普拉格能源 (PLUG) 2002 Q2 法說會逐字稿

Good day, everyone and welcome to today's Plug Power second quarter. Conference call. Today's call is being record. At this time, I'd like to turn the call over to Cynthia Mahoney, Manager of Public Relations and Marketing. Please go ahead.

Good morning, and welcome to Plug Power's second quarter 2002 financial review. Participants on the call include Roger Saillant, President and Chief Executive Officer, Mark Schmitz, Chief Financial Officer, and Greg Silvestri, Chief Operating Officer. Today, Roger Saillant will begin with an update on our activities throughout the second quarter ended June 30th, 2002, followed by Mark Schmitz giving a review of our financial position. We will conclude the call with a question and answer session. I would now like to read our Safe Harbor Statement. This earnings call may include forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve risks, uncertainties and assumptions as described from time to time in registration statements, annual reports, and other periodic reports and filings of the company filed with the Securities and Exchange Commission. All statements other than statements of historical facts which address the company's expectations for the future with respect to financial performance, product development and production or operating strategies can be identified as forward-looking statements. You can identify these statements by forward-looking words such as belief, anticipated, estimated or expected. You should not rely on forward-looking statements because there can be no assurance that the company's future results will not be materially different from those described herein. We caution listeners that these forward-looking statements speak only as of the date hereof. The company hereby disclaims any obligation or undertaking to release publicly any updates or revisions to any such statements to reflect any change in the company's expectations or any change in the events, conditions or circumstances on which such statements are based. Now, I'd like to introduce Roger Saillant, President and Chief Executive Officer of Plug Power.

Thank you, Cynthia. Good morning and thanks to all of you for joining us today. The second quarter was another quarter of exceptional progress for Plug Power. We met one milestone, made significant progress on the remaining milestones, shipped units to new and repeat customers and signed an important memorandum of understanding or MOU with Honda Research and Development. During the second quarter Plug Power shipped combined Eaton Power or CHP systems into the US market and in all shipped 29 systems with CHP capability and two electric only units to eight different customers. All of these systems were natural gas fueled 5 kilowatt units. The CHP systems give the customers the ability to generate electricity and to use the heat generated for domestic hot water needs. The CHP design is consistent with Plug Power's 10 CHP patent. The expected efficiencies of these systems is over 70%, making them more efficient than any central generating plant. Also during the quarter, we shipped our first four units through the GE Fuel Cell System subsidiary who, in turn, distributed these systems to new customers, one system to Flint Energies, an electric cooperative in Georgia, two systems to a utility in the US and one to a distributor in Japan, as has been our policy, we expect our customers to make their own announcements regarding the delivery and operation of their systems, much like Flint Energies did recently. We also shipped systems to repeat customers, Vaillant and the Long Island Power Authority, LIPA, which installed one of our CHP systems at the top of Babylon Town Hall last week and installed 20 new systems at the West Babylon demonstration site. The 31 systems installed during the quarter also included three systems at two additional new customers fulfilling supply agreements that could not be met by other fuel cell manufacturers. These captured sales included two systems to low began energy corporation to be installed at locations in North Carolina and Louisiana. Interest is high in our stationary products especially from government agencies and utilities. Senators Schumer and Clinton of New York are seeking $10 million in funding for stationary fuel cells for 2003 for military installations. This is just one of several government initiatives for funding the development of fuel cells. We believe we are uniquely positioned to take advantage of such future funding opportunities as we have the systems certification, facilities to train service personnel and the ability to deliver systems in less than ten weeks. This week at Plug Power, we are training eight people from five different companies on installation, operation and maintenance of our units. They will also receive full documentation with the units. We continue to build on our extensive field experience including ten units operating in the field of water fleet arsenal which has produced approximately 100,000 kilowatt hours of electricity through the end of year as weel as 75 units installed at LIPA, to our knowledge, the largest group of parent fuel cells in one location. The systems at LIPA have generated approximately 600,000 kilowatt hours of electricity as of June 30th. These multiple unit installations allow us to gather statistically significant data that we immediately evaluate and translate into design improvements. For example, we collect data on over 10 different units for each system 24 hours a day, seven days a week. These data are evaluated for correlations of significance, when important factors identified appropriate hardware and/or software changes are made on the current product and built into future design. The single system sites allow us to see the various users operating modes, climate, altitude and other variables across a standardized product. This information is used to further shape the designs of our future architected systems. I've talked in the past about how the industry's biggest challenges are improving reliability and reducing cost. We continue to make significant progress on both fronts. Through the end of the second quarter, we have reduced the cost of the direct materials in our stationary units by 16%, even as we added the functionality of combined heat and power. We continue to believe our projections of a 30% decrease in cost by the end of the year will be achieved. We are also making progress in increasing the productivity of our other resources. The number of man hours required to produce a system has decreased by 70% over the past 15 months and the amount of time a unit spends in test and verification has declined over 85% over the same time period. We are learning how to modify our in house testing to correlate predictively to field data. This progress has been made possible by implementing a disciplined process throughout all aspects of the production of our systems and first three to be shipped. We are currently working with LIPA to identify the locations to site the units. During the quarter we signed a memorandum of understanding with Honda Research and Development. The MOU commits the two companies to work together on a home refueling station. This system would supply a home with electricity and heat as well as generating hydrogen for a fuel celled vehicle. We expect to have a joint development agreement in place by the end of the year. In conclusion, the progress we are making at Plug Power is significant. We have broadened our customer base and are meeting or exceeding the expectations of our customers as is evidenced by the repeat orders we have received. The milestones we have laid out for the company are real and quantifiable and we are delivering on our promise to our shareholders. Despite market conditions, our focus is on product development, reliability improvement and cost control will not waiver. I'll now turn the formal material presentation over to Mark Schmitz, our Chief Financial Officer. Mark?

