Seeking Alpha article: The Reason Wall Street Is Blanking PLUG's Accounting Problems, Apr. 04, 2021, by Bashar Issa, 1.04K Followers
Summary
- A colossal of law firms are banding on a class action lawsuit against Plug Power, accusing the company of misleading investors.
- Statistically, almost half of securities class action lawsuits are dismissed.
- The reclassification of R&D as COGS will not have a material impact on gross margins. Still, all told, the company has work to do in this regard.
Investment Thesis
The recently announced accounting errors have an immaterial impact on Plug Power's investment thesis, which centers on growth in the number of units sold and subsequent economics of scale that would enable the company to achieve gross margin targets.
The recent Class Action is manageable, given the company's cash position and probability of being dismissed. The plaintiff's main argument is that the company withheld information from shareholders, which, given the line of events, is a hard pill to swallow. If the company knew it had to reinstate the financial statements, it wouldn't have convened a conference call for the fourth quarter. I believe that the company follows its external auditor's lead, who has been part of the necessary financial engineering that reflects the company's complex operating environment.
,,,
Adjustments to Right of Use Assets and Finance Lease Obligations
PLUS sells fuel cells, and hydrogen infrastructure products, and installation services. At this stage of the industry life cycle, PLUG customers have the upper hand in negotiating sales deals, and it happens that many PLUG customers wish to rent PLUG's products rather than buy them. Since PLUG needs cash but cannot finance all its customers, its management came up with a creative solution that entails PLUG selling its product to Wells Fargo for money and then rent it back before leasing it to its customers. The Wells Fargo side of the equation is called sale/leaseback, a financial engineering concept, and where PLUG is a lessee. The customer side of the equation is financial/operating lease, where PLUG is the lessor. In addition to being a lessee and a lessor for the same asset, sale/leaseback and finance leasing includes estimates and subjective judgments on valuations, including but not limited to present values and discount rates.
The company announced that it intends to lower the Right of Use Assets' carrying value, reflecting the leaseback contract's value to Wells Fargo. The company also will adjust the finance lease for some of its customers. The end result is a smaller book value per share. This is generally an adverse event, but show me an investor investing in PLUG for its assets' book value. PLUG is a growth stock, and its value is derived from its position in a growing industry. This is why management stressed that the adjustments don't affect the cash position or future sales and is why all except one analyst maintained their ratings.
Summary
PLUG uses complex accounting methods that reflect its operations' complexity, including sale/leasebacks, valuation of ROUs, and financing leases. Still, none of these hurt the core investing thesis of PLUG, which depends on growth to achieve the economics of scale necessary for improving its margins. I acknowledge that the reclassification of some R&D expenses as COGS will have a negligible impact on gross margins. Still, investors can't ignore that the company is moving in the right direction, as demonstrated by the number of units sold increasing in 2020, despite the challenging environment.
Market Data 
Markets 
AI
