普拉格能源 (PLUG) 2003 Q2 法說會逐字稿

Good morning. My name is Lisa, and I will be your conference facilitator. At this time, I would like to welcome everyone to the Plug Power’s quarterly earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ 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 Second Quarter 2003 Financial Review. Participants on the call include Roger Saillant, President and Chief Executive Officer, Dave Neumann, Chief Financial Officer, Greg Silvestri, Chief Operating Officer, and Mark Sperry , Chief Marketing Officer.

Today, Roger Salliant and Dave Neumann will begin with an update on our accomplishments and financial results throughout the second quarter ended June 30th, 2003. After the quarterly update Roger will review our status pertaining to our milestones for the year. Following Roger’s milestones review we will conclude the call with a question and answer session.

To begin the call I’d like to first read the Safe Harbor statement. During the course of this conference call Management may make projection or other forward-looking statements regarding future events and future financial performance of the company. We wish to caution you that such statements are just predictions, and actual events or results may differ materially. These are forward-looking statements within the meaning of the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995.

We also refer you to the press release issued by the company this morning and to other documents that the company files from time to time with the Securities & Exchange Commission, specifically in the company’s Annual Report on Form 10-K for the fiscal year ended December 31st, 2002 dated March 31st, 2003, and filed with the Securities & Exchange Commission on March 31st, 2003. These documents may contain and identify various risk factors that could cause our actual results to differ materially from those contained in our projections for forward-looking statements. We undertake no obligation to revise or update any such projections or statements or to reflect the occurrence of unanticipated events.

Now, I would like to introduce Roger Saillant, President and Chief Executive Officer of Plug Power.

Thank you, Cynthia. Good morning. Thank you for taking time to be with us today. I am very pleased with our progress during the second quarter, and am happy to say that we remain on track to meet our milestones and objectives for the year.

Revenue increased during the quarter to $3.1m which is a clear indication of the hard work that is being done daily to attract new customers and understand the market. Our order activity was strong during the first half growing 68 percent year-over-year leaving us with a 74-unit backlog as of June 30th.

During the quarter we announced the GenCore5T at [SuperCom] [ph] , a premiere communications and technology exhibition in Atlanta, Georgia, where these systems were on display in the [Tyco] [ph] Electronics Power System and Plug Power exhibit areas. With an industry leading price of $3,000 per kilowatt GenCore5T is designed to provide extended run backup power for the telecommunications industry in the demanding outside market.

GenCore5T is Plug Power’s first direct hydrogen product based no a proprietary modular, scaleable architected fuel cell platform. We are pleased with the interest we have received in the GenCore5T since our announcement, and are working hard to translate that interest into system orders. We currently expect to make our first GenCore product shipments during the fourth quarter of this year.

This quarter we shipped 35 systems which included our first two GenSys5P Systems designed to operate with liquefied petroleum gas. The GenSys5P is a five kilowatt, grid-parallel fuel cell system that is being marketed to customers who require remote fuel capability. Our strategy is to gain valuable insight about customer needs, and understand the technical challenges of the remote marketplace, and incorporate those insights into our ongoing development efforts.

During the quarter our systems operated for more than 139,000 hours, generating approximately 354,000 kilowatt hours of electricity. Our second quarter overall customer satisfaction survey results were very good, as we achieved a 4.7 rating out of a possible 5. Additionally, we added eight new U.S. patents to our portfolio in the quarter for a total of 101 patents. We are proud of these accomplishments and continue to develop new technology that will position us a fuel cell technology leader.

I will turn the call over to Dave Neumann now, our Chief Financial Officer, to review our second quarter financials. Dave.

Thank you, Roger.

I’ll be providing a summary of our financial results for the quarter and year-to-date period ended June 30th, 2003.

Our second quarter results include the full effect of our acquisition of H Power completed in the first quarter of this year. We consummated our merger with H Power on March 25th at which time we recorded the fair value of H Power’s net assets on our consolidated financial statements. The purchase price in excess of fair value of H Power’s net assets was recorded as in-process research and development expense, capitalized technology, and goodwill.

We expensed $3m as a non-cash charge to our statement of operations in the first quarter related to the amount allocated to in-process research and development. We also recorded intangible assets amounting to 5.5m which are expensed ratably over 24 months resulting in a quarterly charge to our statement of operations of approximately 700,000 or one cent per share.

Additionally, we recorded goodwill of approximately 10.4m. We will periodically evaluate the goodwill for impairment as we continue to evaluate the technology, product design, and intellectual property and continue to explore opportunities to carry forward customer relationships.

We have quickly integrated the businesses, and have consolidated the facilities and operations at our headquarters in Latham, New York. The result was net cash used in operating activities for the second quarter ended June 30th of $10.8m including $1.8m for acquisition fees and expenses, and $600,000 for severance and integration costs related to the acquisition. Net of these transaction related expenses our net cash used in operating activity was 8.4m which compares to 9.1m used in operating activities a year ago.