Thank you, Roger. I'll now provide a summary of the second quarter ended June 30th, 2002 financial results beginning with our statement of operations. Total revenue for the second quarter ended June 30th, 2002 was $2.5 million, compared to $1.3 million for the second quarter of 2001. During the quarter, we recognized product and service revenue in the amount of $2.2 million. During the quarter, we also deferred revenue in the amount of 1.6 million related to new sales and service contracts. We continued to apply the accounting guidance most appropriate for our business, whereby we defer 100% of our product and service revenue at the time of sale and recognize this revenue over the period of the underlying service and other contractual obligations. The impact on our statement of operations is conservative, since the costs associated with the production of these systems are fully expensed as they are incurred. Year-to-date, we've recognized product and service revenue in the amount of $4.8 million. There were no product and service revenues recognized in the second quarter or year-to-date periods in the 2001 calendar year. Contract revenue under research and development contracts for the quarter ended June 30th, 2002 was $354,000, as compared to $1.3 million in the second quarter of 2001. This reflects previous guidance we've given to the effect that contract R and D revenue was declined as we emphasized commercial product sales. Year-to-date contract revenue was $686,000 compared to $2.3 million in 2001. Costs of revenues was $2.9 million during the second quarter of 2002. This compares to $2.2 million during the second quarter of 2001. Our cost of revenues represents the direct material cost of the fuel cell systems sold during the quarter, along with the labor and materials associated with servicing all of the systems under contract. These costs consist primarily of productive materials and fees paid to outside suppliers for subcontractor components and services. It does not include any factory, labor our overhead expenses. Cost of revenues also included the fully burdened costs of government contract activity. Year-to-date cost of revenues was $4.6 million, compared to $4.2 million last year. Reserve and development costs were $10.3 million during the quarter ended June 30th, 2002, compared to $15.2 million in the same quarter last year. The decrease in our quarterly spending is primarily the result of fewer systems produced in the quarter for internal test and evaluation purposes. We are keeping development costs down by using modeling and simulation tools to architect a modular fuel cell system. We intend to leverage this design platform across multiple products. We expect research and development costs to increase somewhat in the third and fourth quarters as we procure materials to build the first prototypes of our next generation design, and we increase product activity with Honda and other collaborators. Year-to-date research and development costs were $21.2 million compared to $32 million for the same year-to-date period of 2001. Recurring general and administrative expenses decreased in the quarter ended June 30th, 2002 to $1.7 million, compared to $1.9 million in the second quarter of 2001. The reduction is primarily the result of a reduced work force, combined with more efficient spending in all of our support operations. Year-to-date, general and administrative expenses have been $3.4 million compared to $3.8 million in the same year-to-date period of 2001. Interest income consisting of interest earned in our cash, cash equivalence and marketable securities was $594,000 for the second quarter, 2002 and $843,000 in the second quarter of 2001. the decrease is the result of a lower yield on our investment portfolio during a period of generally declining interest rates. Equity and losses of affiliates represents our minority interest in GE Fuel Cell System and Advanced Energy, Inc., both of which are accounted for with the equity method of accounting. We reported a June 30, 2002 loss of $478,000, including $448,000 for amortization of our original investment in GE Fuel Cell System. Our investment in Advanced Energy, Incorporated was fully expensed as of March 31st, 2002. Our net loss for the second quarter ended June 30th, 2002 was $12.2 million or 24 cents per share. Our net loss for the second quarter of 2001 was $18.3 million or 41 cents per share. Year-to-date net losses have been $28.3 million or 47 cents per share compared to $37.3 million or 85 cents per share in the same period of the 2001 calendar year. We continue to expect our loss per share for the full year 2002 will be less than $1.25 per share. Our loss per share in the second half of 2002 may increase compared to the 47 cents per share loss we experienced in the first half of 2002, as we continue to defer 100% of our product and service revenue at the time of sale, and fully pence the costs associated with the production of these systems. The deferral of revenue means that net losses increase in proportion to increases in unit sales volume. Conversely, losses are reduced as we amortize the deferred revenue. Our accounting for deferred revenue has no effect on cash. Net cash spending was $8.9 million in the quarter ended June 30th, 2002, compared to $14.8 million last year. Year-to-date our net cash spending has been $16.9 million, compared to $31.6 million last year, keeping us clearly on pace to perform within the guidance previously given of net cash spending less than $45 million for the full year. Quarterly cash requirements for the second half of 2002 may fluctuate depending on our product build schedule and requirements of our research and development activities. With an average shares outstanding of the second quarter of 2002 were 55.4 million shares compared to 44.2 million in 2001. Increase is a result of our public offering and private placements completed in July, 2001 our balance sheet includes 75.8 million of unrestricted cash and marketable securities as of June 30th, 2002. We invest our cash and short term high grade commercial paper please press star one on your telephone. Again, that is star one on your telephone if you would like to ask a question and we will take as many questions as time permits today and we will proceed in the order in which you signal us. First question today is from David Smith of 00:16:42 Salomon Smith Barney.

