普拉格能源 (PLUG) 2010 Q1 法說會逐字稿

Greetings and welcome to the Plug Power first-quarter earnings call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Miss Cathy Yudzevich, Manager of Investor Relations for Plug Power. Thank you, Miss Yudzevich, you may now begin.

Good morning. Thank you for joining Plug Power to discuss our 2010 first-quarter results. Andy Marsh, CEO, and Gerry Anderson, CFO, will be on this call today. This call will also be archived on our website at PlugPower.com.

This conference call will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 including, but not limited to, expectations regarding revenues and product orders for 2010. These statements are based on current expectations that are subject to certain assumptions, risks and uncertainties any of which are difficult to predict and beyond our control and that may cause our actual results to differ materially from the expectations in our forward-looking statements.

Including statements regarding the risk that unit orders will not ship, be installed and/or convert to revenue in whole or in part; the cost and timing of developing our product and our ability to raise the necessary capital to fund such development costs; the ability to achieve the forecasted gross margin on the sale of our products; the actual net cash used for operating expenses may exceed the projected net cash for operating expenses; the cost and availability of fuel and fueling infrastructures for our product; market acceptance of our GenDrive and GenSys systems; our ability to establish and maintain relationships with third parties with respect to product development, manufacturing, distribution and servicing and the supply of key product components; the cost and availability of components and parts for our products; our ability to develop commercially viable products; our ability to reduce product and manufacturing cost; our ability to successfully expand our product lines; our ability to improve system reliability for both GenDrive and GenSys; competitive factors such as price competition and competition from other traditional and alternative energy companies; our ability to manufacture products on a large scale commercial basis; our ability to protect our intellectual property; the cost of complying with current and future governmental regulations; the impact of deregulation and restructuring of the electric utility industry on demand for Plug Power's energy products; and other risks and uncertainties discussed under Item 1A Risk Factors in our annual report on Form 10-K for the fiscal year ended December 31, 2009 filed with the Securities and Exchange Commission on March 16, 2010 and the reports we file from time to time with the SEC.

Plug Power does not intend to and undertakes no duty to update any forward-looking statements as a result of new information or future events. At this time it is my pleasure to turn the call over to Andy.

Thank you, Cathy. Good morning, everyone, and thank you for joining our call. Plug Power has proven itself the industry leader in the commercialization of fuel cells in our targeted markets. An architect of modern fuel cell technology, Plug Power fuel-cell systems dominate the marketplace in motive and small stationary power applications.

As we embarked on our path to profitability Plug Power set aggressive annual milestones to track our commercial progress. A cornerstones of this path, Plug Power established annual shipment milestones to provide reliable, measurable guidance when the commercial traction gained in our material handling and prime power market. Dissected on a quarterly basis, however, these metrics often failed to capture the context necessary to actively evaluate our long-term business opportunities and challenges.

In the material handling market we continue to make progress as business opportunities expand as witnessed by the growth of our sales funnel. During the first quarter Plug Power shipped 100 GenDrive systems to our material handling customers. As I will discuss in today's call, this figure is aligned with our GenDrive shipment milestone and Plug Power is comfortable we will achieve our GenDrive annual targets.

In our prime power business GenSys shipments have started and product performance is strong. However, external market dynamics are currently putting pressure on our GenSys business model. That said, I'd like to use today's call to directly discuss our business opportunities and challenges in greater detail beginning with our material handling business.

Plug Power has significant experience navigating the GenDrive market, growing a robust sales funnel and shipping these products on commercial scale and schedules. During the first quarter Plug Power instituted a first of its kind distribution agreement with the Raymond Corporation and its network of authorized sales and service centers to jointly sell and market GenDrive fuel-cell systems and Raymond's lift trucks throughout North America.

As referenced last quarter, Abel Womack, a top Raymond dealer, Raymond and Plug Power jointly secured a purchase order in December of 2009 from United Natural Foods through collaborative marketing efforts. The significance of this relationship cannot be overstated. Plug Power's commitment to forge critical commercial partnership exposes our product solution to expanding customer base.