Year-to-date net cash used in operating activities has been 19.3m including 3.1m related to the acquisition. This compares to 16.8m during the same period of 2002. We do not expect to incur any additional significant expenses related to integration costs during the second half of 2003. Additionally, we continue to expect net cash used in operating activities for the full year excluding the impact of H Power to be #35m to $40m.

Total revenue for the second quarter ended June 30th, 2003 was 3.1m compared to 2.5m for the second quarter of 2002. Year-to-date total revenue was 6.1m compared to 5.1m last year.

Product and service revenue, a component of total revenue, was 2.1m for the quarter which compares to 2.2m last year. Year-to-date product and service revenue has been 4.2m compared to 4.8m in 2002.

We continue to defer 100 percent of our product and service revenue at the time of sale, and recognize this revenue over the period of the underlying service and contractual obligations. The impact of this on our statement of operations is conservative since the cost associated with the production of these systems are fully expensed as they are incurred.

Contract revenue under R&D contracts for the quarter ended June 30th, 2003 was $1m as compared to $354,000 in the second quarter of 2002. Year-to-date contract revenue has been 1.9m compared to 700,000 last year.

Cost of revenues was 3.3m during the second quarter which compares to 2.9m in 2002. Our cost of revenues represents the direct material costs of the fuel cell systems delivered during the quarter combined with the labor and materials associated with servicing all of the systems under contract. These costs consist primarily of direct materials and fees paid to outside suppliers for subcontracted components and services. It does not include any factory labor or overhead expenses. Cost of revenues also includes the fully burdened cost of research and development contract activity. Year-to-date cost of revenues was 5.1m compared to 4.6m last year.

Research and development costs were 10.4m during the quarter ended June 30th, 2003 compared to 10.3m in the same quarter of 2002. Year-to-date research and development costs were 20.5m compared to 21.2m in the same period last year.

We continue to keep development costs down by using modeling and simulation tools to architect a modular fuel cell system. We intend to leverage the resulting design platform across multiple point products. A benefit of using these modeling and simulation tools has been to reduce spending on internal test and evaluation. We also continue to move to an extended enterprise model whereby our suppliers play a larger role in helping to design and build important parts of our system. This has enabled us to reduce research and development costs without cutting back on product development. Finally, in collaboration with our customers we are leveraging the learning we get from our field presence to make improvements and modifications to our fuel cell systems.

Recurring general and administrative expenses were 1.9m in the quarter ended June 30th, 2003 compared to 1.7m in the second quarter of 2002. Year-to-date general and administrative expenses have been 3.4m compared to 3.4m in the same period last year.

Interest income consisting of interest earned on our cash, cash equivalents, and marketable securities was 191,000 for the second quarter of 2003, and 594,000 in the second quarter of last year.

Equity and losses of affiliates representing our minority interest in GE fuel cell systems which we account for under the equity method of accounting. For the quarter ended June 30th we reported a loss of 480,000 representing our minority interest in this entity including 448,000 for amortization of our original investment.

Our net loss for the quarter was 12.8m or 21 cents per share compared to 12.2m or 24 cents per share for the same period in 2002. YTD our net loss was 26.6m or 47 cents per share compared to 23.8m and 47 cents per share in the same period last year.

The current YTD loss includes the previously mentioned non-cash charge of $3m or five cents a share for the write-off of in-process research and development expenses related to our acquisition of H Power.

Weighted average shares outstanding for the second quarter of 2003 were 60.4m compared to 50.5m in 2002. The increase is the result of issuing approximately nine million shares in connection with our acquisition of H Power. As of June 30th there were approximately 60.9m shares of our common stock issued and outstanding.

Our balance sheet continues to be strong with 71.1m in cash, cash equivalents, and marketable securities. Debt includes 5m of restricted cash securing the bank debt on our facilities. We anticipate that these cash balances will be sufficient to fund operations into 2005.

I would now like to turn the call back to Roger for a review of our milestones and some final comments.

Thank you, Dave.

We continue to remain focused on our vision to deliver clean, reliable onsite energy. Our new environmental policy which is located on our web site at www.plugpower.com is an example of our commitment. We will produce quality products that are held to the highest environmental standards which will enable sustainable growth and deliver the triple bottom line, people, [planet] [ph] , and profit.

We continue to expect to achieve all of our milestones before yearend and have made significant progress to date. First, as Dave mentioned earlier, we continue to expect net cash used in operations to be within our original guidance of 35m to 40m excluding H Power acquisition costs. We have worked diligently over the past two-and-a-half years to reduce cost and leverage our investment dollars. During this period we have reduced our annual cash requirements by nearly 50 percent.

Second, with respect to our objective of enhancing our strategic partner portfolio we have executed five joint marketing agreements in support of our GenCore go-to-market strategy. We continue to have strong strategic relationships with GE, DTE, Vaillant, Celanese, Engelhard, and Honda who remain supportive of our ongoing efforts in the development of our products.