Good morning, guys. You talked briefly about the UPS product. Can you give us a little more color on the timing that? It sounds like it's going to be initially in demonstration phase at the end of the year and then when we can expect it see it get rolled out into larger opportunities, and then just on a follow-up or a second question to that, can you talk more about the R and D drop and whether it should be viewed as, you know, a decline in in R and D spending or is it actual amount of spending still occurring that needs to be done at this stage of development?

David, this is Greg. I'll work on the UPS question. I think Mark can go back and bring some more clarity on the R and D spending. In terms of the UPS, where we are is our first design, which we described internally as a market probe unit. That's going through its final design verification and test cycle here at Plug Power. We have orders for that system from LIPA, as well as some other unannounced customers and we have ongoing discussions with several different OEM companies, which is consistent with what we've stated in the past in terms of our OEM go to market strategy. We would expect to place this first design in the hands of that group of organizations throughout the remainder of this year and into the early part of next year. The next generation which would be a design more customized to the specific needs of the OEM, and that customization could be due to the market application that the OEM is targeting, could be due to the remainder of the equipment or system that the OEM is going to bring out to that marketplace, but those customized designs, if you will, will be the engineering efforts between roughly next month and the first half to three quarters of next year, and then you would expect to see the initial designs or the initial units of those designs coming into the market in late 2003.

Okay, and do you have any sense as to where you expect cost to be on that to the customer?

We've stated before on our market adoption curve that the cost per kilowatt for those systems has to be well below 2 to $3,000 per kilowatt. So we're aware of where the market prices are for those technologies, and we're designing according to that.

Okay, great.

David, on your question related to R and D expense, the reduction in R and D expense in this organization, which is quite substantial, is in no way related to the intensity of the R and D activity. Basically, there are two factors that have resulted in the decline in R and D spending, and both of which represent efficiencies or better effectiveness in the way we spend our money. The first is that a year ago, we were building, you know, units for internal testing and demonstration evaluation purposes and those units today are being sold for a price that is, that covers our direct costs. So you take one big factor away right there in terms of the amount of pure spending, and I should note also that those units have come down in costs a great deal as well, as Roger pointed out, there was a 33% reduction last year, another 16% again so far this year, and we're on track to do a whole lot better than that. The second factor is that really there's a reduction in the number of employees in the organization but I think we've got, you know, we're beyond that, and the, you know, the quality of the people and the organizational effectiveness of the folks that are working on that next generation of architected products is really at a very high level now and, you know, it's probably also worth noting that the supply base is doing a lot of our development activity as they get orchestrated towards those objectives. So we feel very good about the R and D expense. I mentioned that it may go up. It may increase marginally as we go through the rest of the year, but I'd say, you know, we're managing that quite carefully and we're happy about the level of productivity coming out of that.

Great, thanks a lot.

And we'll move next to Christine Farcus at Merrill Lynch.

Thank you very much. Could you comment on the backlog that you're seeing, if the order backlog has changed at all from the last quarter and if you could also give us an indication mark on the CAPEX in the quarter and your expectations for the second half of the year?

I think what I'll do is I'll say in terms of the backlog - Christine, this is Roger.

We have a current backlog of about 42 units right now that are firm. This is sort of consistent with what we had in the first quarter, although down somewhat.

Is that because of deliveries and focus on the existing unit that you're working on?

Christine, did you have more?

I just wanted to know if it's a focus on what you currently had in plans or reduced activity in terms of new customers.

