普拉格能源 (PLUG) 2003 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Plug Power year-end and fourth quarter results conference call.

My name is Rhoda and I will be your coordinator for today.

At this time all participants are in listen-only mode and we will be facilitating a question and answer session towards the end of this conference.

If at any time during the call you require assistance please press star followed by zero and a coordinator will be happy to assist you.

I would now like to turn the presentation over to your host for today's call, Miss Cynthia Mahoney White, Manager of Public Relations and Marketing.

Please proceed, ma'am.

Good morning, and welcome to Plug Power's 2003 fourth quarter and year-end 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.

During the course of the call management may make projections or other forward-looking statements regarding the events or future financial performance of the company within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements are subject to numerous assumptions, risks and uncertainties that may cause Plug Power's actual results to be materially different from the future results expressed or implied in such statements.

Plug Power undertakes no obligation to release any revision to any forward-looking statements.

For a detailed discussion of the forward-looking statements please refer to our press release issued today.

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 the time to be with us today.

Today we will review in highlight fashion our 2003 accomplishments, detail our 2003 year-end financials, and announce our 2004 milestones followed by the usual questions and answers.

We made good progress in all key areas of our business in 2003.

We strengthened our financial position, we increased our unit sales, we introduced two new products, we achieved all our public milestones, and while we accomplished these goals we simultaneously improved our scientific, engineering, and commercial practices.

I will begin by presenting a few key financial highlights which will be followed by a more detailed presentation on our financials by Dave Neumann, our Chief Financial Officer.

We added about $85 million to our balance sheet in 2003.

We did this through the acquisition of H Power and a well received private placement of common stock.

Although I believe we did an outstanding job of executing the H Power transaction, it still cost us about $3.6 million in cash used in operations.

Cumulatively, the charges associated with the acquisition represent an expense of 8 cents per share.

However, these impacts should not confuse our investors about our purposeful execution of tough bottom line financial management toward the shortest path to profitability.

Year-over-year our base operating measureables have improved.

Dave Neumann will now take us through a more detailed explanation of our year-end financials.

Dave?

Thank you, Roger.

I will be providing a summary of our 2003 financing activities and our 2003 year-end and fourth quarter financial results.

As mentioned during 2003 we improved the company's capitalization and strengthened the balance sheet by adding approximately $85 million in cash, cash equivalents and marketable securities through a private placement of common stock and a merger transaction with H Power.

The merger transaction was consummated in March of 2003 when we acquired all the outstanding shares of H Power in a stock for stock exchange valued at approximately $47 million.

We issued 8.9 million shares of common stock and acquired certain intellectual property and other assets including $30 million in net cash and cash equivalents.

In November 2003 we completed a private placement of 11.7 million shares of common stock.

Net proceeds of that offering were $55 million.

I would now like to discuss the effect of our H Power acquisition on our financial results for the year ended December 31st, 2003.

Upon consummation of the acquisition we recorded the fair value of H Power's net assets on our consolidated financial statements.

The purchase price in excess of fair value was recorded as in-process research and development expense, capitalized technology, and goodwill.

In the first quarter of 2003 we expensed $3 million related to the amount allocated to in-process research and development, a non-cash charge to our statement of operations.

We also recorded intangible assets in the amount of $5.5 million which are being expensed ratably over 24 months and resulted in a charge to our statement of operations of approximately $2.1 million.

Based on our 2003 weighted average shares outstanding these charges represent an expense of 8 cents per share.

Also in connection with the transaction we recorded goodwill of $10.3 million.

During the fourth quarter, we reviewed the carrying value of the goodwill for impairment and concluded that at December 31st no adjustment to that carrying value was required.

For the year ended December 31st, 2003 net cash used in operating activities excluding $3.6 million for acquisition-related costs declined to $34.4 million from $36.9 million during the same period of 2002, $55.3 million in 2001 and $65.8 million in 2000, marking the third consecutive year of reduced cash used in operating activities.