Third, as stated last quarter, 13 fuel cell heating appliances have been installed in locations in Germany, the Netherlands, Austria, and Luxembourg. These systems have generated more than 100,000 kilowatt hours of electricity and are providing service to multifamily homes, a brewery, and resort swimming pool. Design and verification testing is currently underway in the first production unit, for Phase II of the program is under test. The next prototype system will have a more modular design, the ability to operate at lower power levels, and will have increased efficiency. This Fall we will begin Phase II of the virtual power plant project with our partner, Vaillant. 42 additional fuel cell heating appliances will be installed throughout Europe in the fourth quarter.

Fourth, our work with Honda continues, and we are on schedule to develop a home refueling system prototype which we plan to demonstrate later this year.

And finally, as mentioned earlier in the call, we shipped our first LPG system, the GenSys5P [ph] as projected in our milestones for the year. As our announcement yesterday indicates, we are off to a great start in the third quarter. We received award notification for several programs in the DOE and [Niserta] [ph] that are expected to provide $12m in net funding to Plug Power over the next 30 months. The funding will support further development and demonstration of our [Pen] [ph] fuel cell technology. The DOE and Niserta have been instrumental over the past few years in supporting efforts to advance fuel cell technology throughout the industry.

That concludes our prepared comments. We will now open the meeting for questions. Operator, will you please proceed.

(Caller Instructions.)

Your first question comes from David Smith.

Good morning, guys.

Good mooring.

Good morning, David.

A couple of questions. More housekeeping to start off. But as far as the revenues go for the quarter is that kind of what we can expect for the year? I know that there’s an amortization of deferred revenues that occurs, but is this sort of the level that we should expect, and maybe a modest up tick towards year end?

David, this is Dave Neumann. I think similar to last year you’re going to see that our shipment schedule is backend loaded. But you’re right, but we do have amortization of deferred that also factors into that so that the second half should be slightly better than the first half due to the backend loading of the shipment schedule.

Right, and then the mix between product sales and contract revenues would do what?

The contract revenues for the second half will not – is not backend loaded. And so it will be comparable for the first half. You might see a slight increase, but comparable.

Okay. On the cash expenses for the H Power acquisition, for severance for and other things that you mentioned, what was accrued for in the first quarter? And the casually went out this quarter? Is that how that worked?

That’s right. As part of the purchase accounting we did accrue those expenses but the cash went out the door in the second quarter.

Okay, so none of the number that we see as far as the operating expenses include any of those items this quarter?

That’s right. There’s a small amount, none of the 600,000 that I mentioned there is in the operating expenses.

Right.

That’s correct.

Okay. As far as the order backlog that you mentioned is that based on units that it’s up significantly more dollars?

Those are unit counts in the backlog, Dave.

Okay. And how should we kind of be expecting things to rollout for the end of the year? You talked about Vaillant, or is that in the backlog already?

Yes, the Vaillant units reference the 40 some odd units for Vaillant are in the backlog. They’re in the 74-unit backlog.

Okay.

And so I would say for the year we would expect to ship the backlog clearly in probably another dozen or so, couple of dozen units actually beyond that.

Okay. Any orders then for the new GenCore so far?

Yeah, there’s in the backlog there are 12 units. In today’s current backlog there are 12 units that are GenCore.

Okay. As far as the R&D goes there was a $3m write-off that you had mentioned from the in-process R&D. And that I am assuming is in the plan for R&D on this quarter. In that context there’s a significant drop in R&D this quarter. Is there anything that I should be reading into that? You know, I guess ongoing or on an operating basis R&D would have been more like 7m from what you’re saying, am I right?

Well, there’s actually a separate line on our statement of operations called in-process R&D, and that’s the $3m write-off.

Okay.

The recurring R&D was actually flat. It was 10.4 this year versus 10.3 last year.

Okay, and so then the 3 is in – sorry, maybe I missed this. Where is the 3 in?

There’s a separate line on our financial highlights attachment called ‘in-process research and development.’

Okay.

That’s the write-off of the $3m.

Okay, I got you. Okay, great. Thanks.

Okay.

Your next question comes from Walter [Nesdale] [ph] with [Otter Capital Partners] [ph] .

Good morning, guys. How is everybody today?

Good morning.

I just have a couple of quick questions, kind of housekeeping also. Now, with the H Power acquisition we’re not going to see any more charges on that, right? That’s all done now?

We’ve got the lion’s share behind us. Anything going forward is not going to be significant.

Okay, good. That’s what I was hoping to see.

Now you mentioned that you’ve got 12 units ordered on the GenSys? Have you gotten any feedback on that yet, on how it’s performing, and you know, what it looks like in the field right now?

Walter, this is Mark Sperry. The 12 unit backlog I referenced is on the GenCore product, and so the telecommunications backup is …

Oh, okay.

Is that the product you’re …

No, actually I’m talking about the – I am sorry, the GenSys?

