普拉格能源 (PLUG) 2002 Q3 法說會逐字稿

Good morning, my name is Carmen and I will be your conference facilitator. At this time I would like to welcome everyone to the Third Quarter Financial Conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, press star then the number two on your telephone keypad. Thank you, Miss. Mahoney, you may begin your conference.

Good morning, and welcome to Plug Power's third quarter 2002 financial review. Participants on the call include Roger Saillant, President and Chief Executive Officer, Mark Schmitz, Chief Financial Officer, Greg Silvestri, Chief Operating Officer and Mark Sperry, Vice President and Chief Marketing Officer. Today, Roger Saillant will begin with an update on our activities throughout the third quarter ended September 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. We appreciate everyone taking the time to be with us this morning. Plug Power has made positive progress in the third quarter. We have expanded our customer base, adding 6 new customers, while also shipping units to several repeat customers. In total, the company shipped 49 units during the third quarter. Plug Power currently has 108 systems in the field operating in 25 different locations in 4 countries for 22 different customers. Significant recent shipments include 9 units for Johnson Controls under contract to the US Navy for use at their base in China Lake, and San Diego, California. 15 units [Inaudible] for expected placement at sites in 5 different countries and 17 units to the Long Island Power Authority, including 3 hydrogen units for use in back-up applications.

This expanding customer base teaches us a great deal and our customers learn about us and our systems as well. We have added additional functionality to our GenSys5C product. In July, we announced that system had combined Eaton Power or CHP capability, allowing customers to capture both the heat and electricity produced by the system. The efficiencies on these units in some cases have exceeded 70 percent. Just last week, we announced that the system could operate in standby mode with load falling continue to provide power till critical loads in the event of the grid going down. These features were added to meet customer demand. Customer satisfaction with our product and support is high. Several of our largest customers have ordered additional units. These high marks are based on product performance, Plug Power's responsiveness to customer problems, and the training and documentation the customers receive with their unit. The systems at the [Inaudible] arsenal continue to have an approximate availability of 96 percent. This success has helped us to place units through Logan Energy and other military installations including Fort Bragg in North Carolina and Barksdale Air Force base in Louisiana as well as the 9 units of the California Naval base.

Our significant field experience continues to be a differentiating factor for Plug Power. Year-to-date, our systems are generated in excess of 1.4 million kilowatt hours of electricity. These kilowatt hours of experience have given us an abundance of data on our unit in various settings. We are using these datas to identifying system design weaknesses to not only strengthen the current designs but also to beat force into our next generation design.

Our service technicians and our design engineers are making system improvement that are extending system life. Our service call rate continues a strong down trend toward our ultimate design goal of one service call a year. We continue to simplify the system and bring the cost down. A good example of our progress is the improvement we have made in the inverter.

Our newest inverter, one that we are assembling at Plug Power, weighs 44 percent less, it is 21 percent smaller in volume, and it is 55 percent lower in direct material cost than the previous inverter. These improvements have occurred over the last 9 months. In addition, the new inverter has enabled the additional functionality of standby operation. Inverter improvement alone reduced the footprint of the overall system by 12 percent. This type of progress enables us to plan properly for our next generation system, one which we expect will be lowering cost and size.

Our research and architecture team continues to make progress on our future design. This month we finalized an agreement with Honda R&D to develop a home fueling system. This partnership will enable Plug Power to work with one of the finest engineering company in the world. The product and vision would enable homeowners to receive electricity and heat from the system as well as to produce hydrogen to power a fuel cell vehicle. We are excited about the project and future possibilities with Honda R&D.

In summary, we are making steady progress. We are building relationships with customers, government partners, and commercial partners that will position us to be a leader in the small stationary fuel cell market. Now Mark Schmitz will report on our financial progress. Mark?

Thanks Roger. I will now provide a summary of third quarter ended September 30th, 2002 financial results beginning with our statement of operations. Total revenue for the third quarter ended September 30th, 2002 was 3.0 million dollars compared to 920,000 dollars for the third quarter of 2001. During the quarter, we recognized partner service revenue in the amount of 2.6 million dollars.

