Olemedia/E+ via Getty Images

Olemedia/E+ via Getty Images

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

On Monday, Plug Power Inc. (NASDAQ:PLUG ) reported another set of abysmal quarterly numbers as the company's core material handling business remains an unmitigated disaster:

Total revenues of $140.8 million were slightly below consensus expectations despite a whopping $40.1 million contribution from recently acquired companies Applied Cryo Technologies, Frames Group, and Joule Processing.

For the first time in years, the company did not state the number of GenDrive units shipped during the quarter in its investor letter, likely due to the 6% year-over-year decrease experienced in Q1.

Following recent acquisitions, the company's financial reporting has become even more complex and intransparent than before, with revenues now being derived from eight major product and service lines:

Please note that, as a result of the above-stated acquisitions, more than 15% of the company's first quarter revenues were derived from the sale of oil and gas equipment.

In contrast to CFO Paul Middleton's statements on the conference call, sales in the much-touted electrolyzer segment were a paltry 4.1 million while new orders amounted to just $6 million. While management expects material improvement in the second half of the year, the company might again miss out on its ambitious electrolyzer sales targets this year.

As usual, Plug Power's bottom line fell well short of analyst expectations as the company's long-standing margin issues persist.

That said, the company's service margin showed considerable sequential improvement. In the investor letter, management explained the progress as follows:

We are pleased to report that we have begun to see meaningful improvement in service margins on fuel cell systems and related infrastructure with a positive 30% increase in first quarter of 2022 versus the fourth quarter of 2021. The service margin improvement is a direct result of the enhanced technology GenDrive units that were delivered in 2021 which reduce service costs by 50%.

Unfortunately, this is not correct, as the 10-Q provides the real reason behind the increase (emphasis added by author):

Gross loss decreased to (68.4%) for the three months ended March 31, 2022, compared to (116.5%) for the three months ended March 31, 2021, primarily due to the release of loss accrual recorded in prior periods, offset by certain unexpected costs, including varied inflation, labor market and COVID-19 related issues and scrap charges associated with certain parts.

In layman's terms: service gross margins benefited from massive charges taken last year in anticipation of ongoing, elevated losses from long-term service contracts. In Q1, the company released a whopping $9.35 million from the so-called "loss accrual for services." Adjusted for the release, service gross margins would have worsened to negative 181.8%, a new all-time low.

Margins in the company's leasing business ("Power Purchase Agreements") have also been affected by elevated service costs, but without specific accounting guidance permitting upfront loss recognition, the company will continue to recognize massive service contract losses in this segment for the foreseeable future.

Plug Power's ongoing inability to get a handle on service contract losses even caused the company's auditors to express an adverse opinion on the effectiveness of its internal control over financial reporting, as disclosed in the recently filed annual report on Form 10-K.

As expected, margins in the hydrogen fueling business remained weak as the company's suppliers increased prices again while Plug Power is contractually required to provide the hydrogen at fixed prices to customers.

In the investor letter, management states its expectations for hydrogen margins to remain under pressure in Q2 but once again, the 10-Q is telling a somewhat different story:

We expect higher hydrogen molecule costs to continue at least through 2022.

That said, management continues to expect a "step change in margin profile for the fuel business in 2023 as we expect to see the cost of molecules decline by more than half as our green hydrogen plants come online."

Operating expenses of $103.8 million also came in well above guidance of around $90 million and are expected to remain in this range going forward.

Cash used in operating activities of 209.9 million marked another record high for the company. Capex of $85.2 million remained muted but management still expects the number to reach $1 billion for the year.

At the end of the quarter, unrestricted cash and marketable securities amounted to $3.3 billion, down from $3.7 billion at December 31, 2021.

Assuming an aggregate $1.3 billion in cash operating losses and capital expenditures for the remainder of the year, available liquidity would be down to $2 billion by year end.

On the conference call, management once again celebrated its strategic accomplishments while dancing around some important analyst questions.

