In this Order, the SEC brought settled charges against Plug Power, Inc., a provider of green hydrogen and hydrogen-fuel-cell solutions, for financial reporting, accounting and controls failures in connection with a variety of the Company’s complex business transactions. The failures required Plug to restate its financial statements for several years. In the restatement, Company management identified a material weakness in internal control over financial reporting and ineffective disclosure controls and procedures, allegedly “due to Plug Power’s failure to maintain a sufficient complement of trained, knowledgeable personnel to execute their responsibilities for certain financial statement accounts and disclosures. Despite these control deficiencies, the Company raised over $5 billion from investors during the relevant Filing Period.” According to the SEC, Plug’s “material weakness in ICFR and ineffective DCP have not been fully remediated,” and the Company is continuing its remediation efforts. Plug agreed to pay a civil penalty of $1.25 million and to implement a number of undertakings, including an undertaking “to fully remediate the Company’s material weakness in ICFR and ineffective DCP within one year” of the SEC’s Order. Should Plug fail to comply with those undertakings, the Company will be required to pay a “springing penalty,” an additional civil penalty of $5 million.
Background. As described in the Order, before releasing Plug’s financial results for the fourth quarter and year-ended December 31, 2020, management and the Company’s auditors, KPMG, met with the audit committee and indicated that the audit was substantially complete and that “there were no significant audit issues, and any pending items were considered immaterial.” After the release, however, the auditors continued to drill down on some issues, the Order indicates, including whether the Company had failed to identify a triggering event and potential impairment for certain of its lease assets, as well as open questions concerning Plug’s reclassification of certain hydrogen-fuel costs as R&D expenses. These issues were not resolved in time for Plug to timely file its Form 10-K, leading Plug to file a late notification Form 12b-25 in which it identified the areas that required additional attention and disclosed that “one or more of these items may result in charges or adjustments to current and/or prior period financial statements.”
Once KPMG had concluded its audit procedures over the next weeks, the Order alleged, the audit team advised Plug that its “ROU [right-of-use] assets and lease liabilities for certain sale-leaseback transactions had been calculated incorrectly and materially overstated. They also concluded that certain hydrogen-fuel costs should not be reclassified and reported as R&D expenses.” Upon hearing from KPMG and management, the Audit Committee concluded that the Company should restate its prior financial statements in its annual reports on Form 10-K for 2018 and 2019 and quarterly reports on Form 10-Q for 2019 and 2020. The Company then filed an 8-K to report the anticipated restatement.
A couple of months later, the Company filed its 2020 Form 10-K, which included the restated financials for the prior periods. For those interested, the Order goes into some detail on the specifics of the various accounting errors. The order provides a catalogue of accounting errors corrected in the restatement:
“a. $112.7 million overstatement of ROU assets and lease liabilities as of December 31, 2019 due to the failure to correctly calculate lease liabilities for certain sale-leaseback transactions…;
b. $19.5 million overstatement of gross profit for 2019, and $21.2 million overstatement of gross profit for 2018, due to the failure to properly classify and present certain costs related to R&D activities as cost of revenue…; and
c. $1.6 million understatement of the benefit for loss accruals in 2019, and $5.3 million understatement of the provision for loss accruals in 2018, due to the failure to properly estimate loss accruals for extended-maintenance contracts.
…The restatement also corrected other accounting errors, including the Company’s reported bonus expense in the third quarter of 2020, an error in prior lease accounting, an error from certain conversions of the Company’s convertible preferred stock, and other items. Management concluded that the aggregate impact of these accounting errors was material to the Company’s prior-period financial statements. Additionally, while not part of the restatement, Plug Power initially failed to identify triggering events in the fourth quarter of 2020 that caused a $5.7 million impairment of certain ROU assets.”
In the Form 10-K, Plug also disclosed a material weakness in ICFR: “the Company did not maintain a sufficient complement of trained, knowledgeable resources to execute their responsibilities with respect to [ICFR] for certain financial statement accounts and disclosures. As a consequence, the Company did not conduct an effective risk assessment process that was responsive to changes in the Company’s operating environment and did not design and implement effective process-level controls activities” in several areas. The Company also reported that its DCP were ineffective.
With regard to control problems related to accounting errors, Plug identified a slew of them, but critical was that Plug “did not have the appropriate level of accounting personnel and technical expertise to properly assess the accounting implications of many complex business transactions.” As a result, management determined that certain process-level controls did not operate effectively to mitigate identified risks regarding key accounting areas. In addition, management determined that certain of its policies and processes were inadequate. Here’s one: management determined that “the Company’s process when applying GAAP to complex accounting matters was insufficient.” In addition, management determined that it didn’t have sufficient tools and tracking to maintain appropriate documentation in certain areas.
To address the material weakness resulting from the failure of Plug’s process-level controls, Plug developed a remediation plan, which it began to implement in 2021. In its Form 10-K for 2022, Plug disclosed that management had determined that some of its aspects of its material weakness—the risk-management process, process-level and general information technology aspects of its material weakness—had been remediated. Nevertheless, the Order concludes, “the Company’s material weakness has not been fully remediated.”
The Order reports that, as part of its remedial efforts, among other things, the Company hired approximately 60 new employees in its accounting and finance department and internal audit; began using third-party resources with appropriate technical accounting expertise; strengthened internal training to help employees identify and address complex technical accounting issues that affect the financial statements; and designed a “continuous risk-assessment process to identify and assess risks of material misstatements, and to help ensure that financial-reporting processes and related internal controls are properly designed, maintained, and documented to respond to such risks in financial reporting.”
The Order. The SEC found that Plug violated Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder, the provisions regarding accurate periodic reports; Section 13(b)(2)(A) of the Exchange Act, the books and records provision; Section 13(b)(2)(B), the internal accounting controls provision; and Rules 13a-15(a) – (c), the provisions requiring ICFR and DCP.
As noted above, Plug undertook to “[f]ully remediate its material weakness in ICFR, and ineffective DCP, within one year”; to publicly disclose, within one year, “whether in management’s opinion, Plug Power has fully remediated its material weakness in ICFR and ineffective DCP” and to certify the above in writing. Plug agreed to pay a civil penalty of $1.25 million and, if it fails to comply with the undertakings, to pay a penalty of $5 million.
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