For the fourth quarter net cash used in operating activities excluding $200,000 in acquisition related costs declined to $10.2 million from $10.8 million during the fourth quarter of 2002.

I would like to move on to our financial results of operations for 2003.

Total revenue for the fourth quarter ended December 31st, 2003 was $3 million compared to $3.4 million in the fourth quarter of '02 while year-to-date total revenues increased to $12.5 million in 2003 from $11.8 million last year.

Product and service revenue a component of total revenue was $1.4 million for the quarter which compares to $2 million last year.

Year-to-date product and service revenue was $7.5 million compared to $9.4 million in 2002.

It should be noted that we continue to defer 100% of our product and service revenue at the time of sale and recognize this revenue over the period of the underlying service and other contractual obligations.

The impact on our statement of operations is conservative since all costs associated with the production of these systems are expensed as they are incurred.

Contract revenue under research and development contracts, the second component of total revenue, was $1.6 million for quarter ended December 31st, 2003 compared to $1.3 million in the fourth quarter of 2002.

Year-to-date contract revenue was $5 million compared to $2.4 million in 2002.

The increase is a reflection of the new government contract awards in the second half of the year with the Department of Energy and NIST under which we expect to receive approximately $15 million in net funding over the next 30 months against existing research and development activity.

Cost of product and service revenues representing the direct material costs of fuel cell systems delivered during the period combined with labor and materials associated with servicing all of the systems under contract was $2.8 million during the fourth quarter compared to $1.8 million during the fourth quarter of 2002.

These costs do not include any factory labor or overhead expenses.

Year-to-date our cost of product and service revenues were $7.2 million compared to $7.6 million during the same period last year.

Cost of research and development contract revenues representing the fully burdened cost of research and development contract activity was $2.7 million during fourth quarter compared to $1.8 million during the fourth quarter of 2002 while year-to-date our cost of research and development contract revenues were $7 million in 2003 compared to $3.7 million during the same period last year.

Research and development costs were $9.3 million during the quarter ended December 31st compared to $10.4 million in the same quarter of 2002.

Year-to-date research and development costs were $40.1 million compared to $40.3 million during the same period of 2002.

Recurring general and administrative expenses were $2.1 million in the fourth quarter compared to $1.9 million in the same quarter last year while year-to-date general and administrative expenses were $7.2 million compared to $7 million in 2002.

Equity and losses of affiliates represents our minority interest in GE fuel cell systems.

During 2003 we reported a loss of $1.9 million which includes $1.7 million of amortization of our original investment.

Our net loss for 2003 was $53 million, or 88 cents per share, compared to $47.2 million or 93 cents per share in the year ended December 31st, 2002.

As described previously, the current year loss includes a charge of $3 million for the write-off in-process research and development expense and $2.1 million for amortization of capitalized technology related to our acquisition of H Power.

These charges resulted in an expense of 8 cents per share.

Net loss for the quarter was $14 million or 21 cents per share compared to $12.7 million or 25 cents per share for the same period in 2002.

The current quarter loss includes a charge of approximately $700,000 or a penny a share related to the amortization of the capitalized technology described previously.

During 2003 our weighted average shares outstanding increased to 60.1 million shares from 50.6 million shares in 2002.

The increase is the result of issuing approximately 8.9 million shares in connection with the acquisition and 11.7 million shares in connection with our private placement.

As of December 31st, 2003 there were approximately 72.9 million shares issued and outstanding.

The company had $102 million in cash, cash equivalents and marketable securities at December 31st and $99.3 million in working capital.

I would now like to turn the call back to Roger for a review of our 2003 accomplishments and a summary of our 2004 anticipated milestones.

Thanks, Dave.

So to reiterate we strengthened our balance sheet in 2003 all the while keeping our costs to a minimum.

Now I will summarize some of our other accomplishments and then announce our 2004 milestones before entering into the question and answer period.

Last year we delivered 145 systems which represents a 20% increase over 2002.

We shipped these 145 systems to new and repeat customers throughout the United States, Germany, Japan, France, and the United Kingdom.