Year-to-date we have recognized partner service revenue in the amount of 7.4 million dollars compared to 437,000 dollars in both third quarter and year-to-date period in the 2001 calendar year. We continue to defer a 100 percent of our partner service revenue at the time of sale and recognizes revenue over the period of the underlying service in another contractible obligations. The impact on our [Inaudible] operation is conservative since the costs associated with the production of these systems are fully expensed as they are incurred.

Contract revenue under research and development contract for the quarter in the September, 30th, 2002 was 375,000 dollars compared to 483,000 in the third quarter of 2001. Year-to-date contract revenue was 1.1 million dollars compared to 2.8 million dollars in 2001. Cost revenues were 3.1 million dollars during third quarter 2002. This compares to 2.4 million dollars during the third quarter of 2001. Our cost of revenues represents a direct material cost of fuel cell systems delivered during the quarter combined with the labor and material associated with servicing all of the systems in a contract. These costs consist primarily productive material and [Inaudible] for sub contract components and services.

It is not included in [Inaudible] labor or overhead expenses. Cost of revenues also includes the fully burdened cost of government contract activity. Year-to-date cost of revenues were 7.7 million dollars compared to 6.6 million dollars last year. Research and development costs were 8.7 million dollars during the quarter ended September 30th, 2002 compared to 15.1 million dollars in the same quarter last year. The decrease in the amount expensed includes the reversal of credit expenses in the amount of 1.8 million dollars related to our joint development agreement with Celanese. In the quarter we revised the terms of our agreement with Celanese to jointly develop high temperature membranes. Under the new agreement each party will fund their own development efforts. In accordance with these revised terms we have reversed an accrual amount of 1.8 million dollars related to our funding obligation under the previous terms of the agreement, which required us to cost share the development efforts performed by Celanese.

Additionally we carried a smaller labor force in 2002 compared to 2001, which resulted in [Inaudible] benefit payments to approximately, up approximately 1 million dollars. We also produced fuel systems for internal testing and evaluation purposes and we are keeping our development cost down by using modeling and simulation tools to architect a modular fuel cell system. We intend to leverage the design platform across multiple fronts. We expect research and development cost to increase somewhat in the fourth quarter as we procure materials to build the first prototypes of our next generation design and as we increase program activity with Honda and other collaborators.

Year-to-date research and development costs were 29.9 million dollars compared to 47 million dollars in the same period to-date of 2001. Recurring general administrative expenses decreased in the quarter ended September 30, 2002 to 1.7 million dollars compared to 1.8 million dollars in the third quarter of 2001. The reduction is primarily the result of more efficient spending in all of our support operations. Year-to-date, General & Administrative expenses have been 5.1 million compared to 5.6 million dollars in the same period to-date of 2001. Interest income, resulting in interest earned in our cash, cash equivalents and marketable securities was 352, 000 dollars for the third quarter of 2002 and 956,000 dollars in the third quarter of 2001.

Equity and loss of affiliates represents our minority interests in GE Fuel Cell Systems and advanced energy incorporated both of which are accounted for under the equity method of accounting. For the quarter ended September 30th, 2002 we reported loss of 481,000 dollars including 448,000 for amortization of our original investment in GE Fuel Cell Systems. Our investment in Advanced Energy Incorporated was fully expensed as of March 31, 2002. Our net loss for the third quarter on September 30th was 10.7 million dollars or 21 cents per share. Our net loss for the third quarter of 2001 was 18.7 million dollars or 38 cents per share. Year-to-date net losses have been 34.5 million or 68 cents per share compared to 56 million or a dollar and 23 cents per share in the same period of 2001.

We continue to expect that our loss per share for the full year of 2002 will be less than a dollar 25. We expect our loss in the fourth quarter of 2002 may increase compared to our run rate in the first 9 months of 2002 as we continue to defer 100 percent of our product and service revenue at the time of sale and fully expense the costs associated with production of these systems. Net cash spending was 9.8 million dollars in the quarter ended September 30th compared to 12.2 million dollars last year. Year-to-date our net cash spending has been 26.7 million dollars compared to 43.9 million dollars last year keeping us clearly on pace to perform within the guidance previously given of net cash spending less than 45 million dollars for the full year. Weighted average shares outstanding for the third quarter of 2002 were 50.8 million shares compared to 48.9 million shares in 2001. Our balance sheet includes 66 million dollars of unrestricted cash and marketable securities as of September 30, 2002.