Okay, I think there's two things that I want to say. The first is that the reduction is a reflection of delivery. The second is that we're very selective in terms of where we're deploying and trying to deploy the units. We've got an extensive fleet out there now, and we're trying to focus resources and activity around understanding exactly what those systems in the field are teaching us, and that's accelerating our learning curve for the next family of products that we're designing. So there's - I just want to say there's a very managed effort going on in terms of where we are, where we need to be, and how we're going to cross from the current product to the next generation product.

Christine, your question on CAPEX, our CAPEX for the first six months, you know, continues to be at a very modest level. We've spent about $900,000 - sorry, yes, about $900,000 in CAPEX total in the first six months, which is, you know, less than 50% of the pace we were spending at last year. I think, you know, the guidance we gave earlier in the year on CAPEX was that it would be somewhere between 2 and 2 and-a-half million dollars and we're standing pretty close to that. I wouldn't expect to see it going well above that.

Was there anything in the second half of the year aside from potentially higher R and D expenses, potentially higher losses in the first half, is there anything else in the second half that would suggest a very different cash burn than what we've seen in the first half.

Well, you know, I don't mind your pressing us on this, but we're going to stay with the guidance we've previously given on that.

Great.

It's going to, clearly it's going to be under 45. You know, how much it goes below that is, there's some uncertainties and we want to be pretty careful about it. We're clearly on a track to do quite well this year in conserving our cash.

Terrific, and if I just can ask a final question, Roger, in terms of the application of the CHP units in North America, where are you finding the customers in OEMs looking at? announced things but there are facilities that people go through in significant quantities where hot water would be a good, what's the word I want, a good use. I don't know if Greg you want to add to that.

Yes, Christine I think we profiled the order that we have for 2002 with LIPA in our earlier call, and there's approximately 17 CHP systems which are going to be placed at point of use and that list becomes known to the public if LIPA makes those announcements, similar to what they did with the West Babylon Town Hall. You'll see them in single family residences, you'll see them in commercial establishments that are very well-known to people out in the public domain. So basically, there will be industrial uses, so there's a lot of places where people are drawing on hot water for, let's just call it sanitary needs, and we will confirm the fit for use for the technology in a host of those locations later this year.

Great, thanks a lot.

Thanks, Christine.

We'll go next to Kelly Ness at McDonald's Securities.

Hi, guys. Could you first provide us an update on the 50 kilowatt unit as well as any continued work that you're doing in the high temperature membrane?

Sure, Kelly, the 50 kilowatt unit is in the final stages of installation in Las Vegas. So as we've profiled that earlier, there's three parties that are doing that body of work, ourselves, Air Products, who has designed and installed a system to take natural gas and generate the hydrogen feed streams for the fuel cell, the Department of Energy and the City of Las Vegas. So all of the site installation work has been completed, and we have Plug Power personnel there for the startup of the system. And we didn't specifically speak to that in this call because most of the milestones that we touched on we used the time frame specifically of the second quarter, but that project continues to move ahead as expected with our partners out there, and I think Roger should comment on the high temperature.

We continue to have a strong program under way in collaboration with Celanese on the high temperature membrane. In fact, right - well, the way it's developing right now, it is a significant cost advantage for us to pursue this. There are a few technical issues which I don't think are unresolvable, so we're bringing that program in long in parallel with our base option in our future products.

Okay, and can you provide any more detail on, I guess more specifically what role GE Fuel Cell System played with some of the units that they were able to market this quarter?

The role they played was they had an initial contract with a number of distributors, and they felt that the units that we had were in agreement with us and with their customers, were appropriate for certainly an evaluation to be delivered based on an evaluation approach, and felt satisfied in another ways in terms of certifications and so forth that it was appropriate to deploy those units now, begin deploying.

Okay, and would you expect the units going forward in the second half of this year, some might also be going through GE Fuel Cell System?

Yeah, we would expect some would be through GE Fuel Cell System. Again, we're coming down in this area as well in sort of parallel paths, Christine. We're exercising the GE Fuel Cell System deployment mechanisms and contracting systems. At the same time, we're doing deployments directly from Plug Power.

Okay, and just one last question. Do you have any sense of when you're likely to reach a moor standardized pricing structure for your fuel cell systems?

One of the interesting things, Christine, if you looked at the learning curve, the slope of that is incredibly steep, sorry, Kelly, I'm sorry, incredibly steep, and I would expect that late '04, mid '05 we'll begin to reach, what's the word I want, a flattening out of the curve with our next product, when our next product becomes available.

That's great, thank you.

Okay.

We'll move next to Aweh Aga at Bank of America.

Thank you a couple of questions. First, Mark, could you give us a sense of going back to some of the discussion earlier, what should we expect in terms of R and D budget for the year end right now?