Our sales team is working diligently to drive market adoption and continued to bring the voice of the customer to Plug Power to facilitate product development.

Our training programs met continued success throughout the year certifying 47 third-party technicians from over 25 companies on how to install and maintain Plug Power's systems.

Our product portfolio was enhanced in 2003 with the launch of GenSys 5P our first propane-fueled product.

This 5-kilowatt grid parallel fuel cell system is being marketed to rural electric cooperatives and to federal and state government customers who require the remote fuel capability of LPG.

In 2003 we delivered 15 GenSys systems to military and other federal facilities under the Department of Defense residential fuel cell demonstration program managed by the U.S.

Army Corps of Engineers, Engineer Research and Development Center.

Our work with our longtime customer the Long Island Power Authority, LIPA, continued with the delivery of 45 GenSys systems which were installed at various locations as part of LIPA's ongoing effort to diversify Long Island's energy supply.

LIPA installed GenSys systems at the West Babylon fuel cell demonstration site which contains fuel cell systems that feed directly into the Long Island electrical grid.

LIPA also placed Plug Power fuel cells at various commercial locations on Long Island including the Suffolk County legislative building, the State University of New York at Farmingdale, Nassau Community college and Southampton College.

Additionally, LIPA began preparations for installation of 20 fuel cells at 17 residential and two commercial locations on Long Island.

Also last year 50 fuel cell heating appliances based on GenSys technology were delivered to customers and partners of Vaillant in connection with the European Union's Virtually Power Plant project.

These systems included Euro 1, which was the first field-deployed CE-certified fuel cell system of it kind, and Euro 2 which was developed using input from Euro 1 field data and project partners to improve the design of the system.

A new fuel processor was developed and additional components from Vaillant were integrated into the mechanical design for the Euro 2.

These enhancements increased electrical efficiency, decreased physical volume, and improved system manufacturability.

Systems are currently being installed in multi-family homes and small businesses throughout Europe.

In 2003 we also delivered our first direct hydrogen product, the GenCore 5T to customers and channel partners who are currently testing and evaluating the product for integration into their business plans.

This product is designed to provide backup power for the telecommunications market and is being marketed to system operators and service providers concerned with improving network reliability and reducing maintenance and total equipment expenses.

We delivered 20 backup power systems in 2003 to customers in the telecommunications, industrial, and government sectors.

In the U.S. our systems were shipped to customers and partners including Tyco Electronics Power System, Verizon Communications, and GE.

A system sold to FDT Associates in the United Kingdom is currently operating in a mobile telecommunications environment and two units purchased by Sharp Corporations Solar Systems division are being used to investigate hybrid options that would integrate solar and fuel cell technology at their facility in Japan.

Our accomplishments in 2003 were in line with our uninterrupted focus on the triple bottom line: People, planet, and profit.

We are committed to the delivery of smart energy.

Energy that will allow sustainable growth and the practical transition into the hydrogen economy.

For example, we have a collaboration underway with the New York state Office of Science, Technology, and Academic Research and the National Center for Remanufacturing and Resource Recovery at the Rochester Institute of Technology.

The purpose of this collaboration is to find ways to reuse, remanufacture, and recycle substance and components from our fuel cell systems.

We are also exploring with Honda R&D how to link the buildout of the hydrogen infrastructure to fuel cell automobiles and fuel cells for home use.

In October Honda R&D announced with Plug Power the successful demonstration of the home energy station at Honda R&D Americas facility in Torrance, California.

This system, co-developed by Plug Power and Honda, is fueled by natural gas and is able to generate, store, and deliver hydrogen fuel to Honda's SC X fuel cell vehicle while exporting electricity to the grid.

Collaboration on this project strengthened Plug Power's strategic partnership with Honda.

Other partners including GE, DTE, Vaillant, Celanese and Englehart continue to be enthusiastic in their support of our vision based upon reality-driven goals.

We continue to follow a disciplined market adoption strategy.