That concludes our prepared comments. We would now like to open the meeting for questions. Operator would you please proceed?

At this time I would like to remind everyone if you would like to ask a question, press star then the number one on your telephone keypad. We will pause for just a moment to compile the Q&A roster. The first question is from David Smith of Salomon Smith Barney.

Good morning guys.

Good morning.

One of the concerns with any emerging technology company is definitely R&D and we're seeing on a year-over-year basis in a sequential drop in R&D spending- Can you address that for us and just talk to us, you know, in terms of does it delay product offerings and I know, you know the broader concerns more in terms of cash and long-term sustainability but just address, you know, the cash position in the R&D as it stands now?

David, this is Mark and first of all, just to be clear in the R&D. The R&D expense included that 1.8 million dollars reversal of the accrual [Inaudible] facilities. So, if you look at [Inaudible] accountable basis it means to have that back and you get a number that's you are more like 10.5 million dollars.

But it's still down about 30 percent a year-over-year, right?

Year-over-year yes, but let me explain, I'll come to that in just a second. Let me just make the point go first it that number is pretty much on track with what we said in the last conference call is up versus last quarter. It's not of a lot that it's up by a couple hundred thousand dollars versus last quarter which is kind of what we expected and I think what we communicated. Why is it down from last year? It's down for couple of really good reasons. You know, one is that, that R&D expense includes included last year the money that we spent on building products for internal tests and demonstrations purposes that is not happening to any, to a great extent this year. This year we were, you know, we were putting products in the field, but selling in other words.

Right.

Though, that's one major reason, the other reason, is that cost of products has come down a lot. You know, the third reason is that we are more efficient in our R&D activity despite the fact that it's going up a little bit because of our level of activity are related to prototyping our next generation products to hog effort and so still, we are generally more efficient.

Then Roger you wanted to say something?

Yeah, just a couple of things David. We are very sensitive to the need to be doing the research that's required. I want to remind you that we are developing strong and extensive modeling capability inside of Plug Power. We are doing that in collaboration with a number of outsiders including universities and General Electric, which in itself saves a tremendous amount of our engineering efforts and gives us a great deal of insight. We can do that, well, because we are getting the kind of data from the field that we need to verify the models and to use those to project into the future.

Second, we have really developed over the last couple of years extensive relationship with partners like Angle Hard, [Celanese], [Danalong] and others that help us work together to do R&D so that our data helps them drive their systems to get at the fundamentals whether it's with regard to heat exchangers or membrane design or just systems simplification. That's worked, that we are doing collaboratively because these companies have the same vision for the future that we do and that closeness is allowing us to get more effective R&D work done so that we get more output for per dollar of engineer time invested than we did previously. I might also add that as we move now to our next generation products, our material expense will begin to increase and some of them aren't in internal development cost as we take these models and we do send to physical design. Those expenses will go up and so it may gives the impression although that we were in a low right now, it may give the impression that suddenly we are out of control which in future quarters which is just absolutely not the case. This is very planned, very structured, and very expected on our part.

Okay, so on line, you don't want any body to read into this any delay in R&D and that is a sort of practice in the lower product development?

Absolutely. That would be a complete misrepresentation of what we are really doing.

That's okay and we want [Inaudible] on the backup unit, you talked about material cost, strength to ramp up next quarter, can you give us somewhat of that time frame when you will see delivery start on that and when you know, if you will see that being rolled out on a commercial basis in 2003 and the timing and price details like that?

David just- I want to be careful. Before Mark Sperry answers that question. I just what to point out that when we say material cost are ramping up, we do not mean the net material cost per unit. What we are talking about is our expenditure in terms of actual hardware will begin to increase but actually the cost per units continue to come down and come down dramatically, okay.

Yeah I think it is okay.

The remarks were relative to the hydrogen-based backup units as we indicated we have shipped our initial units on that. I do expect that we will ship a few more units. What I would like to do is characterize what we are doing with that product. It's very targeted in terms of where we are putting that, that system to our potential OEM partners as well as strategic end users some, some in the telecommunications and broadband areas. So we are not looking to drive into next year mass market placements off that particular product, we are, we are absolutely replacing those strategically where we will learn and where will in general partnerships going forward. And that will help us to finalize the design activity, which will yield a product in the later half of next year or early part of the year following that would be a mass-market appeal type product.