Oh, the GenSys, we have a couple of flavors that are out there, the natural gas system which is operating, as Roger indicated, we have extremely high customer satisfaction results. And that’s primarily based off of the GenSys installations we have. And those are the natural gas grid-parallel five kilowatt systems. And so it is meeting the expectations set, that we’re putting out there with the customers around it, and its performance. The propane units that have shipped have yet to be commissioned, and so we don’t yet have any direct customer feedback from that.

When do you expect those to be online?

I would expect those to be online late in the third quarter or early fourth quarter. And most of that is being driven by site preparation type activities permitting those issues. And the GenCore is the same conversation, those units will not be sited in the field until probably very late in the third quarter, into the fourth quarter. And so we obviously have a number of systems that we’re operating internally conducting our test suites as we go forward to actually moving those systems into our acceptance in the field. And, again, that will be a fourth quarter type activity.

Okay, are you working? Do you have any like strategic partners, or anybody on the distribution side of the GenSys that you’re working with right now?

On the GenSys side we have the set of partners who have distribution rights to our product. That would be the DTE Technologies, General Electric, and Vaillant. And they are in all cases have a set of units that they have moved to end users, and we have moved some product directly.

And in the case of GenCore we are actively working to build that channel infrastructure. As Roger indicated, we have a number of marketing agreements in place. Those agreements really are designed to help us assess the market with potential partners, and begin to gauge market opportunity and what the product feature set needs to look like. And from there we will move into discussions of more commercial in nature around distribution.

I see. Now, one more thing, did you – with the H Power acquisition did you for any reason continue the relationship they had with the Association of Rural Electric Cooperatives? For something like this I think that might be an interesting alliance there.

Yes, as part of the H Power acquisition, the distribution agreement between H Power and ECO was terminated.

Oh, OK.

We continue to have some dialogues directly with a few of the members of ECO, but that was terminated as part of the acquisition.

I see. Well, thank you very much.

Thank you.

Okay, bye now.

Your next question comes from David Snow with Energy Equity.

Yeah, hi. I am trying to get a feel of what the price points are in the backup telecom product versus whatever the comparable product for outside use is? Is it batteries, or what are you comparing with, and how much per kilowatt do you have as a bogey out there?

David, this is Mark again. The technology set that we are competing against is exactly as you stated. It’s batteries, and in some cases it’s nothing but batteries, and in some cases it’s batteries being deployed in conjunction with some sort of generator sets. But by and large we’re targeting the extended run backup application, and so these would be people who have application needs for four to eight hours of backup not 20-minute type bridge backup, battery bank, if you will.

And in general, when you look at that, depending on whether it’s eight hours of batteries or two hours of batteries with a GenSys, and how it’s sized, you tend to see installed prices in the say $2,000 to $4,000 a kilowatt range when you look at it. And so we’re clearly with our $3,000 price point not at the low end, but I would say it’s a competitive price.

And we have some value add in terms of our product versus batteries in terms of the ability to predict outages, to know exactly how the system will operate. We have [telemetry] [ph] embedded that will allow people to know how much hydrogen storage is there, therefore, how many hours a system will continue to operate. We have designed this system with the right environmental footprint to alleviate some of the issues with batteries, where they need to be – they’re very sensitive to temperature and so you tend to have to build very elaborate and expensive cabinets to keep them in a certain temperature zone.

And so the price is very competitive, especially when you add in a lot of the value add aspects of fuel cells versus batteries, or in the case of generators clearly the issues around emissions and noise come into play there, as well.

And so are you at a point where this will be at least a cash flow positive product, or do you still have to eat some costs as you start getting out into the market?

We will, our intention here is to move to a cash generating position off of this product very quickly. I can’t tell you that the initial, you know, units will generate a positive gross margin but I can tell you that our business plan assumes that we get to cash generation off of that product line very quickly.

And do you have any other non-battery competitors, flywheel, or whatever, that are serious, or other fuel cell offerings out there that you’re going heads up against?

We’re starting to see, I think, interest by other fuel cell companies. I think in terms of some of the other technologies there is always the promise of new and improved battery technologies itself. And so there are a number of those things that are talked about. There is from a perspective of flywheels we don’t see that necessarily as a direct competitor in that it tends to be more of a bridging solution as opposed to an extended outage solution.

And you’re basically the first fuel cell offering out there, are you not?

I don’t know if we’re ‘the’ absolute first but we are certainly among the first.

And then do you – can you tell us who the customers are for the propane, two units? Where are they going?

No, I can’t tell you that.

Okay, thank you very much.

They will be – the customer themselves will be making an announcement around that in the near term.

Oh, good. Thank you.

Once again, I would like to remind everyone in order to ask a question please press star then the number one on your telephone keypad.

Your next question comes from [Alan Matrani] [ph] with [Copper Beech Capital] [ph].

Hi, thank you. Just a question on the balance sheet for a second. The restricted cash that you have, I just want to understand what that is – hello? Sorry, the restricted cash that you have, the 4.675 long-term, and the remainder of 25,000 short-term that matches up against, recovers the debt, the long-term debt and other liabilities you have?

