracts. Cost of contract revenue was $7.4 million for the six months ended June 30, 2000, as compared to $5.1 million for the same period last year. The increase in contract costs were related to increased effort on those contracts with greater cost sharing requirements, combined with the additional staff and related support costs necessary to earn the additional contract revenue. The result was a loss on contracts of $2.0 million for the six months ended June 30, 2000 compared to a loss on contracts of $1.4 million last year. 14
We expect the cost to produce our initial systems to be higher than their sales price under the terms of our arrangements with our two distributors, GE Fuel Cell Systems and Edison Development and expect to continue to experience costs in excess of product revenues until we achieve higher production levels, which we do not anticipate until after 2003. Research and Development. Research and development expense includes compensation and benefits for the engineering and related staff, expenses for contract engineers, materials to build prototype units, fees paid to outside suppliers for subcontracted components and services, supplies used, facility related costs, such as computer and network services and other general overhead costs. Research and development expenses increased to $33.4 million for the six months ended June 30, 2000 from $7.8 million for the six months ended June 30, 1999. The increase was a result of a one-time charge of $5.0 million related to the write off of in-process research and development related to our acquisition of intellectual property acquired from Gastec and amortization of $1.1 million related to the portion of the Gastec purchase price which has been capitalized and recorded on our balance sheet under the caption "Intangible assets." The remaining increase, $19.5 million, is attributable to the growth of our research and development activities, including the production of 61 test and evaluation residential PEM fuel cell systems. General and Administrative. General and administrative expense includes compensation, benefits and related costs in support of our general corporate functions, including general management, finance and accounting, human resources, business development, information and legal services. General and administrative expenses decreased to $3.3 million for the six months ended June 30, 2000 from $5.6 million for the six months ended June 30, 1999. The decrease was primarily due to a $2.3 million charge for non-cash stock-based compensation, a $1.9 million charge for the write-off of deferred rent expense, both further explained below, offset by an increase of $1.9 million for increased personnel cost and general expenses associated with expanding business operations. Our original formation agreements provided for Mechanical Technology to earn non-cash credits relating to services it rendered prior to our formation in connection with securing future government contracts. Upon our formation, Mechanical Technology contributed its fuel cell operations to us and we received the right to these government contracts if ever awarded in the future. When these contracts were awarded to us, Mechanical Technology earned the non-cash credits, entitling it to receive 2,250,000 shares of common stock with a fair value at the time of grant of $2.3 million. Accordingly, we recognized $2.3 million in non-cash stock-based compensation expense during the three months ended March 31, 1999. In June 1999, the Company entered into a real estate purchase agreement with Mechanical Technology to acquire our current facility, a portion of which we previously leased from them. As a result, we wrote off deferred rent expense in the amount of $1.9 million during the quarter ended June 30, 1999. Interest Expense. Interest expense of $155,000 for the six months ended June 30, 2000 consists of interest on a long-term obligation related to a real estate purchase agreement with Mechanical Technology in June, 1999, and interest paid on capital lease obligations. 15
Interest Income. Interest income consists of interest earned on our cash and cash equivalents and increased to $4.5 million for the six months ended June 30, 2000 from $218,000 for the same period last year. The increase was due to interest earned on higher balances of cash and cash equivalents available throughout the first half of 2000, which is result of our initial public offering of common stock and the exercise of warrants and stock purchase commitments by our existing stockholders. Equity in losses of affiliates. Equity in losses of affiliate increased to $963,000 for the six months ended June 30, 2000 from $500,000 last year. Equity in losses of affiliates during the six months ended June 30, 2000 in the amount of $963,000 is our proportionate share of the losses of GE Fuel Cell Systems and Advanced Energy Systems in the amount of $253,000 and goodwill amortization on those investments in the amount of $710,000, which we account for under the equity method of accounting. Income Taxes. No benefit for federal and state income taxes has been reported in the financial statements because the deferred tax asset generated from our net operating loss for the three month period ended March 31, 2000 has been offset by a full valuation allowance because it is more likely than not that the tax benefits of the net operating loss carryforward may not be realized. We were taxed as a partnership prior to November 3, 1999, the effective date of our merger into a C corporation, and the federal and state income tax benefits of our losses were recorded by our stockholders. Effective on November 3, 1999, and began accounting for income taxes in accordance with Statement of Financial Accounting Standards No. 109 (SFAS 109), "Accounting for Income