Additionally, investment in our technology by established industry veterans such as Raymond, Abel Womack and other validates the commercial viability of our GenDrive solutions. As summarized by Chuck Pascarelli, President Sales and Marketing for the Raymond Corporation, Raymond understands that hydrogen fuel cells will have a firm place in the material handling industry moving forward. And as the industry leader we want to always provide our customers with the most cutting edge lift-truck power solutions available.

Celebrating this positive commercial momentum Plug Power displayed our full suite of GenDrive products at NA 2010, the premier international trade show for the material handling industry, attracting over 12,000 attendees and 400 exhibitors this year. During my tenure at Plug Power I've attended many trade shows.

I'm proud to say the results of NA 2010 were above and beyond any trade show success this company has experienced before. Generation over 100 quality leads, visitors to our booth included exciting material handling accounts such as IKEA, Office Depot and Pepsi-Cola Bottling. No longer a prospective technology, our GenDrive power solution needed little introduction. These potential customers understood the product -- appreciate the value proposition and came prepared to discuss deployment opportunities.

In our booth Plug Power showcased the complete GenDrive power solution with a Yale Class 1 sit-down counterbalanced truck, a Raymond Class 2 stand up reach truck and a Crown Class 3 Ryder pallet truck. Plug Power's exhibit also included a compact hydrogen fueling dispenser and an air products fuel and video demonstration demonstrating the ease and convenience of lift-truck refueling.

Reinforcing our industry partnership Plug Power also held a press conference with the Raymond Corporation to discuss our recent distribution agreement and participated in a well attended customer breakfast with Praxair to promote our comprehensive material handling hydrogen fuel-cell solutions including innovative hydrogen fueling options.

As discussed in our prior calls, the North American material handling market currently represents a total available market of over $4 billion annually. Globally this market represents a $10 billion opportunity. This trade show demonstrated that Plug Power's commercial relationships and reputations will continue to drive significant sales in this sector.

An understanding of the sales process, however, is critical to appreciate the material handling market opportunity. The sales funnel is best divided into four categories -- prospects, trials, single buyers and multiple buyers. Currently our active funnel has Plug Power engaged with 195 customers. In the past six months we have held trials with six customers with 11 additional trials scheduled for this quarter. These trials with these customers alone represent an opportunity to sell over 50,000 systems.

When viewing our customer set as a whole, the material handling business expects orders to range anywhere from 1500 to 2500 systems this quarter. Increasing the size of the sales funnel is largely attributed to the availability of the Class 2 stand up reach product. We are also enjoying repeat discussions with certain established customers. With one we are currently negotiating a deal with the purchase of over 500 units for multiple sites.

Now our shipment of 100 GenDrive systems for the first quarter represents 9% of our annual milestone, another 200 to 300 systems are planned to ship in the second quarter, aligning these figures with our target to ship 1100 GenDrive systems by year-end. With manufacturing capacity for over 5000 systems per year at our Latham facility, the current challenge for our material handling business will be to fill the sales funnel to accommodate the annual GenDrive shipment milestone.

As we discussed in our last call, we expect this effort to be substantially complete by the end of the second quarter. To be clear, GenDrive shipments for the first half of the year are as expected as the material handling business turns its focus to filling the backlog for the second half of the year.

Moving our discussion to our prime power business. As I mentioned earlier, external market dynamics are currently putting increased pressure on our prime power business model for the Indian marketplace. Relative to artificial subsidized diesel costs, the increasing expense of LPG in India has weakened the GenSys value proposition.

It's a strong challenge to the GenSys Indian business model because the GenSys value proposition is all about lower fuel costs. A 50% increase in LPG prices over the past year has put strain on the value proposition, particularly when evaluated against the relatively stable subsidized diesel cost.