That’s right, Alan. This is Dave Neumann. The restricted cash covers 100 percent the debt line that you see in the liability section of the balance sheet.

Why is it that you have to keep cash on the books to match a line that you can just draw down?

That was the quickest way to get the transaction down when we took this building over was just to cure the facility and the debt that came along with it with cash.

Do you know how long you have to keep that on with? Or is it the life of the lease, or?

It would be the life – actually, we own the building. That might be interesting to point out. This is something that we own, and this piece of debt came along with the ownership, and so that cash secures that debt. And we’re not leasing it, we own it.

I am confused. You have, what? You have 5.8m of debt that you used for what? I mean why not just pay it off?

Well, we’ve been considering that actually.

Okay, I mean what is the interest rate on the debt, that you pay?

Right now we’re making a little bit more interest on the restricted cash than we are on the debt, and so that’s the reason that we’ve kept it on to date.

Okay.

This question keeps coming up every quarterly call.

This conversation is one that should go away if we just stopped [that detail].

Okay, so just to understand, so I will just net them. And so if I am looking at cash really I just net them against each other?

That’s right.

Because eventually they’ll go away, one will go away, or one or the other. So really the cash you have then is call it 49, call it something like $65m, $66m, something of that nature?

66.1.

Can I – it sounds like, I mean guess consistent with your plan your burn rate is going to go up in the second half versus the first half in terms of money that you’re going to spend, right?

Including the impact of H Power we’re still on track and sticking with our guidance of $35m to $40m for the year.

Can you give us your capex guidance for the full year, overall? And then for next year, as well? I mean?

We haven’t given that kind of guidance for this year, nor have we for going forward. You know …

Your cash burn implicitly implies the capex spend, no?

It does, it does. And you can use last year as a proxy for that.

What was last year’s number?

Right around $700,000 for the year.

The entire year is $700,000 in capex?

Yeah, I think that’s right.

Okay, so you expect to be roughly in line, plus or minus a little?

Plus or minus.

Okay, are you going to need to, as you [lap up] some of these products over the next year, are you going to need to, obviously, put some money into working capital, or invest money in capex to develop these products? And get them out?

Yeah, Alan. This is Greg Silvestri, helping on this question. The working capital requirements to fund the revenue growth, the obvious answer to that is ‘yes.’ The question around capital expenditures are we’ve done some pretty sophisticated modeling work with the products that we currently have and the designs that are under development.

And we believe that for the next two to three years this site is well equipped to handle those production needs. Now there will be some capital expenditure as we change test facilities, or do buildouts of some manufacturing sells, but in terms of our manufacturing footprint we have a good quantitative backup that gives us great confidence in our existing manufacturing footprint.

As you get out towards the end of ’05 there are definite scenarios where we will have to start specific actions around planning for the next step of capacity growth, but we’re well situated with our current property, plant, and equipment footprint.

Okay, and just to understand a little bit, you said you’re funded through ’05, you’re going to spend call it another 15m maybe towards the end of the year on a cash basis, and so 65 will become 50, something of that nature? Is that close enough?

Yeah, we’re funded into 2005, not necessarily through ’05.

Okay, right. That’s what I don’t understand. So by the end of the year you’ll have, call it approximately 50m plus or minus a little bit, depending on where you come out with your cash burn for this year? I guess that’s the issue. You need to at some point next year – my question is I was encouraged by the press release you put out yesterday. It says you expected to receive $12m in funding from your programs. Is this – is that – I mean when would we see that? Are they for specific programs? Is that something that you get in and you have to net against, sort of the programs? Or is it somewhat discretionary?

Alan, Mark Sperry. Those programs are for specific work activities that are embedded in our product development plans and our product placement plans today. And so depending on which one you’re talking about, in general I would characterize the DOE funding which is the lion’s share of what we’re going to be receiving. Those are across approximately 30 months. And so the work activity as defined, embedded in those, will take place over the next 30 months. We will begin to see those monies, well, in the fourth quarter of this year. And we’re – that’s our current expectation. We’re working to finalize the contracts with the DOE. That’s a similar conversation with the Niserta based monies. And so that – the number that we put in that press release is basically the net amount of funding that will be coming to Plug Power. When you look at the total programs they’re more on the order of about 19m which includes Plug Power’s share in terms of some of the activities, as well as some of the monies that are going to the partners involved with that. But the actual cash flow into Plug will occur beginning late this year and extending for about 30 months.

Excellent. And how much do you currently receive from these programs?

From those particular programs we do not, those are new programs. We do have programs in conjunction with Niserta that are for different sets of activities. We have some Federal programs with the National Institute of Science & Technology. And so we have some modest programs that are currently in our, if you look at the contract revenue line, basically, it’s embedded in there. It’s not all of that, but that’s what is represented in the revenue that’s coming into the company.

Okay, thank you.

Thank you.

Your next question comes from David Snow with Energy Equities.

Yes. I was just following up on the two products for the telecom industry and your regular GenSys. Do you need batteries to help bridge the moment of pulling on power from the – from your backup telecom unit?