And that's when you'll expect to start marketing as a mass-market product?

Yeah. Until then it's not a product that we are going to push broadly.

Well than, that will be your first commercial product will it not?

Well it's a product which, which we're selling. So I mean people always get sort of twisted around in terms of defining what's a commercial product. I am just trying to describe to you what we are doing and you can put on that whatever label you want.

Okay. And then just as you talked about strategic partners, what type of applications do you foresee putting this into at least in the early stages?

Our early phase focus is on in the telecommunications outside plan arena primarily and in broadband applications.

Now seeking a specific partner, would you go ahead with a bunch of different- ?

I think that really depends on the particular market segments we are looking out. Our strategy right now would have us having multiple partners, but it's a little early on to really give too much guidance into how that will play out. I mean I wouldn't say that it couldn't be more exclusive than not but that's not our current strategy.

Okay. Just a housekeeping question, cash burn goes for the full year you said. You are staying with the 45 million but you that would imply a significant amount of cash burn in the fourth quarter. Are you at this point calling that in a bit?

Yes. David, as you know, we have said and just you know for the record everybody on the call, we said that it will be between 40 and 45 million dollars for the year. And clearly you know the track that we are under 27 million dollars right now. I don't, I don't expect we are going to spend 30 million dollars in the fourth quarter.

Okay.

It maybe, it maybe up a bit in the fourth quarter versus third but not going to be 30.

Okay. Great. Thanks guys.

Thank you.

Our next question is from David Kurtman of HP Wainwright.

Hi folks, couple of quick questions here, first of all in the past you talked about progress on raising cash, I didn't see it in the release. Can you give us any updates on that?

Yeah David this is Mark. No, it's a difficult subject. It's a complex subject. But I will tell you this. We do have several different initiatives and work processes underway there. They are working hard at it. We feel like there are some possibilities, there is nothing I can talk about specifically at this point.

All right.

But I just like leave it at that for now.

From also, I don't know if it is a meaningful metric or not, but what is your time from receiving an order to actually sending your delivery and how is that confronting?

David this is Greg, with this answer. Our stated delivery time is approximately 10 weeks. Our actual performance is much shorter than that and so with the types of relationships we have in the way that the orders pump through the sales funnel, we will work with certain customers to make sure that we can deliver systems well inside of that 10 weeks. But our worst case would be 10 weeks. And that's been a really competitive advantage in gaining some of the customers that were referenced earlier in this conference call because it's going on, our view of what's going on in the marketplace right is that lot of people making representations and very few making actual delivery of units. So for that the people that actually want to feel so and want to get engaged what they need to do for adopting a technology, we're a very attractive provider.

The one more question I have is related to competition. When you go out in the field with your sales force, which competitor have you been seeing either meaningful or not so meaningful competition from in the field?

Well David, this is Mark Sperry. I would say that when we go out in the field I really wouldn't want to single on any particular company over another one. But I would say this relative to competition that the number of serious players out there is definitely declining. So that we're say a year ago we would have been competing up against have a dozen to a dozen different- what I would characterize is serious contenders- that number is easily been cut into half. So it really comes down to a fewer set of players at this point in time.

Okay thank you.

Your next question is from Jaret Baize of TD Neucres.

Good morning, I just had a question with respect to the prepared remarks in the finalization of the Honda R&D agreement, it was mentioned future possibilities maybe exploit, I just want to get a little clarification on that, that's just directly related to the prototype home refueling in [Inaudible] just going forward from there, new products maybe looked at in the future?

Yeah, we are very careful about the Honda relationship, it is, in our review capable of going in a number of different direction and we were just trying to alert the market to it. As we begin to work together, as we are continuing to work together, this relationship can go in a number of different directions and we just didn't want to have any surprises for people.

Great, and just curious, do you have a backlog number any for the quarter?

We went out the quarter with a backlog of 7 units that backlog accordingly is at 17 units, so we have added to that this month.

Great. Okay thank you very much.

Okay.

Your next question is from Ali Agha of Banc of America Securities.

