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.