Last year we executed several joint marketing agreements with partners including Tyco Electronics Power Systems, Sharp Corporations Solar Systems division, and Airgas Incorporated.

These agreements will contribute significantly to our product delivery success for both GenCore and GenSite product lines.

In June Tyco displayed a GenCore system at SuperCom 2003, a telecommunications trade show, as part of its next-generate telecom power display.

Tyco currently intends to exhibit another GenCore system in its booth at CTIA Wireless in Atlanta, Georgia, in March.

As part of our enduring collaboration with the state and federal government we were awarded contracts with U.S.

Department of Energy, National Institute of Standards and Technology, and the New York State Energy Research and Development Authority under which we will receive approximately $15 million in net funding covering a 30-month period.

Major steps were taken advance our technology portfolio in 2003 as well.

Twenty four new U.S. patents were added bringing our number of currently held patents to 102 with 147 patents pending worldwide.

Additionally, joint patents were filed with Honda relating to development work for the home energy station.

December was marked by the unveiling of GenSite, our new product line intended to provide reliable onsite generation of compressed hydrogen gas for industrial applications such as generator cooling and metals processing.

This product leverages our core reformer technology that has been embedded in more than 380 GenSys fuel cell systems already installed in the field.

The first of these systems will be available for shipment in 2004.

We will be talking more about this product later in the year.

GenSys, our early development product, GenCore and GenSite each represent a specific point along the market adoption curve which we continue to come down as our cost of energy decreases.

These accomplishments are the result of the dedicated work of the highly talented and skilled employees of this company who perform daily to ensure that Plug Power has a quality of products, field service, partners and strategies that we collectively know are needed to drive to us to profitability.

The year 2004 will be a year of transition for Plug Power.

We are entering the premium backup market for telecommunications, a necessarily conservative market.

The process of market adoption in this sector follows a fairly rigid path.

First, each of our candidate customers will purchase one or two systems, which will then be tested in labs and under real conditions applied rigorously by the telecom for three to 12 months.

This part of the process is already underway at many locations including GE, Tyco, Verizon, and Sharp facilities.

Following the successful completion of this test period the customer's chief technical officer will decide if the systems are suitable for installation.

This will be followed by approval from the customer's purchasing manager which will allow the various operations managers to purchase at a rate they find appropriate to their willingness to install new technology and that is within their capital budget.

Anchoring all of these process steps is the need to become network equipment building systems, or NEBS compliant.

Although we have a number of systems in the test phase we know this process will take time.

We are poised to profit from the enormous market opportunities in this field of distributed generation.

Our milestones address actions that you should expect us to complete in 2004 along this path.

We expect to complete the NEBS testing for GenCore.

We expect to secure GenCore distribution and hydrogen supply partners.

We expect to complete negotiations and work efforts for a second phase in the home energy station with Honda.

We expect to install initial GenSite units at customer locations and we expect to use less cash in operations than was used in 2003.

That concludes our prepared comments and we would like to open the meeting for questions.

Operator, will you please proceed?

Ladies and gentlemen, if you wish to ask a question, please press star followed by one on your touch-tone telephone.

If your question has been answered or you wish to withdraw that question press star followed by two.

Questions will be taken in the order received.

Again that's star one to begin.

And your first question comes from Eric Prouty from Adams Harkness.

Please proceed, sir.

Thanks a lot, guys.

Listening to some of the comments I think you're being prudently conservative on the ramp-up and deployment of the products.

You gave some, I think some good timelines as far as how long it could take before the products really get out into the commercial market.

Can we equate that to any sort of a revenue outlook?

You obviously have some of the contract revenue coming in and some of the deferred revenue which should hit in '04 but should an '04 year be significantly above '03, similar, or similar to '03 from a revenue standpoint?

Eric, it's Mark Sperry.

How you doing today?

Great.

What I would comment is embedded in the last milestone that we put out there about cash utilization being less than '03, we've incorporated the revenue projections into that.

So we typically have not and are not comfortable giving out revenue guidance.