Thank you. Couple of questions, first Roger, could you also update little bit in the state of the end market right now and in that context give us the sense of what we should expect in terms of shipments both for the fourth quarter and then what we should be looking for in 2003 based on what your are seeing out there.

Sure I will make it. First of all good morning Ali. I will make a couple of remarks about that and then I'll turn it over to Mark again. One of the things that we're findings that's really, really interesting to us is, that there are three markets developing clearly Europe is becoming very stimulated and interesting to us and it really places a higher premium on our relationship with [Inaudible] understand that market, incentives are coming there. United States, there are things at work in the United States in the longer term particular around hydrogen-powered systems. The DOE is becoming more active and obviously there's a huge commitment in Japan. I want to prioritize those in any one way or another. But, under the headline its Fuel Cell, it's really interesting the number of visits the number of calls and the number of possibilities. Even at the price points and the reliability characteristics that our products have. So I am expecting more interest, not less. Its far less glamorous than it once looked like in terms of headline but in terms of its practicable bottom-line effect and its ability to have us develop our company. I say it's much more realistic.

I am Mark Sperry. Relative to the quarter, we shipped as of today 96 units. So we have shipped an additional four beyond what we did in the last quarter and as I mentioned we have a back log of 17 units and my expectation is that we will clear that back log and probably some you know handful of additional units on top of that. It would be my expectation. You know the vision in to the next year is little murky. I would say that I expect a profile somewhat to the past two years where its relatively back end loaded in terms of the activity that we are doing, and you can expect that we would continue to do market engagement along the lines of what we have done this year in terms of very targeted customers progressive utilities government type sales were still in that region of the adoption curve in marking acceptances as we progress through certainly the early part of the next year.

Mark, coming back to you again. As a follow up to that, when you look at specific US government initiative either at the state or at the federal level, could you point out to may be two or three or where your priority is, which you think, over the next months could lead to additional shipment orders for you, are they such programs that you can identify for us today.

I would say that in general there is a fair amount of activity today in sight of and around the DOE with respect to the freedom car activities and hydrogen infrastructure and we expect that there will some solicitations in the near term coming out relative to Fuel Cells and hydrogen infrastructure which would be applicable. We already know that DOD has done it and the house appropriations where additional moneys for demonstration programs similar to the ones we participated in the last two years. So we expect that we will be participating there. Our focus in terms of states there are fair number of states that are now beginning to put programs in place that would include Texas, Michigan, Ohio, California- certainly we will continue to focus in the state of New York. But there is an increasing interest certainly in the United States and then ongoing interests than actually in increasing interest now inside of European Union. There has been some recent messaging that they will significantly increase the amount of moneys are being directed towards programs for Fuels Cells and infrastructure and we continue to see interest in Asia.

Yeah, and then final question after relates to the Fuel Cell, United Cell and technology, could you update us where in the near term you are seeing the biggest bottle neck challenges in terms of your move toward the mass market.

I continue to feel that [inaudible] authorization of LPG is a key area. I think membrane durability itself continues to be challenge and the door ability is related in number of factors controlling indemnification would be related to that and controlling the various types of poisons that can get to the membrane. So, in sum I would say its both the membrane, the reason I have to you its for a second. I think the biggest single challenge is to get the systems engineering right. So, you can present the membrane with pristine gases and that's an area we have been very focused on again and systems engineering is far less expensive in terms of expenditure. But its got the greatest break through. I'd say the systems engineering that we have been doing and the kind of training and development with our engineers and our collaboration as really helped us significantly improve the life time and the over all performance of the system.

Roger, what about the fuel reformer technology.

Well fuel reformer technology itself, we feel pretty comfortable with our reformer we understand a pretty well and judging from the number of external visits were getting from other companies interested in reforming and what their feedback is, I would say that we probably have the best ATR reformer in its size and the best understanding of it. If its not the best its among the leading fuel.

Thank you.

Your next question is from Jarett Carson of RBC Capital Markets.

Hi, good morning. Couple of quick housekeeping. What was the capex and depreciation and amortization in the quarter?

Jarett, for the quarter, D&A was 1.9 million dollars, substantially more than the capex number. Capex was about 600,000.