As the spread between the price of diesel and LPG increases downward pressure is placed on the price of GenSys systems to compensate for the higher LPG fuel expenses. While historically the spread between LPG and diesel has been fairly consistent in India, short-term swings in the price ratio raises doubts and delays decisions related to projects where fuel savings are critical.

With the operational savings provided by our GenSys solution under scrutiny, India telecom companies are hesitant to commit to a purchase order. The strength of our prime power product demonstrations coupled with the long-term viability of the customer value proposition, however, continues to drive serious negotiations with several of the largest telecom companies in India. We expect to have more clarity on these issues with our key potential customers within the next several weeks.

Again to be clear, Plug Power's capacity to manufacture GenSys systems in India is not an issue. Absent these externalities the strength of our prime power solution, our solid partnership with contract manufacturer SFO and our growing in-country employee base have positioned Plug Power to meet our annual shipments and order goals. We are confident in our ability to execute long-term on costs and expenses, but we need to assess the evolving pricing dynamics.

Accordingly Plug Power is currently evaluating our GenSys business model, including our likely achieved price in India given the current pricing for LPG and diesel in India. We are also considering additional market options including a slower rollout in India and more aggressive deployment schedule for sub Sahara Africa and Australia where diesel subsidies are not currently a factor.

Determined to resolve this challenge, Plug Power will complete the evaluation of the prime power business model by the end of the second quarter and, if necessary, revamp our strategy accordingly. I'd like now to turn the call over to Gerry Anderson to discuss our performance metrics in greater detail.

Thank you, Andy, and good morning to everyone participating in our call. Our first quarter of 2010 was not without its challenges. While our GenDrive shipments at 100 units were within our targeted range for the quarter, delays in getting units off our production line in India impacted our ability to deliver GenSys units during the quarter. Units are now rolling off the production line and we expect to deliver our GenSys backlog, 199 units, during the second quarter.

Total backlog at the end of the quarter was 864 units comprised of 659 GenDrive units, 199 GenSys units and six GenCore systems with a total invoiceable value of approximately $22.6 million. We accepted 106 GenDrive unit orders during the quarter, all of which we expect to ship in 2010.

As it relates to our 2010 shipment milestone of 2100 to 2300 units, approximately 89%, or 769 units in our March 31, 2010 backlog, are expected to ship over the remainder of the year. Quarter two will be a critical quarter for us to fill out our backlog to meet our shipment milestone for the year.

Looking at operating results for the first quarter of 2010, total revenue was $2.7 million, a $126,000 or 5% increase over the prior year comparable quarter, and was comprised of $1.5 million in products and services and $1.2 million from research and development contracts.

Product and service revenue increased $257,000 or 20% from the prior year quarter largely due to increased parts, service and rental income. We did defer $1.8 million of revenue associated with the shipments made in the quarter, consistent with our current accounting practices, but we would expect to realize a substantial portion of this revenue in 2010 with our anticipated quarter two adoption of the new accounting standard update for revenue recognition.

In our earnings press release reported earlier this morning we have included a reconciliation table of gross margin and adjusted revenues as they pertain to our previously announced 2010 milestone. Our deferred product revenue reported on our balance sheet at March 31, 2010 was $5.4 million, an increase of $790,000 from December 31, 2009 as a result of the $1.8 million in new deferrals less $1 million in previously deferred balances recognized into income during the quarter.

Our revenue recognition policies, as well as other accounting policies, are more fully detailed in our filings with the SEC. We encourage you to review these documents for further explanations of our policies.

R&D contract revenue at $1.2 million is a $131,000 or 10% decrease from the prior year comparable quarter. While we have three major R&D contract programs we are performing work on this year, we do expect the bulk of our efforts in 2010 and beyond to be focused on commercial sales activities and the resultant product and service revenue instead of R&D contract revenue.

Our total cost of revenue for the first quarter of 2010 was $5.2 million and was comprised of $3.3 million for product and service cost of revenue and $1.9 million for cost of R&D contract revenue. Product and service cost of revenue increased $2.8 million in the comparable prior year quarter which was favorably impacted by $2.5 million associated with capitalized costs for direct GenDrive units delivered under a lease arrangement with our end customer.