We're still directing you towards the cash consumption guidance which does have our internal assumptions reflected at this point.

Okay.

I guess, then, one could assume though with a negative gross margin product that you're not expecting at least a significant ramp-up in sales which would probably cause more of a cash drain?

What I would say is, you know, we do expect to do more unit volume than we did last year, and the emphasis of the company, we're obviously shifting from the GenSys product line which was more of a prototypical type product to the commercial products of GenCore and GenSite.

Those products we do anticipate being cash accretive with what we said right out of the box.

So we don't expect there will be cash drain.

They will be, we're not saying they're going to be cash margin positive right out of the box but they will be cash accretive, so we'll be covering our direct costs associated with that.

Okay, great.

And then a housekeeping question.

You might have mentioned this.

The one-time charge shown on the quarter, that was a, wound up in the cost of goods sold?

No, the amortization charge of $700,000 that shows up as R&D expense, Eric.

Oh, that wound up under R&D.

Okay.

As did the rest of the year.

There's a separate line item on our financials called in-process research and development.

That's the $3 million.

And then the $2.1 million in amortization, that shows up in R&D expense.

Got you.

Okay then maybe could you talk to the margin a bit which looks like it went in the other direction this quarter?

Is that just switching over, the product mix here?

Or is that just to do with the timing of the revenue recognition and the expense recognition?

Yeah, one thing you have to remember is that we continue to defer our revenue at the time of shipment, yet we record the expense as it's incurred.

So that -- the margins are a little -- from that perspective

So it's just a pure timing issue?

Yes.

In previous calls you've talked a little bit about, you know, your path down the cost curve of the products and we can assume that that's also continuing now?

Yes, very much so.

We are working to, I think what Mark said, the transition to the emphasis on the GenSys in the marketplace to the GenCore, the GenCore has very tough cost-down standards which must be met in order for to us secure the kind of margins that we are really targeting for this business.

And they are being met, by the way.

Great.

And then finally, another a balance sheet question.

The deferred revenue on the balance sheet generally is that something which can get recognized over a 6-month time period?

Is it closer to a 12-month time period?

What would be the timeframe for the deferred revenue recognition?

Most of that will be recognized in 2004.

It rages from six to 18 months but most of what you see on the balance sheet will be recognized in 2004.

Great.

I'll jump back in the queue.

Thanks.

Thanks, Eric.

And your next question comes from Jarrett Carson from RBC Capital Markets.

Please proceed, sir.

Yes, hi.

Good morning.

Good morning, Jarrett.

Dave, can you help me, I'm still not getting very accurate here on the R&D contract revs.

When we talked last quarter you had a small piece of some of the DOE stuff built in and then were expecting a substantive ramp, so I guess I was looking for, if I take the, just the $12 million on the DOE over the 30 months that would be a ten-quarter period, that's be another $1.2 million a quarter, and then I guess a little more if you start to factor in the NIST award.

Did that not show?

Was that on a full quarter in the fourth quarter, or is that going to start in the fourth, in the first quarter of '04?

Most of the contracts that you just referenced started, two of them started the end of the third quarter and the other started in the fourth quarter.

So what you see, the $1.6 million that we recorded in the fourth quarter had a mix of all three of those contracts.

Okay.

And so I guess, really if I'm just trying to model out what's going on, I presume that means that there were some other contracts that you had that started to tail off, because I would have probably expected --.

That's right.

-- a much bigger ramp.

Is that fair?

That's right.

Some of the existing contracts were coming to a close and those newer contracts took over.

Okay.

It always helps to be on the inside to see that.

Yes.

Next question regarding, what's the, you talked about kind of unit backlog last time, and on the third quarter.

Can you give us some data points coming into '04?

Jarrett, Mark.

I would say our backlog right now is 17, a total of 17 units as we speak today.

The majority of those, 15 of those, are GenCore systems.