Yes, David, it’s Greg. There’s a, we call it an ‘electrical energy storage module’ within the system which provides for covering the outage during it’s – literally within a cycle so that the power is assured to the end user. And then there’s a very fast ramp-up of the fuel cell to the rated power load. And Mark mentioned earlier, we price this product to compete economically and that there’s some other value added features that we believe this solution brings versus some others. And how quickly we can bridge to fuel cell power we think is one of those advantages. In fact, there’s some electrical energy storage, which will capture the need within a cycle.

And so there’s a small – that’s a fancy word for ‘batteries,’ I guess, a small battery …

Batteries are one way to provide that.

Or are you using some other method, capacitors, or something else?

We prefer not to tell you. The first ones out the door will be a battery technology, and what other battery technologies or non-battery technologies follow will be known later.

Oh, okay. Now you don’t have to worry about the life of the product as much as you would for regular use. I am wondering how you are doing in the product in the life in your other measure, offering, the GenCore?

We’re actually quite pleased with the progress we’re making on all aspects of the performance of the products that are out in the field. I think the metric that Mark talked about in terms of our customer satisfaction, the metric of the repeat orders we’re getting from our existing customers, and broadening out to new customers, those are all positive signs that the performance metrics including life for the products that are out there are definitely doing a good job of meeting the customer expectations.

You are absolutely right, that in a backup power scenario the operating hours of life expectations for that customer group and for what that product needs to do are different than a product that’s in a continuous run, continuous power generation. And that’s one of the reasons that we went into this product development effort, because the technology that we can deliver today is very well suited for commercial, economically driven buying decisions for the people that we’re targeting with this GenCore product.

Are you on the order of a two-year life at this point with the field units for the GenCore? I mean the extended use product? GenSys?

We’re not going to have the discussion about life because it gets into how long the systems are being operated versus different components within the systems. And so I think Mark characterized it earlier, meaning that we typically sell the GenSys products into programs for customers. They expect to operate the unit between 12 and 24 months. And we’ve had some agreements where we’ve extended the original operating period due to mutual decisions between Plug Power and the customer.

And then you buy the product back at the end of the timeframe?

The revolution of the product at the end of the timeframe is contract and customer specific. Some of them have included what you’ve just mentioned.

Okay, thank you very much.

Thank you.

Your next question comes from David Smith with Smith Barney.

Hi, guys. Just a quick follow-on. What Alan was saying earlier, as far as the funding money goes, that you get from the DOE, does that offset expenses that you would have otherwise incurred?

David, Mark again. We have had some very robust discussions around our strategy specific to Federal and State dollars for development and research. And we will only go after dollars that are very highly aligned with the work that is critical to our product delivery plan, and so essentially work that we intend to do. Our strategy really is to take our development plans, and then scan the available dollars, program dollars if you will, for strategic alignment to what it is we’re going to do. So that the dollars that we just got very clearly align with the product development plans that we had going forward for our product lines.

So thereafter, is that IP yours? On that?

Yes.

Comes out of that?

Yeah, that’s correct.

And what’s the, you know, the outlook or, you know, some kind of forecast of – I am not necessarily saying what you expect to get, but where would be a place that we could maybe get some reference as to available dollars coming in the year, the next two years for these types of programs, that you may apply to?

Well, I think the best place to look really is inside of the, at the Federal level, as to – there’s a couple of things out there. There’s the Energy Bill. There is the I think the ongoing programs, if you go to the DOE, the Department of Energy web site, they have quite a bit of information about where their interests are over the next several years in terms of funding programs. Similar conversation for the National Institute of Science & Technology. Would be where I would go in terms of those agencies, tend to be having dollars available for the types of work that we would be interested in.

David, this is Roger. I just want to emphasize that we have extraordinary focus on whatever money or whatever product development we do. We are interested in punching through into the market using every available resource, not diverging our focus, not diluting our focus, make a beach head, and then from there expand and grow.

Okay. One thing, just a final thing on what you said, Mark. I know that Plug has got some activity down in Washington. Can you give us an update, your current read on what sort of provisions in the Energy Bill might benefit you?

There are a number of things that are embedded in the Energy Bill, and maybe not directly embedded but annexed to it.

There are some buy-down dollars, think of it as end user tax incentive monies that are contemplated again this year. There are inside of the program that we’ve been very heavily engaged with the core of engineers, demonstration dollars for fuel cell technologies at military bases, be they on the Army or Navy side, those dollars are again in varying forms right now under consideration.

There are some initiatives with the Department of Defense in various branches around the utilization of fuel cell technology in the ground support area, as well as in the aviation support area. So there’s development of technologies to help alleviate some of the logistics issues that you run into as you move troops forward. And so those activities clearly are things that we’re keeping an eye on.

The overall funding associated with the agencies that would administer those, and so embedded in the DOD, the DOE, the National Institute of Science are things that are currently embedded, as well as I said, their legislation around tax credits or tax buy-downs associated with this technology sect.