Accordingly, these assets are on our balance sheet and are being depreciated over their estimated lives rather than charged to cost of goods sold when shipped in quarter one of 2009. Our cost of revenue for R&D contracts decreased from the prior year quarter by $338,000 or 15% which relates to a comparable decline in R&D contract revenue already noted.

In our operating expense categories, research and development expenses, costs incurred for internally funded R&D programs were $5.5 million for the quarter compared to $4.5 million for the prior year comparable quarter. The $1 million or 23% increase resulted primarily from our ramp up of operations in India for the GenSys product.

Our selling, general and administrative expenses for the quarter were $3.9 million, an increase of $619,000 or 19% from the prior year first quarter. Again, substantially all of this increase is attributable to our ongoing efforts to build, sell and service our GenSys products in India.

Our net loss for the quarter ended March 31, 2010 was $12.2 million or $0.09 per share on a basic and diluted basis. Weighted average shares outstanding for the quarter were 130.4 million. Net cash used in operating activities for the quarter was $11 million with an additional $386,000 used for capital equipment purchases. On March 31, 2010 the Company had $50.3 million in cash, cash equivalents and available for sale securities, $2.3 million in restricted cash balances and $49.2 million in working capital.

To wrap up my comments I would like to reiterate where we are currently focusing our attention and resources and provide a brief update on business risks we have discussed in the past.

In terms of management execution on our business models in our material handling business we are aggressively working with existing customers and prospects to close deals and fill out our sales funnel to meet our shipment targets for the year. In our prime power business we are evaluating our business model, given the current pricing dynamics, to assess what additional options we may have to grow this business profitably.

In reviewing the readiness of the hydrogen infrastructure to support our material handling deployments we are actively engaged with three leading industrial gas companies to ensure we will have enough fueling station assets for our customers and to shrink the lead times to get those assets installed.

As for shorter lead times to introduce new products, our material handling engineering team is working on variance of our existing products to further expand the size of our addressable market and we expect several of these complementary products to be released this year.

In looking at competitive threats to our business, as Andy has noted, the increasing price of LPG in India when compared to the subsidized price of diesel fuel has placed a strain on our GenSys value proposition versus the incumbent technology solution diesel generators.

Lastly, we continue our efforts to drive down costs to build and service our products. However, with downward pricing pressures, particularly in our prime power business, as Andy has commented on, we are faced with additional challenges to expand our gross margins as quickly as we have projected in our models. At this time we would now like to open the call to any questions.

(Operator Instructions). Steve Sanders, Stephens, Inc.

Good morning, this is Trey Cobb for Steve. Just so I'm clear, the GenSys orders to date aren't in question, it's kind of future orders and shipments given the LPG diesel market dynamics that come into play, is that right?

That is correct, Trey.

Okay. And then, Andy, what event or events are you looking for in the quarter that will help you decide whether you proceed in India kind of as planned or you pull back that business?

Sure. Trey, we have -- are really in the final stages of discussion with two tower companies which represent 50% of the market in India. And the outcome of those discussions and during the coming week the largest tower company in India we have a meeting scheduled with the CEO. At the outcome of those meetings, if we can reach an agreement that allows us to build a profitable business for Plug we'll look to go down the path we're heading on.

I think that we're looking at different options, one is a slower role in India with a higher price, as well as faster expansion in other parts of the world where we have been setting up distribution agreements where the value proposition because diesel is not subsidized is much stronger. Or there's a possibility that Steve will just focus on those markets where the value proposition has strengthened because the market conditions are much, much more compelling. So, we're kind of looking at all three of those options based on how those negotiations go.

Okay, and then what areas or other parts of the world would be potential targets for this?

We have a trial going on in Australia at the moment. And we have a plan trial going on in Nigeria, both where the value -- I think sub Sahara African in general the value proposition is strong. Places like Australia, Indonesia, the value proposition appears relatively strong.