The other point, I mean, relative to stocks trading down a little bit, I think today, I and, I think, many others are expecting on the product revenue side a substantive, probably at least a doubling, if not more, in '04 and it, directionally is if you keep kind of backing out of deferreds and deferreds are really roughly flat year-over-year in the $5 millionish range, although up sequentially from third quarter, it's not giving me, I'm trying to understand how the, maybe you are kind of starting to get that guidance that it's going to take maybe a little longer because of all the processes on the telecom side.

Is that a fair statement?

Start to ramp up the volume?

Yeah, Mark is going to make a comment in just a second.

This is Roger again.

I just want to come back and say it's always been known that the adoption rate by the telecommunications customers will be from a financial perspective tediously slow.

However, we've accommodated that in the way we're approaching the market and we're well aware of how to manage our way through this.

We're doing a lot of things in parallel.

But I would point out that the thing to watch is our unit volume sales, not so much our revenue numbers, because the value proposition of the GenCore is coming in, it's saying that we must and we will deliver and are delivering at approximately $15,000 a unit as compared to three and four time multiples for the prior GenSys which was higher on the adoption curve.

So we will have a lot of units that won't necessarily, it will take a lot of units to equal the same kind of revenue.

So watch the units.

Okay?

Okay.

Mark?

Jarrett, just to give you maybe some background context, I would say that the vision for the year-end volume numbers is a little murky right now.

We're very early in the year.

And if you look at our shipments over the past three years, actually, we're typically very much back-end loaded.

So it's typically how our profile goes and then we are, as you indicated, beginning to sell into a new market that has a fair amount of certification testing, I think the industry lingo is standardization that needs to take place.

So the product needs to be evaluated, accepted, before you can even begin to move the product.

What I would tell you is that we have internally what's different year-over-year here is we do now have a small sales force, basically come on line very late in the year last year, which is out actively working the direct selling activity as well as working to establish the channel partnerships.

So we have put, we've made a decision to put some more resource against that, and that is beginning to build a very active funnel.

So what we do have, I think, is pretty good vision into all of the major customer sets that we're targeting.

So, fortunately, it's not a real large list in terms of who the end users are going to be for the equipment.

And to this point we're very happy with the reception that we're getting around the product, but that reception, as Roger indicated, in his script, is okay, send me a couple units, let's deploy them, let's begin this evaluation process and then we'll go from there.

So we're very pleased with that.

What we don't have, you know, exact vision into, or even clear vision into, is how long is that going to take, what rate is it going to really begin to ramp once the approval for the standardization has been achieved.

You really get into you have to make the sale at the local operating manager level, and, obviously, they'll move at different paces, and that's where our sales team is active today, beginning to establish those relationships.

So once we move through this testing period we'll be able to move quicker than we would otherwise.

Two more questions.

One around the telecom area.

With the other, you know, developers also, you know, starting to try to get products out and in place and trials, from your vision from the customer side, if they see, you know, other telecom providers looking at and maybe starting to adopt the technology, maybe it's too early yet, but the potential to create a kind of competitive pull meaning, in a way, you know, any particular one would want to accelerate the adoption to try to have a first mover advantage on that and create some type of, you know, overall improvement in their cost structure, is that, I mean, is it too early to maybe be thinking along those lines, or are you seeing some of that?

I don't think it's too early.

I think it absolutely will help.

I mean, my view is competition will absolutely help in terms of the supply chain and being able to drive costs.

It also helps in terms of having credibility with the end user.

So the fact that they're not having to see this as a single supplier obviously makes them more comfortable that they would be able to shop the technology and the price and the service packages completely.

And that's the environment that they're used to.

Clearly, being able, from our perspective, being able to execute faster and be there faster and have a more compelling value proposition is where we want to be, but it actually does help that there are other people out there active referencing the same applications and targeting the same customer set that we are.

Okay.

Great.

And final question on the much maligned energy bill that seems to be quite elusive.

Any, you know, we're seeing a few things in the last just day or two talking about a possible vote in the Senate in the next few weeks.

Any updates from your contacts out of Washington that might give us some additional clarity?