Okay. All right. Could you talk a second about the inverter, that seems to be a new, I believe on the call and sharing with us here and also seeing this kind of- a typical from other what other developers are doing and that it sounds like you have had this effort going on in-house and you are comfortable with what you are developing in house, related to so many other, let us call them power electronics guys?

Jarett, this is Greg. You are right about we did call out some specific progress on the inverter in this call. But we are not solely developing inverters in house. We have for a long period of time, had relationships with many power electronics company looking at both DC, then AC and also as we get it more and more, into some hydrogen backup power situation looking at DC/DC products. The investment that we have in Advanced Energy, which we have referenced several times, dead investments about 3 years old. That was the company that came up with the design for the original inverter when out on our first Su1systems and so we have used some other firms for work on our advanced system designs, but our engineering group working closely with the staff at Advance Energy recognized that for the immediate term we can make some ongoing improvements to our current inverter and again this was the type of information that was coming back from the field both in terms of operations as well as installations and, you know, what we were seeing with actual power quality to add our customer sites.

I think one of the challenges in front of the whole group is pursuing power electronics. Is that the grid is not a stable entity and so what people see in terms of actual color and the grade, what they see in terms of how power is handled inside their facility is often different and a good power electronics design has to accommodate those differences. So, we basically through our internal efforts as well as leveraging network at Advance Energy, we design the system to take advantage of those learnings in all of those positive attributes that we spelled out in this conference call. We are part of the end result. I think it is also important to note that what we specifically said is that we were assembling those units here. And so, I think that hopefully gives you some more background in terms of the progress we made specific to the products that are going out the door today. But power electronics in collaboration with supply base is still a front-and-center matter in our long-term research in systems architecture application.

Jarett one thing I want to add. This is Roger. I just wanted to add that we are constantly looking at ways to reduce cost, improve the reliability and reduce the size and again that comes through a lot of hard systems engineering work, comes to collaboration with our supply base. But probably, most importantly it is understanding what is essential and what is not essential and that only comes from field experience.

Okay. On the Celanese agreement that you have, could you explain that a little more? May be not necessarily on unwinding or are you going to separately pursue high tech or you still going to do it jointly? Just talk a little more about that.

We are really excited that in terms of a breakthrough technology from one in which we have invested very heavily and have been supported by government work as well for example, [inaudible]. We are excited with the relationship we have with Celanese, we just have to mature it and move into another stage. About a month and a half ago, two months ago, I was in back on Labor Day, I was in Germany to celebrate the opening of a new five million dollar facility that they had completely dedicated to high temperature, membrane fabrication. Our relationship, which is a collaborative exchange in detail, in terms of design and development and how best to bring this product to market is a lot more enriching than the prior almost pay for research kind of exchange and in this exchange now we have not only ownership in the final design and some equity in the IP, Intellectual Property of it, but we can - we have extended this contract out further than the prior agreement.

Okay, all right. And then one final question, Mark, if I am correct on unit shipments, I know, you had the big order last year, which puts you up around, I believe 132. It sounds like may be in some range of one ten to one twenty, well that might be the year-end number. Is that above line?

I would say, probably we are likely to see 115 to 130.

Okay. All right, thank you.

Our next question is from David Snow of Energy Equities.

Hi. Could you review with us given this last comments, the advantages of the high temperature membrane and how much different temperature is it versus the ones in current use? Would it become a standard up mainstream application or for specialty, when might you incorporate that give us little color on it?

David this is Greg, I am not going to give you exact numbers but the suffice it to say that most of the membranes that are out there are operating well below a 100 degrees C. And that the product that we are working on with some of these is well above a 100 degrees C and there will be a bunch of specific decisions made by the development team Atlanta on the exact operating range for those membranes. There are probably two chief advantages to the stack in the membrane technology that we are pursuing. One is the elevated temperature. Water management becomes an easier issue because you are dealing with water that's strictly in the vapor phase. Since you are above a 100 degrees C, you don't have the complexity of managing liquid water inside the stack.