Okay, and then assuming India remains in question for now, do you think GenDrive shipments can offset the potential shortfall in GenSys, maybe not in 2010, but kind of looking at that three-year milestone that led out at the analyst day for 2011 and 2012?

Trey, at the analyst day we said that the shipments for GenDrive was about half the revenue opportunity. And I think that it would be premature for us to suggest today that they will be greater than that.

Okay. And then --

Though I think if you look at the GenDrive sales funnel when you start thinking about that were actively engaging with 195 customers, when you start thinking about the fact that over the last six months we've done six trials and we'll be doing 11 trials this quarter, that those trials represent over 50,000 units, obviously there's greater optimism in this business than the other business where we put time.

And then kind of sticking with GenDrive and the Raymond distribution agreement, how should we be looking for that mix to shake out? I think you mentioned it's both lease or buy. How does the leasing side of that business work? And then will it -- I guess it would be something similar to the Central Grocers deal?

First, it will not -- first -- and Trey, I know we -- the Central Grocers deal, I know that has confused individuals. But Plug Power has no intentions of being in the lease business, that was to help develop the marketplace. I'll let Gerry comment on lease companies who have been engaged in helping our customers with leases, but Plug Power is not in the lease business. Would you like to add to that, Gerry?

Sure. Trey, and again, to facilitate that deal with Central Grocers we had to stand in the shoes of the lessor. But going forward we do have one leasing company that we work with closely for those customers and again probably 40% or so of our customers prefer an operating lease rather than owning equipment.

So, we have been able to offer those leasing options with some of our customers that we're presently delivering products to, as well as utilizing the strength of Raymond and Crown and some of their potential leasing opportunities by working with them.

So, while we're trying to offer that as a financing option to our customers, our intent is not to be the financier. We're going to manufacture the product, sell and service it, take care of the customers and let someone else deal with the financing end.

Okay. And then lastly and I'll hop back in the queue. If India, given the situation there, how should we look for cash burn to progress throughout the year? And is the prior milestone still good or has that fallen under question as well?

Sure. I think, Trey, if you go back and read the transcript, I make it clear that we will be -- based on the performance in India and our expectations in India, by the end of the second quarter we will be able to make it clear where we expect the cash flow to be in the rest of the year. So we're studying, as I mentioned, I mentioned three options for the prime power business and I obviously have cash models which we're developing based on likely outcome.

So, we will at the end of the second quarter, if not earlier, be able to make it clear to the market how we'll perform against the milestones this year. I think as you go through our presentation today, we're obviously feeling upbeat about the material handling market and we have to think through the adjustments we should make for India based on previous commitment.

Okay. Thanks, guys.

Burt Chao, Simmons & Co.

Hey, guys, thanks for taking the questions. How are things?

How are things? Well, even though the performance in India is a little bit disappointing I think we're feeling pretty good about a lot of the opportunities in the business, Burt.

Yes, absolutely. Well, I mean India -- Southern Europe would be a worse place to be right now, right? There are certainly other places to be.

Right.

Just looking just big picture with the fuel cell industry, how plug fits in there and how your competitors fit in there. There has been more -- enough harp on Bloom Energy, but the Bloom Energy certainly brought a little bit more attention recently; you've seen some articles come out in the actual press. The question is still asked by several people -- is there a consolidation model within the industry that would make sense with or without Plug Power whereby you can leverage existing resources and extract synergies?

Or is that something that -- I mean, how does the management team approach that and not pushing you into a corner saying do you want to consolidate? But rather can you, knowing what you know about the industry, is there a consolidation model that in your mind may make sense in the future, not in the next couple of months or quarters, but maybe like down the road?

I guess, Burt, when I -- first, do I think there will be eventual consolidation in the industry? I think that's likely. I think it's very important for companies in this industry to develop, markets and opportunities that can show and drive a path to profitability. Personally I'm suspicious of promise without performance.