Aweh, we haven't disclosed a budget in R and D as a line item. The numbers that you see in the six months, you probably expect a little bit of an uptrend from that in the second half of the year. I've got to be a little less bet than perfectly clear on it, because some of this is - there are some unknowns there. There are some unknowns, you know, related to some of the programs we're collaborating on with outsiders that are going to pick up in intensity but we want to be just a little careful about how much we commit to saving there. As I mentioned earlier, the intensity of our R and D activity is very high and probably increasing.

Okay, a second question. With regard to the units that are out there at customer sites now and data is being collected on them, could you give us an update or some rates for us, what would be the salient feature of that data collection in terms of any surprises to you either positive or negative?

I think we've had, one of the things I'll say immediately, Aweh, is that the biggest surprise to us, maybe not to our engineers and our scientists is the fact that the learning curve has been enormous in terms of an improving rate of lifetime of the systems. In terms of variables, I think that subtle things that we manage, for example, orientation just with sun and wind that you wouldn't think would be very significant, have a huge, can have potentially a huge impact. There are some software subtlties that have to do with managing line voltage and frequency and so forth that are coming to surface and alow, can also have a significant impact. Just the whole business of interconnecting with the grid has a significant impact, and I'd also say that the, just the connection process itself working with subcontractors, working with people who aren't necessarily skilled in traditions of the fuel cell development, that transfer of knowledge, it's not necessarily a surprise but it's something that we're well-prepared for, but is a deep learning experience and I talked about bringing people in here to be trained from other locations. That training is rated, and I'm not quite sure how many generations we've had of training but I'd say we've had three or four cycles of training, and we're getting top ratings on the effectiveness of the transfer of knowledge, and also in the development of our instruction manuals and so forth, very valuable experience.

Aweh, one other benefits we've received operating in the field is a lot of this data is directly shared with the development teams resident at our suppliers, and so as we've worked with and down selected to certain suppliers are going to be working on future generations of technology with us, this date is very important to them as well for their design efforts in terms of either components or subsystems that they're working on. So there's been enormous value going back to our supply base with this information as well. standardized product then undergoes another set of variations that are very controlled. Again, that helps us design robustness into our product in the future.

Roger, what's your expectation right now for second half shipments?

We have a number right now. We're not giving guidance. We're still saying we expect. We're expecting more units than last year.

I think that's what we said. We're going to be backloaded this year just as we were last year, Aweh, and we expect the total number of shipments to exceed last year.

And last year was 132, correct?

That's correct, yes.

Last question, Roger, if I could. You mentioned in your opening remarks, talked about activity out there and what you're seeing in the government and et cetera. Can you just characterize the level of activity or interest today versus six months ago and is it the same, has it gotten better or worse, exactly what are you seeing incrementally?

I think, Aweh, that there is a, the short answer is it's significantly higher and it's much more robust. I'm not going to detail the kind of visits that we're getting from government agencies, but they're numerous. They're at high level, and there is very serious commitment particularly amongst the senior staff and down through the staffs of the various government agencies, both state and federal in really understanding where fuel cells stand and how to accelerate the technology for faster deployment into, I'll just say into our economy. So it's coupled with two things. One is, what type of funding, how much funding, and around what specific objective, and to give you more feeling for that, there is clear interest on the military in trying to quantify how much money would be required to make significant year improvements in the pull ahead of the technology into the market and also what can be done with regard to improving the facilitization of the hydrogen infrastructure in the United States. There's the definite feeling, I had a few weeks ago I was in Washington in a panel in front of the, I think it was the energy, the science and energy subcommittee, and they were probing very heavily around what it would be required to accelerate the hydrogen infrastructure and also are very aware that the United States could become an importer of these technologies if we're not careful, and they want to understand what they can do. So I'd say go back to the beginning. The interest is very height heightened, even if the high level policy in the country doesn't - and I'm thinking of the protocols and so forth, doesn't reflect that just yet.

Okay, thank you.

We'll go next to Chris Quann at TD Securities.

Just following up on that question on government programs. Could you just highlight some of the programs that are, that have been talked about, the California initiative, is that going anywhere or some of the other states that you see promise?

Sure. The California - first of all, I think that's sort of a statement and a question, is that going anywhere. The California program is in a state of development. I think the underpinning thing there is when will the funding become available, but California, Texas, Michigan, New York, Connecticut and Massachusetts and Ohio have all sort of declared themselves in one way or another to be the leading fuel cell development center in the country, and I certainly think in New York that Governor Pataki came out first with his five and ten-year plan to improve or reduce energy produced emissions across the state to use renewables in increments of 10 and 20% over the next decade, so there's a lot of activity. There's real meat to the programs. Our people, we have people actively on the road talking to those, the state governments in very specific detail about what's real, about where we're going, and they're not only asking about Plug Power and what can be done with Plug Power products. They're asking about what's real with regard to opportunities for automobiles with fuel cells, stationary fuel cells, backup fuel cells, fuel cells that are PEM based versus phosphoric acid based versus solid oxide and so forth. So there's a real thirst for basic knowledge, and then, of course, the Department of Defense and the national laboratories are doing things in demo settings across the country.

