Acquisitions

6 Months Ended

Jun. 30, 2020

Acquisitions

Acquisitions

3. Acquisitions

Giner ELX, Inc. Acquisition

On June 22, 2020, the Company acquired 100% of the outstanding shares of Giner ELX, Inc. (Giner ELX). Giner ELX is developer of electrolysis hydrogen generators which is used for on-site refueling of hydrogen fuel cells.

The fair value of consideration paid by the Company in connection with the Giner ELX acquisition was as follows (in thousands):

Cash	$	25,820
Plug Power Stock		19,263
Contingent consideration		7,140
Total consideration		52,223

The contingent consideration represents the estimated, preliminary fair value associated with earn-out payments of $16.0 million that the sellers are eligible to receive. Of the total earnout consideration, $8.0 million is related to the achievement of the Allagash earn-out, $2.0 million is associated with the receipt of certain customer opportunities (purchase orders or other contracts) by December 31, 2021, and $6.0 million is associated with the achievement of certain revenue targets for years 2021 through 2023. The Allagash earn-out is achieved when the Company has produced at least two PEM electrolyzer stacks of one megawatt each, utilizing the dry build process and meets certain technical specifications as more fully described in the merger agreement. To be fully paid, the Allagash earn-out needs to be satisfied by July 31, 2023 and is reduced by approximately 8.33% each month beyond this date. In addition to the above, should the earn-out revenue exceed 150% of the 2023 target, the sellers will receive warrants with a value of $5.0 million and if the earn-out revenue exceeds 200% of the 2023 revenue target, the sellers will receive warrants with a value of $10.0 million. The warrants are exercisable within two years of issuance.

The following table summarizes the preliminary allocation of the purchase price to the estimated fair value of the net assets acquired, excluding goodwill (in thousands):

Accounts receivable	$	1,237
Inventory		4,108
Prepaid expenses and other assets		(4,707)
Property, plant and equipment		596
Identifiable intangibles		29,930
Accounts payable, accrued expenses and other liabilities		(1,887)
Deferred revenue		(2,347)
Total net assets acquired, excluding goodwill		26,930

The preliminary fair value of acquired identified intangible assets were calculated with the assistance of an independent valuator and were determined through a variety of valuation techniques.

Identifiable intangibles consisted of developed technology, non-compete agreements, estimated in-process research and development (IPR&D), and customer relationships.

The fair value of acquired developed technology and non-complete agreements was nominal.

The fair value of the acquired IPR&D totaling $29.0 million has been calculated using the multi-period excess earnings method (MPEEM) approach which is a variant of the income approach. The basic principle of the MPEEM approach is that a single asset, in isolation, is not capable of generating cash flow for an enterprise. Several assets are brought together and exploited to generate cash flow. Therefore, to determine cash flow from the exploitation of IPR&D, one must deduct the related expenses incurred for the exploitation of other assets used for the generation of overall cash flow and revenues. The fair value of IPR&D was estimated by discounting the net cash flow derived from the expected revenues attributable to the acquired IPR&D. The fair value of the acquired customer relationships totaling 0.3 million has been calculated using a distributor method approach, which is a variant of the MPEEM under the income approach.

In addition to identifiable intangible asset, the fair value of the deferred revenue was determined using a cost build-up approach. The direct cost of fulfilling the obligation plus a normal profit margin was used to determine the value of the assumed deferred revenue liability.

Included in the purchase consideration are three contingent earn-out payments (as described above): the Allagash earn-out, the customer opportunities, and the revenue targets. Due to the nature of the Allagash and customer opportunities, as outlined in the purchase agreement, a scenario based method (SBM) was used to value these contingent payments as the payments are milestone based in nature. The revenue targets are achieved when certain revenue thresholds are met, and the catch-up provision creates path-dependency. As such, the revenue targets were valued using Monte Carlo Simulation.

Included in Giner ELX’s net assets acquired are net deferred tax liabilities of $6.1 million. In connection of the acquisition of these net deferred tax liabilities, the Company reduced its valuation allowance by $5.2 million and recognized a tax benefit $5.2 million during the three- and six- months ended June 30, 2020.

Goodwill associated with the Giner ELX acquisition was calculated as follows (in thousands):

Consideration paid	$	52,223
Less: net assets acquired		(26,930)
Total goodwill recognized		25,293

The goodwill consists of the Company’s increased capabilities in green hydrogen supply through the production of electrolyzers. The synergies with the Company’s production of hydrogen storage and dispensing equipment is important to the Company as the demand for green hydrogen increases.