Second is that the technology is much more forgiving and CO power. So Carbon monoxide which had to be carefully controlled with the current generations of membrane in terms of [Inaudible] that the membrane can see. That restriction is now removed entirely but it's a more forgiving membrane to Carbon monoxide. That advantage as well as the water management advantage spill over into simplifying portions of the fuel processor as well as other parts of the balanced plant to the system. So that the stack itself becomes little bit more robust, if you will. But then the systems integration benefit and the system design benefits still offer that. So all of the attributes in terms of size, weight, lower unit cost, improved reliability- all of those come more favorably with the spill over benefit.

Would the higher temperature give you any improvement in efficiency?

That's not totally known in terms of electrical efficiency but in terms of what you can do for combined heat power and then as you get to a certain elevated temperature you get start to get into some air conditioning types of applications. I think the total system efficiency is more likely to be improved.

Okay and on the efficiency, what would you say that you are getting on the electrical efficiency as you have introduced in your latest units? What are you shooting for in that number?

I think you know, the ones that we have reported out in the public domain I think all in the mid to upper 20's in terms of percentages.

Are you shooting for higher than that?

Yeah, we continue to look for improvements in the electrical efficiency and some of those will come from just the ongoing design changes to our current system. The next big step up would come with our future generations to system and also we mentioned about in the in this release that the changes for grid standby, the added features set for grid standby as well as combined heat power was really to meet customer demand and I think that the more and more customers are becoming tuned to the total efficiency opportunity which in the US is eclipsing 70 percent in terms of the energy value and natural gas more than [inaudible] percent and that energy value has been captured either for electrical power or heat and in Europe I think we have reported in earlier calls that the fuels are heating a plant designed between ourselves and Taiwan is in excess of 80 percent and both those efficiencies are getting more and more consideration by the end users in the marketplace if they become familiar with the technology.

In terms of the combined heat and facility heat, we don't really have a way to capture that facility heat in the US as much as in Europe where they use hot water for heating is that not correct?

Yeah the penetration for circulated hot water heat in Europe is very, very, very high. It is lower in the United States but in certain market applications it is actually becoming more and more popular with radiant heat through floors and there is still a base load of probably the upper single digits of percent of homes that use our circulated hot water heat. Well lot of people are finding like it's the town hall in long hour one of our system is and where the company headquarters of one of our distribution partners and these systems are meeting the total needs for the sanitary hot waters. So for the hot water that they use for washing and bathing, those types are what we may call portable or sanitary hot water. These systems are very effective meeting all of those, then you are going to find other applications in small commercial for, you know, things such as pools and spas and commercial needs of small business, what do you think these systems are well designed to deliver their needs.

The standby system, is that as it compared to the one is run on hydrogen is this a battery backup or how does it standby working? Is it absolutely continuous or do you have flicker between modes?

Yeah I mean absolutely continuous and is there a flicker is that it's tough to quantify but these three systems switch over immediately and we have demonstrations here on our site where we are running computers or household appliances and be it ambient lights or things like that. To date the customers responses have been that none of it's noticed.

So it wouldn't necessarily work for a computer as much as it works for a regular household appliance?

Well they got to be careful, I mean our demonstration includes a computer working and what we would consider to be sort of a normal PC home-based application, but we are not. When you get into a to a critical load backup situation like a hydrogen powered systems are designed for then you get into fractions of a cycle and those are separate discussions with those design teams versus the broader public offering of the GENSYS 5C but the transfer on an optic grid is excellent and the load following ability to follow the load it is critical load, the systems designed to meet the responses all being extremely positive from the people that have been here as well as the initial end user.

That load following ability didn't you at one point become some standardized sizes at which you would operate and is the fuel cell itself doing the load following now?

Yeah this is in that application and I think what you are pointing to David this is just another sign of carry the ongoing progress we are making as the system becomes more robust in our confidence in the designs you know, continue to increase, we can provide added features to our customer group.

Okay.

David we have to move on to the last question.

Thank you.

Thank you.

Your next question is from Allen Machoni of Cooper Beach Capital.

Hi! Thank you. Can you tell us how many employees you currently have versus what you had at the end of last year?

Current employment level is somewhere around 370 including part timers.

What percent? Do you have lot of part-timers?

No, not a lot. I did say we probably got- I am not absolutely sure of the breakdown there. Let's say it is 370.

Okay. And how does that compare with where you were at the end of last year?

I don't have the number at hand but it is about the same.