Great, specifically on California, that seemed to be at one point the most advanced in terms of funding and actual fuel cell installations. Where do you guys see that standing right now?

As I understand it right now, it's kind of watched day by day. I think they're trying to raise and someone here probably knows, $5 billion, is that what their number is? They're trying to raise 5 billion. I don't think it's installed but they have to put the appropriations through in some sort of bond which is in process.

Okay, separate question on the backlog. You mentioned that you had, what, 40, 42 units firm? Last quarter I think you talked about, you had a certain number in proposal. Is that backlog, the 42 units, is that over the next year or how long is that?

Oh, that will be weeks, not years. It will be all this year, and we have an extensive review under way relative to proposals. I'm trying to think in terms of the length of the list. Right now, we're very confident that we'll exceed last year's numbers, and I think I want to leave it there.

Okay, and two last questions. Can you give us a current head count?

Yeah, we're firm in terms of people on salaries at 360, and we have in addition to that, we have summer students, interns and contract employees that get our number roughly to 382.

The recent announcement by GE Power Systems to cut about 7% of their workforce, did that have any impact on your operations? I know you share some space with GE Fuel Cell System.

No, it has absolutely no effect on us, zero impact on us what GE does.

Perfect. Thanks a lot.

Okay.

And we'll move next to David Kurtman at HD Wainwright.

Before I start into the questions, let me let you know that I bumped into a recently retired person at Englehardt yesterday and he had only the highest praise for you guys.

Thank you.

Yes. Let me ask two questions. In terms of life of units, what would you say the average life of your CHP units is today?

David, we sell those units under contract to our customers with a range of operating expectations between 12 and 24 months, and so the units are all played with those customers with specific contracts for that period of time and I think that ties to the deferred revenue recognition, which Mark went through in our notes, and also, you should be aware that most, if not all of those contracts include options to extend the agreement with the customers at Plug Power and the customer's discretion. If I could, David, I just want to make a statement the cash burn number. You say that 8.9 million was burned in the quarter net, and 12.2 million was the net loss. When I look at the change in trade working capital and the like, I'm seeming to come up with about 2.8 to 3 million short. Can you walk me through where the difference between the net loss and the cash burn was?

I can give you some of that, David, and for the fine details, you'll probably have to wait until the actual cash flow schedule comes out.

Sure.

But there are a number of noncash expenses. Let me give you one number here on -

Whatever the big ones are.

Yes, yes. The - sorry, just a second, David.

Sure, take your time.

The amortization - depreciation and amortization amounted to $2.5 million, and that's for six months, by the way.

Right.

And the losses related to our equity interests in GE Fuel Cell System were about $1 million, and the other big number would be the amortization of our intangible asset, which is the acquisition costs related to Gas Tech back in February of 2000, and that's1.4 million. But I think you've got the lion's share of it with those three numbers.

All right, I'll go back through and make sure I got it. Great, thanks.

Okay.

We'll move next to Jared Carson at RBC Capital Markets.

Good morning, guys.

Good morning.

On the Honda announcement that you had earlier in the quarter, can you talk a little bit about the conceptual benefits, if you will, to that product and maybe just kind of give us a little more info on that?

Well, first of all, the conceptual benefit of having a relationship with Honda in itself is very valuable for us, the discipline, the technology that, technology experience, the wide range of technologies that they've embraced over the years is really, really important for us. Second, the conceptualization around the product is that there's a common statement that one reason why there will be no hydrogen fuel cell vehicles is there's no hydrogen infrastructure and building a home refueling station with its own economics, that both supply heat and power to the home as well as hydrogen to the vehicle begins to allow you to see a rational framework that's economical in terms of deploying the infrastructure with the vehicle ownership.

Okay. There's been now, we talked about this a little earlier, but maybe some more detail. There's obviously some talk around the DOD and the DOE and perhaps in the budget for next year and there's some reports floating around on some large programs that may be forthcoming. Without getting into particulars, is that kind of rumor continue to be confirmed from what you can see and maybe just a few more thoughts on the kind of large federal programs that may be in the offing?

There are large federal programs being studied. The problem is there are many studies that don't come to, you know, come to light of day. I would say the number of programs is up. The number of considerations is up, and whether they'll emerge as major funding - major funded opportunities in about 2004 is almost anybody's guess at this time, but just the statistics of it gives me comfort that I think the capital markets will begin to see a signal from the government in a relatively short period of time.