Jarrett, my sense is, if you were to ask me that 30 days ago I would have told you it's dead-dead, it's an election year, it's likely not to happen.

I probably moved a little, I'm a little more upbeat than that at this point but I'm not the whole way to where I'm optimistic but I do think there is literally in the last couple of weeks some more action going on there that gives us hope.

The energy bill is scarred but not fallen.

Okay.

Maybe we're out of intensive care and just on the critical list.

Right.

Thank you.

Thanks, Jarrett.

Again, ladies and gentlemen, if you would like to ask a question, please press star one.

And your next question comes from David Smith from Smith Barney.

Please proceed, sir.

Good morning, guys.

Morning, David.

Good morning, Dave.

First point on the GenCore, can you talk a little bit more about the selling points that you've been going into customers with and also some of the hurdles that you're facing when you do talk to these people about larger deployments?

Sure, Dave, Mark.

The primary sales pitch that we go on with is around the value proposition.

So it's not anything other than that in terms of the lead.

We go in and basically represent that over the life cycle of the equipment, be that an outside plant location or a cell tower, whatever, when you look at a fuel cell versus the existing technology set, which is the batteries, over that say, five- to ten-year horizon depending on which company you're talking to, you're going to save money using the fuel cell.

So that's the lead conversation point.

The second one really is around predictability and scalability.

So unlike batteries our fuel cell comes with the ability for a fair amount of telemetry where you can remotely dial into the system to see how it's doing, make sure it's ready to rock and roll when it needs to, understand how much hydrogen is in the tanks so how many hours of backup are there.

While you can do that to some extent with batteries it's much more difficult, much more expensive and usually you just physically have to go to the site to really understand what state of charge the batteries are in.

So that becomes the next talking point.

And in terms of the scalability, in terms of extended run backup, in order to extend the run of our system you simply have to add more hydrogen tanks versus adding more energy, more batteries, if you will.

So when you really begin to need runs of 4 hours, 6 hours, 16, 24 hours, the economic proposition becomes even that much more compelling with respect to the GenCore product.

From another value proposition that we really didn't put as much weight on going in but we're finding out resonates very well is the overall weight of the system.

So many of these systems want to be located on rooftops, and today it's somewhat problematic with batteries due to the weight.

You need to get into reinforcing the roof or very expensive load spreading type equipment which is not an issue with our solution.

In terms of the hurdles, the second part of your question, it is new technology, so I think primarily I like to tell people that, you know, batteries have a lot of bad aspects to them but nobody's getting fired for buying them.

And it is a fairly conservative industry, and we need to go through this process of being certified or standardized in getting people comfortable, so that is probably at this point the primary hurdle that we run into, is not everybody out there understands fuel cell technology.

It's something new, it's something different.

And just because of that people tend to be somewhat conservative in their approach.

How about the NEBS testing?

Has that been passed yet?

We have not communicated that we've passed that just yet.

Okay.

Talking more about the markets that you've sent units out to and units that are in your backlog, are they, can you talk about more about the end markets that those are going to and also the geographic split of where those are going?

Yeah.

We currently have systems I would characterize that are installed in the two critical applications we're looking at that being wireline and wireless applications, so we have systems that are in outside plants and we have systems that are at remote cell towers that are being exercised in those critical applications.

We also have systems that I would characterize that have been installed in a hybrid application.

By that I mean where they're being integrated with other primary source remote power providers, things like wind, things like solar, being integrated into an electrolyzer system for example with a fuel cell.

So the notion of being able to have a diurnal energy system is one that is another application where we have installations today.

How about geographically as well?

Geographically we're primarily the most of the majority of the systems are in North America.

We do have systems in Europe at this point and in Asia.

Then on the sales split as well.

How many of these units have gone out to what would you classify as real world commercial kind of customers as opposed to, you know, R&D or development-type customers?

I would put the split at about 50/50 right now.

Any comments as well on penetration into motive power or what's happening regarding GenCore on motive power applications?

I would just say right now our focus here very much has been on the telecommunications application of the GenCore product line and on the GenSite, the hydrogen generation product line.