And I think that as a number of companies succeed in executing against their business plan that I think consolidation of the successful companies as well as maybe some with emerging technologies may make sense. I don't see a great deal of value of putting two companies together that have not been able to yet meet the promise of the market. And I think it's fair to say -- I don't think you can point to any company that's public at the moment that's met the promise of the Company.

No, absolutely.

And I would say that a company like Plug, that you think about material handling, you think about stationary power, that you probably can start thinking of mixes and matches of maybe even consolidation within the industry. One probably could think about -- does a fork lift company like Toyota, would they be interested in being in the material handling industry.

Would a gas company like a Lindy or an Air Products like to have this equipment that could create great value for them in hydrogen sales. Would we be interested long-term to merge with a company that could give us greater vertical integration in our business model? What I'm really not interested at all is putting together two companies that just haven't been successful yet.

Yes, no, that makes a lot of sense. One of the reasons you kind of get those from an OpEx standpoint there could be savings. But just turning I guess back more to the OpEx specifically with Plug Power. Going forward with some of the Indian market you're working there and there are potentially other markets that would be available but also attractive markets.

When you look at the Company and you look at kind of controlling operating expenses and therefore preserving -- working towards that operating margin down the road, what's your sensitivity and what's your comfort level with approaching new markets that may stretch operating expenses in the short-term, but can play out to be promising markets in the long term?

You'd like to think that every market is promising and you can just kind of go after all of them, but we know there are limited resources and time. I mean, how do you approach that especially given where India is today? But there are other markets that potentially might poke their head up and present themselves as hopefully long-term attractive markets, but we know that long-term attractive markets in the short term oftentimes go through what you're experiencing in India right now.

I think that's a good question, Burt. I am much more geared towards -- I've made commitments in two businesses. And using the capital that we have on our books to drive those businesses to success and before we spread out around the world or into other markets that we would have to probably have a high level of anticipated success.

I think that certainly if there is market opportunity where we could partner with someone and let them use their capital and use their expertise in a region to be successful -- for example, when I think about sub Sahara Africa, it won't be Plug Power doing the heavy lifting, I'll be using their resources and their capabilities to drive the business.

Okay, great.

So I don't see myself as taking steps into next year to make an announcement we're jumping into a whole new line of business or whole new region, unless that region -- unless those businesses are a sure opportunity.

Right. And talking about the sure opportunity, obviously long-term government support would help, whether in the US or abroad. I mean, is there anything coming down the pipe in your view of things whether it's in the US or maybe abroad -- from a legislative or a subsidy or a policy support standpoint that's something interesting that maybe people have missed for now? I'll be frank, I haven't seen anything other than existing things on the plate. But is there anything we're missing that might be a huge upswing to the fuel cell specific to Plug as well?

So when you look at the material handling market there are activities going on with the Green Jobs Bill and we have put a good deal of effort in with our local congressmen and our local senators who are actually quite strong here in the state of New York. And last week Congressman Tonko introduced a piece of legislation to be included in the Green Jobs Bill that actually would look at the forklift truck market with fuel cells more like the auto market so that we -- they can achieve essentially a greater discount to include all the components that make a system attractive.

Sure.

Additionally there is a good deal of work being driven out by Congressman Larson out of Connecticut who has FuelCell Energy and UTC close by as well as Praxair to really drive -- help drive down the cost of hydrogen infrastructure and deployment. And I think that we here at Plug, and we've spent a good deal of time, are very optimistic that the Green Jobs Bill will have legislation attached to it that will allow our business to offer our customers greater discounts. And there's certainly, even in places like India and elsewhere, a good deal of activity going on to look at driving down the cost to our end customers of introducing new technology.

Great.

I think the external dynamics from a government basis for alternative energy, even in these difficult economic times, generally I think those vectors are pointing in the right direction around the world.

Sure. Okay, well great. Well that's good to hear. And then just one last quick housekeeping -- I know you probably talked about it, but I missed it. Can you characterize and give the number on backlog again real quick?