Taxes." LIQUIDITY AND CAPITAL RESOURCES Summary Our cash requirements depend on numerous factors, including completion of our product development activities, ability to commercialize our residential fuel cell systems, market acceptance of our systems and other factors. We expect to devote substantial capital resources to continue our development programs directed at commercializing our fuel cell systems for worldwide residential use, to hire and train our production staff, develop and expand our manufacturing capacity, begin production activities and expand our research and development activities. We will pursue the expansion of our operations through internal growth and strategic acquisitions and expect such activities will be funded from existing cash and cash equivalents, issuance of additional equity or debt securities or additional borrowings subject to market and other conditions. There can be no assurance that such additional financing will be available on terms acceptable to the Company or at all. The failure to raise the funds necessary to finance its future cash requirements or consummate future acquisitions could adversely affect the Company's ability to pursue its strategy and could negatively affect its operations in future periods. We anticipate incurring substantial additional losses over at least the next several years and believe that our current cash balances will provide us with sufficient capital to fund operations for at least the next 12 months. We have financed our operations through June 30, 2000, primarily from the sale of equity, which has provided cash in the amount of $225.4 million. As of June 30, 2000, we had 16
unrestricted cash, cash equivalents and marketable securities totaling $122.0 million and working capital was approximately $122.0 million. As a result of our purchase of real estate from Mechanical Technology, we have escrowed $5.8 million in cash to collateralize the debt assumed on the purchase. During the six months ended June 30, 2000, net cash used in operating activities was $32.7 million, including $5.0 million related to the write off of in-process research and development related to our acquisition of intellectual property acquired from Gastec. Cash used in investing activities during the six months ended June 30, 2000, was $29.6 million, including $11.2 million for the purchase of marketable securities. Excluding the purchase of marketable securities, cash used in investing activities was $18.4 million consisting of $7.2 million for the purchase of property, plant and equipment, $9.7 million representing the goodwill portion of the purchase price related to the acquisition of intellectual property from Gastec and $1.5 million for a 28% ownership interest in Advanced Energy Systems. Since inception, net cash used in operating activities has been $65.3 million and cash used in investing activities has been $43.1 million IMPACT OF YEAR 2000 In late 1999, we completed a review and evaluation of the potential impact that the change in the date to the Year 2000 will have on our computer systems and concluded that all of our major computer systems were able to recognize and appropriately process dates commencing in the Year 2000. As a result of those planning and implementation efforts, the Company experienced no significant disruptions in mission critical information technology and non-information technology systems and believes those systems successfully responded to the Year 2000 date change. Our historical cost to assess our Year 2000 readiness has been negligible. The Company is not aware of any material problems resulting from Year 2000 issues, either with its internal systems, or the products and services of third parties. We will continue to monitor our mission critical computer applications and those of our suppliers and vendors throughout the year 2000 to ensure that any latent Year 2000 matters that may arise are addressed promptly. 17
PART II - OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS - -------------------------- On January 25, 2000, DCT, Inc. filed a complaint against Plug Power, The Detroit Edison Company and Edison Development Corporation, alleging that these entities misappropriated from DCT business and technical trade secrets, ideas, know-how and strategies relating to fuel cell systems and breached certain contractual obligations owed to DCT. We believe the allegations made against us are without merit and we intend to vigorously contest the litigation. Discovery is currently underway. Due to the early stage of this litigation, we cannot determine whether any loss will result from the ultimate outcome. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------------------------------------------------------------ At the Company's Annual Meeting of Shareholders ("Annual Meeting") held on May 24, 2000, the Company's shareholders approved the following: (1) To elect the following directors as Class I Directors, each to serve until the Company's 2003 annual meeting of stockholders and until his successor is duly elected and qualified: <TABLE> <CAPTION> Against/ Broker Nominee For Withheld Abstain Non-Votes ------- -------------------------------------------- <S> <C> <C> <C> <C> Gary Mittleman 37,538,037 23,047 -- -- Walter L. Robb 37,538,037 23,047 -- -- Anthony F. Earley, Jr. 37,538,037 23,047 -- -- (2) To approve an amendment to the Company's Certificate of Incorporation increasing the number of authorized shares of Common Stock from 95,000,000 to 245,000,000 37,287,322 243,622 29,212 -- </TABLE> ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K - ----------------------------------------- A) Exhibits. 2.1 Agreement and Plan of Merger by and between Plug Power and Plug Power, LLC, a Delaware limited liability company, dated as of October 7, 1999. * 3.1 Amended and Restated Certificate of Incorporation of Plug Power. * 3.2 Amended and Restated By-laws of Plug Power. * 4.1 Specimen certificate for shares of common stock, $.01 par value, of Plug Power. * 10.1 Amended and Restated Limited Liability Company Agreement of GE Fuel Cell Systems, LLC, dated February 3, 1999, between GE On-Site Power, Inc. and Plug Power, LLC * 10.2 Contribution Agreement, dated as of February 3, 1999, by and between GE On-Site Power, Inc. and Plug Power, LLC. * 18