So if you were to say where are we putting our energies in terms of applications, it's more focused there than on some of the other things we've talked about at this point.

Okay.

Thanks.

Yep.

David, I want to emphasize one point that people may forget from time to time.

We never pre-announce anything with a customer.

And so some of the statements sound like they're vague, but it's actually vague based on the fact until our customer is ready to make an announcement, we stand firm in being silent except that the units have been shipped somewhere.

Okay.

Thanks.

And your next question is a follow-up question from Eric Prouty from Adams Harkness.

Please proceed.

Just a follow-up on some of the attributes in the telecommunications market.

With going after kind of the batteries and the GenSys market is there an issue or could you compare and contrast the technologies on, I guess, if there's any temperature issues with your product or have those been worked through?

Next, is there using kind of the pure hydrogen, since most of these are at least somewhat remote, I assume there's no zoning or placement issues using hydrogen as a fuel.

And then finally, just kind of the instant-on, the rapid start-up time obviously even with pure hydrogen it's going to take at least a couple of seconds for the fuel cell to start up.

What's the technology that's kind of bridging that?

Are you using like an ultra capicator or whatnot for the bridging time?

In terms of the temperature our system is designed to operate from negative 40 to positive 46 degrees C. So in terms of the environment in which it can operate, we've designed it to cover a very robust set of environmental requirements.

I think as you're aware, batteries, in order to operate in those types of conditions they tend to be very sensitive to temperature so you need to either air condition them or heat them depending on where you are in terms of the geography and the weather extremes.

That adds a lot of cost.

Batteries, if you do get outside of the operating zone that they're targeted for they have significant deterioration in terms of their power output.

So that is one of the elements inside the value proposition that people are really resonating with, with respect to our product.

Our start-up time is subcycle.

We have a small bridging requirement.

We count it at the system level, or at the stack level rather be the full output on the order of 30 to 60 seconds after you apply the hydrogen.

So we have a small battery bridge that gets us through that initial startup.

It gets us to a literally subcycle on time.

And we can accomplish that in a variety of ways but today the technology that's embedded is batteries and I expect we'll be moving off of that as we look at some of the other technology sets but right now they tend to be cost prohibitive, but understand the value that you can get from those.

Your next question comes from Chris Kwan from TD Securities.

Please proceed, sir.

Hi, guys.

Hey, Chris.

Just a couple questions on the financials.

Could you break down, what was the amortization total and depreciation total of the cost of revenues?

In the cost of revenues, the amortization total?

Yeah.

All of the amortization that we were referencing is in research and development expenses.

None of that is in the cost of revenues.

But typically, I guess I'm wondering what's the depreciation and amortization total?

Oh, in total?

Yeah.

Hold on one second, I can tell you that.

For the year, it was $5.4 million in depreciation and then we had amortization of the intangibles and other things like that of another $4.9 million.

That includes the H Power stuff?

That includes the H Power stuff, right.

And in the quarter?

In the quarter I don't have that number with me.

I'll follow up with you after.

I can get that number to you.

The SG&A and R&D, is that a pretty reasonable run rate for next year, or do you expect any major changes upward or down from that?

We haven't given any formal guidance there but I think what you're seeing in the fourth quarter is a pretty reasonable run rate for both those line items.

Okay.

Then the last question, could you just clarify a little bit, you talked a lot about the Honda relationship.

Remind me again, what's the next stages of that program?

And what milestones should we be looking for?

I think that the Phase II, the completion of a contract arrangement with Honda would be the thing that we would say is the milestone.

We've never given any visibility to exactly the content of that, and at the time of the announcement, it will be progressive and enhancing.

We'll provide some clarity.

Okay.

Thanks.

I think that's it.

This concludes the question and answer session.

I would now like to hand the call back to Cynthia Mahoney White for closing comments.

Thank you very much.

This will conclude our call today.

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 your participation in today's conference.

This concludes the presentation and you may now disconnect and good day.