Gerry?

Sure, our backlog is 864 units, it has four of the GenCore systems, 199 of the GenSys and 659 of the units are GenDrive. And I think importantly on the GenDrive, the substantial bulk of those units in the backlog are F2 and F3 products which support the grocery and high throughput retail businesses where we have had a high-level of success thus far.

Okay. Okay, great. Oh and one last -- my real last question. I'm sorry, guys. The switching from the accounting standard, is there somewhere I can look to -- or maybe just give a brief update as to what that's going to look like for us modeling going forward?

Yes, and basically, Burt, on that it is Accounting Standards Update 2009-13. And not to bore you with the details, it is in our Q, but it pertains to those that sell products or services that have multiple elements, which ours does -- we have the product, we have service and we have hydrogen. So it's basically a way to be able to break out and unbundle those specific elements and recognize revenue upon the sale.

So our expectation is it will be effective retroactive to January 1, 2010 for us. So the deals that we actually booked in the first quarter and have deferred, we should be able to pull some of that revenue into the 2010 P&L.

Okay. So that doesn't have too much to do with the deferred revenue in the sense of the development stage company accounting right? That's still in (multiple speakers)?

It's kind of a different issue from the development stage. Concurrent with adopting this revenue recognition update, we would expect to also leave development stage accounting which deals with some of the other cumulative disclosures that we have to make in our filings.

Okay, wonderful. Thanks so much.

Thank you, Burt.

Stuart Bush, RBC Capital Markets.

Yes, good morning, guys. How many orders did you have in the quarter?

We had 106 unit orders all in the GenDrive business.

Okay, and is that also matching to your milestones to meet shipments of 1100 by the year end?

As we said on the last call, Stuart, we will have those -- we will have our backlog covered by the end of June for material handling. So it's consistent with what we told the market in March.

Okay. So when you come (multiple speakers).

To be honest, Stuart, I wish it was faster.

When you come to this decision on GenSys, if you were to decide to shut that business down how much would that save you in cash costs or capital burn per quarter?

You know, I think that would be premature, Stuart, because we haven't made that decision and we're looking at, as I mentioned, multiple models for India or for that prime power business. So that would be premature for us to put that information out there because it's certainly in initial phases here at Plug.

Well, I mean it looks to me like you have $11-plus million cash used in the quarter and $50 million something left on the balance sheet. So do you have any ideas on securing additional capital?

I would say, Stuart, certainly we're not unaware of the cash on our balance sheet and we certainly have spoken to different bankers and different funds. So there have been discussions as well as thinking through how to -- how to reduce the quarterly run rate. So, all those issues are being looked at.

Okay. Let me ask you, do you have any concern if the GenSys business were not price competitive in the current market and you were to shut that down, you essentially would be left with the materials handling business which does not use your internally developed stack. So would your stack no longer be offered into the market without GenSys out there?

Stuart, as I mentioned before in this call, that I haven't said that the prime power business -- that we would be exiting it. I certainly have not made a determination about the status of our own stack. As I mentioned to you before that -- as I mentioned in this call that the performance of our product has met our expectation and the performance of this product in other markets, we're quite pleased -- the offering in market value in other markets appear quite attractive. So, I'm not in a position where I would say that we're going to stop our own stack work.

Right. But it would still take quite a while for you to ramp up a presence in other markets outside of India. I mean you've done a lot of groundwork there. So, I mean, what would be -- wouldn't that not push out the path to profitability expectations on that product if India were not to play out this year as expected?

Certainly, Stuart, those are questions that -- I have my whole list of questions that we're evaluating and that's certain one of the questions that's on the table.

Okay, so has the -- the change in India in the LPG fuel price, that is a recent development, I'm just not aware of the movements in LPG prices in India. Is that a recent development that you expect will be sticky at that price? Or I mean, help me understand the thinking there?