Would you classify that relatively short period of time as maybe the second half of this year in terms of studies coming out or -

No, based on the life cycle of things, I think there could be some announcements late they are year about the studies in a formal sense, but I would think you would get into that in the early, the first six months of next year, which of course is putting the budget together for '04.

Okay, sounds good. One final question. There was an interesting press release the other day from GM talking about getting into fuel cells with backup power by 2004 and I think I even read a comment in there how that segment was one where there weren't too many people, very few people were focused, and I guess my thought has been that's almost exactly the opposite. It seems like everybody's tracked there because obviously the higher potential price points. Can you give us sense of how you think the competition is shaking out and obviously what's attracting them and maybe your differentiating potential?

Yeah. First of all, I don't want to explain GM's press releases and the way they position themselves in the market. Second, I think that competition is very good. Third, I think that General Motors coming in as they are is merely validating what many of us know who have been working in this sector for some time. So I'm very, very pleased that GM is deciding to do what they're doing and making the statements that they do, because with that kind of commitment an power in the market, I think it will encourage the supply base. It will encourage the general public, and as far as I'm concerned, we have wide open spaces for a decade for more in this industry. So I look at it as very helpful.

Okay, all right, thanks.

We'll move on to Cyrus Lowe at JP Morgan.

Good morning. Can you give us an update on the operational status for your field trial systems? I think last quarter you gave us systems availability and maybe total run time.

I think what we referred to last time is information that's on the Department of Defense web site that characterizes the installations that the DOD is contracted for and one of those is obviously the installation in water relief, and the information you'll see there is if the ten systems continue to operate, they were commissioned at the beginning of this year, and they're expected to go for at least a year. The average availability to date is in excess of 96%, and we're quite proud of that, and I think that what you'll start to unfold is confirmation of customer satisfaction, because when you look at some of the expectations the Department of Defense has for PEM fuel cell systems, there's a number of other companies that have entered into agreements to place PEM fuel cells at other DOD locations, and frankly, they can't deliver, and so there was, I think some reference in our prepared comments that Plug's taking full advantage of those opportunities. So we're quite pleased with the performance of the units and we also mentioned earlier that we have repeat orders from LIPA and Vaillant, which is a good sign, and you know, another statistic is that we're now in the year 2002 we have shipments and orders from 14 different customers, and that's a year-to-date number. That's up from 8 last year, and we're also in 11 differentiates and three different international locations. So I think there's a lot of sensitivity from some of these earlier questions

And then also, last quarter you mentioned that you'll be launching an installation kit, a simplified installation to your systems. Is that available now and have you seen a positive reception for that kind of kit?

Yes. I don't want people to think that it's, you know, sort of a kit as a separate SKU that we go out and sell in the market. We work with all of our customers for how to install the systems at their site, and every one of our new customers gets the cumulative learning of ourselves and our prior customers in terms of how to simplify the installation. So that translates into lower cash costs, shorter times to install, and faster and more reliable startup of the system, and so Roger, I think, in our prepared remarks talked about the number of training programs that we've had, and one of the things that I think distinguishes Plug Power is in the vast majority of cases over the last few months and going forward, our systems are installed by the customer's personnel or their subcontractors, and so we think that's a huge affirmation of the degree to which we understand these systems and their red for end use locations.

Great, thank you.

You're welcome.

We'll move now to David Snow at Energy Equities.

Yes, I wondered if you could tell me a little more about the system with the MOU with Honda. Is this going to be a reversible PEM that will at some point just turn around and produce hydrogen when it's not making the electricity and heat?

I think it would be very difficult for us to disclose that extra additional information. I will say that initially we're doing this in a very wide, open way that allows us to explore all kinds of options, and that would be just one of them.

You can't really simultaneously make hydrogen and electricity and heat though, can you, or is that -

Sure, you can. Let's just put it this way. The system that we're talking about, it goes into a home that has natural gas feed to the home.

All right.

That system will provide the following benefits to the owner. One, it will provide electrical power to the house. Two, it will provide heat to the house in the form of hot domestic water consumption, and three, it will provide hydrogen for what's expected to be an onboard storage system for a Honda fuel cell part, and that's probably the level of detail that's appropriate for us to discuss in the public at this point.

Okay, and I'm wondering if you can elaborate on the life of the 12 to 24 months life of your initial product. Is that essentially your buy back at some residual or is it supposed to be amortized over that short period or how does it work in terms of the economics?

I think those, the specific transaction at the end of that period is really between Plug Power and the customers, and I think it's out in the public domain, you know, different options exist and basically that's a one off discussion between Plug Power and our customer.

But that's not your ultimate life expectancy, you're going to push for extending the life beyond that as you get more experience; is that correct?