Roughly about the same. Okay. So, you haven't seen that much of a decrease in terms of the employment level?

No. We have not.

Okay. Do you anticipate that as you ramp up product and start shipping more commercial or more mass market products into next year that you'd need to hire people?

We are trying to very carefully design processes- manufacturing, and design and development processes- to match the current workforce that we have. We are very conscious about volume ramp ups. We were conscious about taking contact hours out of that process including test-time, assembly time, and development time. That is one reason we are relying so heavily on modeling. So the short answer is that we are going to go through the next phase of our development at this headcount level.

Okay. That's helpful. Also, on your, on the cash and marketable securities, can you tell us what your current interest rate is, so we can model that out in terms of looking at interest income for this next year? Are you thinking about putting money into longer maturities? Sort of give us the breakdown as to how you manage the cash?

Allan, you have to remember this is a nuclear winner financially.

Yeah, we are pretty conservative.

Believe me, I know, on the other side yeah...

Allan, we are obviously not in the investment business, and we do invest the funds that we have quite conservatively. They are short maturities. They are doubly rated. Securities are A1-P1 commercial paper. We have very rigorous guidelines that develop quality oriented. I don't think we get much above 5.2 percent.

Okay. That's what I was thinking some companies I know if they don't have need for the cash, say for 12 months or more, they need to put it in one year paper to be able to get a better year interest yield. So roughly about second [Inaudible] plus a little bit just to get the sense. Can you, one thing I did not understand, maybe it was, I may have missed it, can you detail who wanted to revise the Celenese agreement, and can you just highlight maybe what the key revisions were and will that come out as a case [Inaudible]?

First of all I don't know if I will come out of the K at all. But we had built into that original contract with [Inaudible] that we would revisit it, and this was just part of the normal course of business to say Hey where are we? Are we going to go forward, how are we going to go forward, and reevaluate on [Inaudible] go through the next step. So both Celenese and [Inaudible] initiated those discussions because we were going to have mutual best interest to do it. I think the really interesting thing about of all this is that Celenese themselves had seen this possibility and the implications, and that's why they have invested the 5 million dollars of capital expenditure in the new facility in Germany.

Okay. But just to understand, you took the reversal of 1.8 million because issued accrued for covering some of their R&D. Does that mean your R&D now goes up because they are not covering some of yours? How does that work over the next 12 months to 5 years?

I wouldn't expect to see any impact over and above that we've already anticipating in our R&D expense. I think that is just a more constructive, collaborative relationship going forward. Each party bearing its own costs, but still marching towards development objectives that are jointly agreed upon.

Got it. One last question if I can. In terms of the issue of raising cash, I realized it's a difficult environment for everyone. One thing that's been frustrating is seeing that one of your largest shareholders seems to sell whenever he gets the chance. They have their funding issues. Is there any possibility that if you do a deal or workout a deal that you can instead of constantly seeing selling on the tape- sort of holding your stock back that there is a way to do all in one or try to get an offering done, sort of clean it up and put in stronger hands all at once?

Yeah, that's always a possibility, and you know, we'll have to see what happens there.

Okay. But we will get guidance sometime by the fourth quarter at least as to what cash burn will be for next year, R&D, and also your expectations into next year for raising money?

Yeah. We are clearly not in a position yet to provide that guidance for next year, but very much on our minds and as soon as we got enough visibility to give you some guidance with confidence we'll do that.

Okay. Thank you very much.

We need just one more question please.

Your final question comes from John Quealy of Adams, Harkness & Hill, Inc.

Good morning.

Good morning John.

Could you update us what you are hearing as a latest interconnection standard such as T1547 and how is that going from your perspective?

John, this is Greg. We don't have anything specific to say that standard. We have a broad set of initiatives in the different states we are work and also with Federal level to understand the various interconnect standards. If there is something specific to that one that we need to come back to you on, we are happy to do it post this conference call. Just send us an e-mail.

Great. Thanks very much.

Okay. Thank you.

This concludes the Q&A portion of today's conference. Do you have any closing remarks?

Yes. Thank you very much. This will conclude our call today and we hope that you found the session informative and we look forward to having you join us next quarter for another update.

Thank you for participating in today's conference. You may now disconnect.

Thanks operator.