For example, there was no real answer to this very concrete question:

And then I noticed your Walmart announcement and it sounds good but I'm a little confused. Do you need formal agreements, or can you just naturally swap in your own green hydrogen in lieu of third-party industrial gas supply?

The analyst actually hit the nail on the head here. One would have assumed the company to simply start replacing third-party gray hydrogen supply to customers with its own, less expensive green hydrogen but apparently Walmart (WMT) wanted to keep all options as the retail giant avoided a firm commitment in the recent agreement.

In addition, analysts pointed to increased prices for renewable power which would result in significantly higher production costs for the company's planned green hydrogen plants. While the company has locked in favorable power purchase agreements for its near-term capacity additions, Plug Power still needs to secure renewable power for the vast majority of its planned 2025 production capacity.

Given this issue, the company's recent announcement with Olin (OLN) starts to make some sense. Essentially, Plug Power is expanding the business model of United Hydrogen, a company acquired in 2020 which operates a small liquid hydrogen plant at an Olin site in Tennessee.

Unfortunately, the by-product hydrogen from the Olin plants is not considered green, which was likely the reason why Plug Power was preferring to establish own production facilities.

But things have changed, and with the original strategy of generating green hydrogen with cheap renewable power no longer viable, Plug Power apparently has turned back to Olin to add more capacity at sufficiently low cost.

While Plug Power management has not elaborated in detail on its plans to convert the Olin by-product hydrogen into green hydrogen, Olin's CEO Scott Sutton provided a pretty simple answer on the company's conference call in late April:

And just wanted to ask a little bit about the plan to produce the green hydrogen with Plug at St. Gabriel, it seems like you could go a variety of paths. You could just simply source renewable power into your existing electrolyzers. Is that the plan or are you planning to add 30 or 40 megawatt electrolyzer or could you just change the hydrogen production right now by changing the saline brine concentration?

So all we're doing is taking that hydrogen and essentially liquefying it and then Plug Power is taking it to their hydrogen distribution service centers, fuel cell application customers.

So it's already there as soon as we start using it for a more appropriate application, we achieved carbon abatement. If we need to get the definition to green, which we will, there's multiple ways to do it. A simple way to do it is to use RECs available on the market or RECs available from Plug through their other operations.

While there would apparently be options for Olin to generate green hydrogen, the company is actually preferring the least expensive and least complex method: Offsetting emissions through renewable energy credits, a move that is often considered as greenwashing.

While the initial capacity of 15 tons per day starting in 2023 appears to be rather small, Olin currently has a daily hydrogen waste stream of 350 tons, according to management's statements on the conference call, thus providing plenty of future optionality should Plug Power indeed fail to achieve its original green hydrogen targets.

More of the same at Plug Power with management touting the company's future prospects while the core material handling business remains in abysmal shape.

Management making some very questionable or even outright wrong statements with regards to service margin improvements and Q1 electrolyzer sales in the investor letter and on the conference call certainly doesn't help things either particularly given its long history of misleading investors in its financial statements.

In addition, the company's ambitious transformation strategy is already showing some cracks, as prices for renewable power in the U.S. have increased by more than 30% since the company outlined its initial plans in 2020.

Given management's less-than-stellar performance on Monday's conference call in addition to its long history of over-promise and under-deliver, investors really need to ask themselves the question:

If management hasn't been able to execute with the company mostly focusing on a single domestic market niche, how likely will the very same senior management successfully deliver on a complex strategic transformation and international expansion?

Personally, I expect nothing short of disaster but with billions in net cash still on the balance sheet, the company's liquidity remains sufficient to afford some additional missteps.

That said, Plug Power will have to deliver upon its stated plans to generate cash in the not-too-distant future as otherwise, liquidity might run low again in 2024.

Given the recent sell-off in the shares, I am keeping my "neutral" rating on the shares for now.

This article was written by

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.