Absolutely. Just one observation on that is that, you know, our next generation of architected products S you know, due out in a period that's not much beyond the 24 month period. So there's no real reason, no real economic reason for a customer to have those products for longer than 24 months, regardless of how long they might physically last.

So you plan to replace these with a next generation product as soon as it's possible.

If we have a contracted arrangement for that, yes. In fact one of the problems is that the future product is so attractive that it's basically beginning to, you know, devour the parent.

Is it going to be at a price point that will be attractive for commercial launch?

Absolutely.

That's about what, $5,000 a unit?

We're not discussing that right now.

Okay, thank you very much.

We'll move next to Sante Shrefta at First Albany.

A couple of questions, guys. One, can you give us more feedback and some of your expectations with the Vaillant relationship here considering they've been a repeat customer here?

Sure. What we've gone with Vaillant, we've reported there are four systems that are currently installed and operating at fuel cell heating appliances throughout Germany. The next phase of work that we're doing and the orders that we have in-house with Vaillant, we'd anticipate putting about a little bit over a dozen more units of the next generation designed for fuel cell heating appliances into multiple locations throughout Europe. That's what's called the EU program, so it's a network, if you will, of about 20 companies throughout the European union that are all working together for fuel celled heating appliances and that body of work continues. The first prototype of that design is operating in Vaillant's lab, and the collaboration between ourselves and Vaillant continues as expected.

Okay, so - okay, that's great, and in terms of the cost reduction here of 16%, can you share with us, what is most of this reduction coming from?

It's almost statistically a dead heat across every major subsystem, and so the contributions this year have come out of the fuel processing subsystem. They've come out of the stack or the power generation module, and they're coming out of the electronics and the balance of plants, so it is almost a statistical dead heat.

Pretty much across the board then?

Correct.

One last question. In terms of the competitive landscape for the residential fuel cell market, I mean, what are you seeing out there given the recent market dynamics here? Are you seeing more customers coming to you or there is enough activity out there that you're not even thinking about that. Can you comment on that a little bit?

I think in terms of, it definitely is something that we see, and we receive several pieces of feedback which I think are important for Plug Power. One, we get through our supply base, so we know from them who's buying the most product from our suppliers.

Okay.

And the second is from customers who are beginning to come to us and shifting their contracts to us even if they had a previous contract with what would be considered a competitor, and the third is that we're doing a very, very extensive - we're collecting very, very extensive customer satisfaction metrics around things from, everything from what's our relationship building skill, how would you rate it to what's our communication process, what's the standalone favorable comment.

That's great. It's good to hear. Keep up the good work guys. Thank you.

Thank you. We'll, we can take two more questions, if they're available.

Thank you, we'll go next to John Quigley at Adams Harkness and hill.

John may not be with us.

Hearing no response, Rick Derigo at the Business Review.

How are you?

Good. How are you.

Good. I just wanted to ask about the staffing situation. Was there another round of layoffs just that last quarter? I want to get an update on the head count and make sure I understand this correctly.

No, there was no round of layoffs, Rick, and some of you who follow us very carefully, I think you may have, when we talked about our employment numbers, we usually gross it up to include interns, contract and consultants and that may be the number of difference you heard when I said we were at base 360, but I plussed it up to 283, which is probably akin to the number that you know.

Okay, so there hasn't been cut backs in R and D in terms of actual staffing and that kind of thing.

No.

In fact, Rick, we've gone markedly up in head count the last couple of quarters.

Sorry, could you give a number or no?

You mean in terms of the growth?

Yeah.

It's been less than a dozen.

Is this Mike?

Mark Schmitz.

And I guess everybody out there answered questions I was going to ask, so thank you very much.

Okay, and thank you to all of you.

We'll take our last question today from John Keeley.

Hi, can you hear me?

Yes, John.

Quick question on quarterly revenues. 92.5 million how much was derived from the amortization of previously deferred revenues?

The quick answer to that, John, is actually all the of it. The way we handled this from a revenue recognition standpoint is that all products that are delivered, revenues from all products that are delivered are in fact deferred and then we amortize it back into the P and L over the life of the underlying service contract. So you might see, you know, for products that were delivered earlier in the quarter, you would see some small amount of revenue actually reflected as an amortization coming in during that quarter but by far, the largest share of revenue is from product deliveries that occurred in prior quarters.

And a last question, out of your backlog of about 42 units, can you give us the number of units left to ship to LIPA moving forward?

We think it's about 19 units that are left to be shipped to LIPA.

Great, thanks very much.

Okay. Okay. Operator, thank you very much. I think that concludes the questions. Am I correct?

Yes, it does, sir.

Thank you very much. This will conclude our call today and we hope you found this session informative and we look forward to have you joining us for our next quarter update.

That does conclude this conference 01:06:37 call. Thank you all for joining us.