United Hydrogen Group Inc. Acquisition

On June 18, 2020, the Company acquired 100% of the outstanding shares of United Hydrogen Group Inc. (UHG). UHG produces and sells liquid hydrogen.

The fair value of consideration paid by the Company in connection with the Giner ELX acquisition was as follows (in thousands):

Cash	$	19,466
Plug Power Stock		30,410
Contingent consideration		1,110
Total consideration		50,986

Included in cash and common stock in the above table is $1.3 million of cash and $6.5 million of common stock that was paid in April 2020 to purchase a convertible note in UHG. This convertible note included terms that allowed for reduction of the purchase price if the Company was to complete the acquisitions. As such, this note was cancelled in conjunction with the closing of this acquisition.  

A portion of the purchase price of UHG was in the form of contingent consideration.  The contingent consideration is contingent on future performance related to the expansion of the liquefication capacity of the Charleston, Tennessee liquid hydrogen plant (the Charleston Plant).  The Company’s liability for this contingent consideration was measured at fair value based on the Company’s expectations of achieving the expansion milestone.  The expected performance was assessed by management which was discounted to present value in order to derive a fair value of the contingent consideration.

In accordance with the merger agreement, the Company is obligated to pay $1.5 million by June 30, 2021 once the liquefication capacity of the Charleston Plant is complete to the UHG’s stockholders.  Due to the level of progress made as of the reporting date, it is estimated that a payout will be made.  As a result, the Company has recorded $1.1 million as the fair value of the contingent consideration.

The Company’s liability for contingent consideration was preliminarily measured and estimated at fair value based on unobservable inputs, and was considered a level 3 financial instrument.  The fair value of the liability determined was primarily driven by the Company’s expectations of reaching the performance milestone.  The expected milestone of expansion of the liquefication capacity of the Charleston Plant was discounted to present value in order to derive a fair value of the contingent consideration. The primary inputs of the calculation were the probabilities of achieving the milestone and a discount rate.  At June 30, 2020 the Company has recorded $1.1 million as the fair value of contingent consideration.

The following table summarizes the preliminary allocation of the purchase price to the estimated fair value of the net assets acquired, excluding goodwill (in thousands):

Accounts receivable	444
Inventory	89
Prepaid expenses and other assets	1,152
Property, plant and equipment	41,244
Leased property	796
Identifiable intangibles	2,338
Long-term debt	(13,080)
Other liabilities	(13,820)
Accounts payable, accrued expenses, deferred revenue and finance obligations	(4,560)
Total net assets acquired, excluding goodwill	14,603

The preliminary fair value of acquired identified intangible assets were calculated with the assistance of an independent valuator and were determined through a variety of valuation techniques.

Identifiable intangibles consisted of developed technology, as described above.  The fair value of the developed technology totaling $2.3 million has been calculated using the relief from royalty approach which is a variant of the income approach. The application of the relief from royalty approach involves estimating the value of an intangible asset by quantifying the present value of the stream of market derived royalty payments that the owner of the intangible asset is exempted or ‘relieved’ from paying.

Additionally the Company estimated the fair value of an unfavorable customer contract. The fair value of the acquired unfavorable customer contract was calculated using a with and with-out analysis which is a variant of the income approach.  Cash flows were calculated using pricing per terms of the existing contract and then compared to cash flows using expected market pricing. The difference between the two cash flows was used to determine the fair value of the contract.

UHG will be eligible to receive earn-out payments, contingent on the company achieving certain milestones (successful completion of construction and achieving a defined capacity/production level). Due to the milestone nature of the payments, a scenario based method (SBM) was used to value these contingent payments.

Goodwill associated with the UHG acquisition was calculated as follows (in thousands):

Consideration paid	$	50,986
Less: net assets acquired		(14,603)
Total goodwill recognized		36,383

Goodwill consists of the Company’s ability to expand liquid hydrogen manufacturing capability with an established management team. The Company now has capabilities in liquid hydrogen generation, liquefaction and distribution logistics, which is important in a growing hydrogen market.

The above estimates are preliminary in nature and subject to adjustments. Any necessary adjustments will be finalized within one year from the date of acquisition. Substantially all the receivables acquired are expected to be collectible. We have not identified any material unrecorded pre-acquisition contingencies where the related asset or

liability, or an impairment is probable and the amount can be reasonably estimated. Purchased goodwill is not expected to be deductible for tax purposes.  

The results of the Giner ELX and UHG are included in the Company’s results for the three and six months ended June 30, 2020 and are considered immaterial.