Okay, great. Thank you.

Your next question comes from [Chris Kwan] [ph] with CD Securities.

Hi, a couple of questions. First, if you could just give a little bit of an update on some of your activities with the H Power acquisition? What R&D programs? You’ve had a good chance to look at some of those, and what you might bring forward, if any? And how some of the implementation is going on there?

Yes, Chris. This is Greg. The – most of the work that we’ve done in the past little while around the R&D brought in from H Power is focused on stack design and on some power electronics areas. There’s been some work done on fuel processing and on systems integration, but I would say the vast majority is around some design aspects that H Power was pursuing related to the fuel cell stack. And some designs they were pursuing with relation to power electronics.

And how about, they were, H Power had a small, you know, sub kilowatt size product, and is that -–any intentions on going forward with that product?

Well, because – not to the product, not at this time. I think Roger a few minutes ago mentioned the focus that we have as an organization, and bringing that product forward as a product is not something that is in our near term expectations. However, some of the designs and the approach that’s used in that product are what we’ve been exploring as to how could those design concepts perhaps contribute to the product areas that we are focused on. And we are focused on committing to go forward with.

Okay, and then secondly, on just following up on the DOE funding. The $12m that you are getting, is that on a cost shared base, 50, 50? Or how is it – how are the costs being allocated?

Chris, Mark Sperry. It varies by program, but in general about $11.5m is the net amount embedded in the DOE contracts, and that’s against total program spend dollars of just less than 18. So when you get inside of that it depends on the type of program what the cost share [to count on].

Perfect. And you said that would be over 30 months?

That’s correct.

Okay, and then lastly, just on the energy debate. There was some, around a year and a bit ago, there was a bunch of State programs that were looking to implementing fuel cell installations. What new States or what States are still doing this on a proactive basis? Or has that settled down quite a bit now?

Yeah, I would say the States that are most active in thinking about fuel cells, be it attracting development of fuel cells into their region or deploying the technology set, we have a lot of dialogue going on with Michigan in their next energy activity, and clearly the State of New York has been leading in that activity. Ohio has recently begun to move out. The State of Texas. California has traditionally been a State that’s interested in new energy. And some of the States right around us here in New York in terms of Connecticut and Massachusetts continued to also have interest in activity around the deployment of the technology.

Have any been – I know that Michigan, New York, Ohio, Texas, they’ve been mentioned before, but any new programs that are coming up? Or are we just sort of in a holding pattern here?

I would say, I wouldn’t characterize it as much as a holding pattern, I would say there’s acceleration, and were gaining traction in those States. There is, you know, I could go down and talk about New Mexico, Minnesota, you know, some, like some newer names that are beginning to also consider legislation to consider acceleration of the technology. Hawaii has some programs.

And so actually when you look at where it is that Plug Power is operating in terms of the domestic States the number is increasing significantly. I mean we have I would say New York State leads the nation clearly in terms of deployment of the technology and their number of systems that have actually been fielded say in the last three years. I would, it might be close to saying that New York has probably fielded more than everybody else combined. I don’t know if that’s exactly true, but it’s on that sort of magnitude in terms of the deployment of the technology.

Great, thanks a lot.

Your next question comes from Alan Matrani with Copper Beech Capital.

Well, that’s close. Alan Matrani, Copper Beech Capital. Thanks. How many employees do you have right now?

319.

I am sorry, 319?

Yes.

And how many did you have last quarter?

Plus or minus.

Roughly the same, yes.

And so am I correct? I mean the question really relates to the H Power, and how many H Power employees were brought over?

I think we said last time that it was about a handful.

Okay. And do you have any – I mean is this the right employee level for through the year and into next year? Or will you need to be adding employees as some of these programs, some of these Government programs ramp-up?

If you looked at our employee base and you said ‘do we expect to remain roughly equivalent, or have a significant up trend or down trend?’ I’d say roughly equivalent, for the planning grid that you’re discussing.

And the Government programs, we want to remind you, on the programs that we were already planning to do, and that was part of the objective in receiving the funds, stay on track.

Okay, and so understanding your answer to the last person’s question if $11.5m net, and so that means – so for every, let’s say they give you $12m you don’t have to spend $5m to get $12m? It’s not, that’s not the case, right?

They are cost shared dollars, and so I mean we will essentially embed it in the program or work efforts that we have to do for the ongoing development of our product, and the work efforts that we will undertake when you run that into program dollars exceed the amount of money that would be coming back net to us. And so, you know, that’s what I was referencing in terms of you need to spend 18 to get 11.5 is the way of thinking about it.

Okay, that’s fine. And so you said those monies would start coming in in the fourth quarter, correct?

Yes, our expectation right now is by the time we go through the contracting process and begin to bill against that it would be the fourth quarter.

Okay. Are you going to – at what point at the end of the year are you going to give us some sort of projections going out the next couple of years, or at least a plan to be able to bridge the gap for the next couple of years?