10.3 Trademark and Trade Name Agreement, dated as of February 2, 1999, between General Electric Company and GE Fuel Cell Systems, LLC. * 10.4 Trademark Agreement, dated as of February 2, 1999, between Plug Power LLC and GE Fuel Cell Systems, LLC. * 10.5 Distributor Agreement, dated as of February 2, 1999, between GE Fuel Cell Systems, LLC and Plug Power, LLC. * 10.6 Side letter agreement, dated February 3, 1999, between General Electric Company and Plug Power LLC. * 10.7 Mandatory Capital Contribution Agreement, dated as of January 26, 1999, between Edison Development Corporation, Mechanical Technology Incorporated and Plug Power, LLC and amendments thereto, dated August 25, 1999 and August 26, 1999. * 10.8 LLC Interest Purchase Agreement, dated as of February 16, 1999, between Plug Power, LLC and Michael J. Cudahy. * 10.9 Warrant Agreement, dated as of February 16, 1999, between Plug Power, LLC and Michael J. Cudahy and amendment thereto, dated July 26, 1999. * 10.10 LLC Interest Purchase Agreement, dated as of February 16, 1999, between Plug Power, LLC and Kevin Lindsey. * 10.11 LLC Interest Purchase Agreement, dated as of April 1, 1999, between Plug Power, LLC and Antaeus Enterprises, Inc. * 10.12 LLC Interest Purchase Agreement, dated as of April 9, 1999, between Plug Power, LLC and Southern California Gas Company. * 10.13 Warrant Agreement, dated as of April 9, 1999, between Plug Power, LLC and Southern California Gas Company and amendment thereto, dated August 26, 1999. * 10.14 Agreement, dated as of June 26, 1997, between the New York State Energy Research and Development Authority and Plug Power LLC, and amendments thereto dated as of December 17, 1997 and March 30, 1999. * 10.15 Agreement, dated as of January 25, 1999, between the New York State Energy Research and Development Authority and Plug Power LLC. * 10.16 Agreement, dated as of September 30, 1997, between Plug Power LLC and the U.S. Department of Energy. * 10.17 Cooperative Agreement, dated as of September 30, 1998, between the National Institute of Standards and Technology and Plug Power, LLC, and amendment thereto dated May 10, 1999. * 10.18 Joint venture agreement, dated as of June 14, 1999 between Plug Power, LLC, Polyfuel, Inc., and SRI International. * 10.19 Cooperative Research and Development Agreement, dated as of February 12, 1999, between Plug Power, LLC and U.S. Army Benet Laboratories. * 19
10.20 Nonexclusive License Agreement, dated as of April 30, 1993, between Mechanical Technology Incorporated and the Regents of the University of California. * 10.21 Development Collaboration Agreement, dated as of July 30, 1999, by and between Joh. Vaillant GMBH. U. CO. and Plug Power, LLC. * 10.22 Agreement of Sale, dated as of June 23, 1999, between Mechanical Technology, Incorporated and Plug Power LLC. * 10.23 Assignment and Assumption Agreement, dated as of July 1, 1999, between the Town of Colonie Industrial Development Agency, Mechanical Technology, Incorporated, Plug Power, LLC, KeyBank, N.A., and First Albany Corporation. * 10.24 Replacement Reimbursement Agreement, dated as of July 1, 1999, between Plug Power, LLC and KeyBank, N.A. * 10.25 1997 Membership Option Plan and amendment thereto dated September 27, 1999. * 10.26 Trust Indenture, dated as of December 1, 1998, between the Town of Colonie Industrial Development Agency and Manufacturers and Traders Trust Company, as trustee. * 10.27 Distribution Agreement, dated as of June 27, 1997, between Plug Power, LLC and Edison Development Corporation and amendment thereto dated September 27, 1999. * 10.28 Agreement, dated as of June 27, 1999, between Plug Power, LLC and Gary Mittleman. * 10.29 Agreement, dated as of June 8, 1999, between Plug Power, LLC and Louis R. Tomson. * 10.30 Agreement, dated as of August 6, 1999, between Plug Power, LLC and Gregory A. Silvestri. * 10.31 Agreement, dated as of August 12, 1999, between Plug Power, LLC and William H. Largent. * 10.32 Agreement, dated as of August 20, 1999, between Plug Power, LLC and Dr. Manmohan Dhar.* 10.33 1999 Stock Option and Incentive Plan. * 10.34 Employee Stock Purchase Plan. * 10.35 Agreement, dated as of August 27, 1999, by Plug Power, LLC, Plug Power Inc., GE On-Site Power, Inc., GE Power Systems Business of General Electric Company, and GE Fuel Cell Systems, L.L.C. * 10.36 Registration Rights Agreement to be entered into by the Registrant and the stockholders of the Registrant. * 10.37 Registration Rights Agreement to be entered into by Plug Power, L.L.C. and GE On-Site Power, Inc. * 23.1 Consent of Goodwin, Procter & Hoar LLP (included in Exhibit 5.1 hereto). * 24.1 Powers of Attorney (included on signature page). * 20
* Incorporated by reference to the Company's Registration Statement on Form S-1 (File Number 333-86089) 27.1 Financial Data Schedule B) Reports on Form 8-K. On May 4, 2000, we filed a Form 8-K with the Securities and Exchange Commission announcing the issuance of a press release announcing first quarter results and product development update. SIGNATURE __________ Pursuant to requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PLUG POWER INC. DATE: AUGUST 11, 2000 BY: /s/ GARY MITTLEMAN ---------------------- GARY MITTLEMAN CHIEF EXECUTIVE OFFICER BY: /s/ WILLIAM H. LARGENT -------------------------- WILLIAM LARGENT CHIEF FINANCIAL OFFICER 21