Alan, this is Dave Neumann. We typically give our guidance in the fourth quarter release, and so you would see that in the first part of next year. And we likely would give guidance for the year.

Okay, thank you.

Thank you.

Your next question comes from David Snow with Energy Equities.

Yeah, just to follow-up, how many of the new [LPG] [ph] units are in backlog?

David, let me see if I can pull that out for you. I don’t have the exact count of the LPG that are in the backlog, in front of me.

Could I get …

It’s, you know, I would put it on the order of measured in a handful type number. I can’t give you the exact number. We have shipped two.

Okay, do you think that will be rapidly growing, or slowly growing specialty product?

My sense is, you know, that it will – we’ve got a couple of initiatives underway in terms of direct mailing campaigns, et cetera, that will likely accelerate that. But you know, I would put the order, you know, in the range of a dozen or so for the full year.

Okay. Is that likely to be one of the more early profitable or cash flow profitable products? Or is it not any different than your other GenSys units?

No, when you look at that market opportunity, and so, you know, one of the things that we’ve been spending a lot of time on here is the market adoption curve, if you will, and thinking about where are the applications that make sense, from where is the technology and what are the price points. If you look at the remote customer, these are people who really, truly don’t have an option of being on the grid, and they typically today are satisfying their energy needs with a combination of [follible payex] [ph], batteries, generator sets, that they literally have to cob together.

The price points of those solutions today are significantly higher than the price points you would see if you’re a grid customer. And so, ‘yes,’ we think that particular application will be, as we feel with the telecommunications and the backup battery replacement market, that will be an early adopter market, or a market where we can begin to realize profits sooner than we would be able to realize off of grid connected solutions that are intended to augment or replace the grid ultimately.

Also, from a reliability perspective and from a lifestyle perspective those customers tend to have less, much, much less reliability, much higher maintenance obligations in terms of literally having to touch this equipment every day than you and I would expect as a grid customer.

They do their own maintenance, you were saying?

By and large they do their own maintenance, if it’s a generator, they’re typically out there having to change oil, those types of things, you know. In the case of batteries, make sure that they’re being recharged properly. There is a much higher degree of end user interaction with that technology set than the grid.

Can they learn to interact with your system? Or is there a lot of that that you would have to be servicing through a utility or somebody?

Well, our interest is in making the solution ultimately much simpler, and also being able to integrate with the elements of the solution that are out there, be they batteries, or follicle payex, and so the notion of being able to manage multiple VC loads into a house is something we think would be of incredible value to that particular customer set. But also, recognize that by and large the people that are providing service, providing fuel to those customer sets today would clearly have to be engaged in our technology sets as we deploy them in the field.

Is there any expectation, have you given it in the past or you could give now, as to when you expect the company to be cash flow positive?

Well, I think the main guides that we’ve given has been that it will be somewhere after 2005. And so we’ve also publicly said that we’re finding, just like we’ve talked with regard to the DOE funding and so forth, we’re finding the shortest path to profitability for this technology in this company, and we’re extraordinarily focused on that. And if there’s any opportunity to pull that in this direction in time we will seize it.

I think we’ll just take, Operator, I think we’ll just take one more call.

Your final question comes from David Smith with Smith Barney.

Hi. Two quick questions. On cost reduction, Roger, can you give us any update there as to kind of the mid-year evaluation of hitting your target for the year? And then, secondly, can you address whether or not -- there’s a large shareholder out there who has been quite a bit of stock in the market, what the company intends to do, or if there are any possible maneuvers that the company can take to stem the supply of stocks hitting the markets these days?

Sure. Internally, we haven’t made a public announcement about cost reductions. They’re extremely tied to the next generation design, and as we release the next generation design it will be really clear how well we’re doing on that. I am very pleased with where we are internally on cost reductions. And that’ll be tied with information coming out later. And I think you get some indication of that of where we are in the systems simplification and focus in the GenCore product, which is really right there as a value proposition to the customer, and was.

That product, though, it’ll be gross margin positive, I recall you saying that in the past?

As quickly as it possibly can be. That doesn’t mean that it’s the first unit out the door will be, but …

Certainly.

But right away would be my expectation for that. And we’re tracking to that objective.

But there’s a positive contribution margin?

Yes.

And in terms of cash contribution to the company that will happen quicker than a full cost of sales that you typically would think of. And so all the overheads associated with a typical GAAP cost of sales we don’t report it that way, but on a contribution basis it helps the company right away.

Okay.

Now there is one large dollar, regularly announced, seller of our stock. And they are selling to fund their own R&D. They see it as the only pathway they have to fund their business is to put our shares into the market. They are looking for alternatives to mitigate the impact on Plug Power, and we’re certainly working with them to find solutions that are better for our shareholders. And, Dave, do you want to comment on that?

I would just add, I guess, all things being equal they’ve expressed that they’d prefer not to be disposing of shares, and they are actively looking, and we’re trying to help them look for alternative means.

Okay, great. Thanks.

Thank you.

This concludes the question and answer session. Miss Mahoney, are there any closing remarks?

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