I think that, as we said in the call, and I know it's hard when I read these items and to catch everything, is that the spread has been much more radical in the last six months especially than what we've seen when we look at five-year trends. And understanding the long term pricing of LPG in India, as well as the long-term pricing of diesel, is a discussion that we're having with our customers with folks like Indian Oil and others to really understand the long-term market dynamics.

I don't want to make a short-term decision on India which is just based on a short-term anomaly in the market when long term if the pricing settles down to the traditional deltas our value proposition is quite strong.

Okay. And then to just ask about the research and development contract revenue. I know that you mentioned it would be less of a focus going forward that's consistently been a negative gross margin piece of business. What are your options in exiting that or reducing your exposure there to help with future cash flow situations?

We certainly will complete any commitments we have to any government programs. Once you sign up for a contract of that nature you have commitments from the government -- you make commitments to the government that's -- it's not an activity that we can exit. So, that's really not an option that I view as available to the Company.

All right, so considering what you have contracted now, how long will that play out?

Stuart, the three primary programs that we are working on right now all funded by the DOE will carry into next year. We expect those three programs, and there are six other smaller ones that we will do a little work on this year, should contribute roughly somewhere in the range of $4 million to $5 million of revenue. But those three key programs to the DOE will carry into 2011.

And once those are done would the costs associated with them go away?

Well, basically, Stuart, keep in mind on those where most of these programs are 50-50 cost shared. So the materials and other external purchases that we make to fulfill those program obligations obviously would cease, but those programs are also covering some of our existing engineering costs as well as some of our G&A expense. And again, absent any structural changes we make those costs will still exist once we complete those programs.

Okay. All right, thanks a lot, guys.

(Operator Instructions). Peter Wright, Tradition Equity.

Great, thank you for taking my questions. The first one is a follow-up to Stuart's question. If I look at the breakeven model for you guys, and really what I'm trying to get at is your GenDrive model. If you roll forward to your guy's steady-state basis, there is a key component in there that you are outsourcing. What do you think kind of the ideal margin for that business is for you guys?

We have projections for 2010, 2011, 2012, do want to comment on that?

Yes, Peter, we -- and I think in the past we've been pretty consistent in saying that if we get in the range of 4000 units a year, which we expect by 2012, that this business will be positive for us, generating positive cash flow. We expect to be in the high 20% gross margin range by 2012. Ideally we want to get over 30%, it's going to take us a little more work to get there. But again, that kind of sets a framework for what we're looking for in that business.

And the ASPs of -- I know there are many flavors here, but the ASP roughly for your GenDrive system is 12.5-ish, is that a good number to be using?

Actually that's a little bit low and it's based on whatever the mix of products are. The Class 3 palate jack, which is a lower power output, roughly 2 to 2.5 kilowatts, would be somewhere in the mid teens, the Class 2 stand up sporter picker and the Class 1 sit-down counterbalanced are much more expensive. They're 8 to 10 kilowatt power units. I would say in general when you look at our 659 unit backlog the average ASP in that backlog is probably somewhere in the range of $22,000 to $25,000.

So, as a blended average what would you recommend using?

I would probably stay in the low 20s, and again, think about what we've said where our key success has been thus far has been in the grocery high throughput businesses which are primarily a mix of Class 2 and Class 3 products. And typically you'll go into a site and if they have 100 units roughly 60 would be a Class 3 and 40 would be a Class 2.

Okay, so that's roughly suggesting OpEx, if I just do cash flow breakeven you're suggesting cash flow positive at about 1000 is about $5.5 million is associated with GenDrive, is that fair?

I'm not sure I understood that, Peter. Did you say 1000 because were saying 4000 units just to get to breakeven.

So per quarter -- so either 4000 a year is roughly, $22-ish million in OpEx is kind of your annual budget for OpEx for GenDrive, is that about reasonable?

I don't have that in front of me right now, Peter, I can get back to you on that. I actually think it's a little lower than that.

I think if you look at it from a loaded with G&A, that's probably about -- that's fairly close, Peter.

Okay.

But the run rate from a contribution margin point of view, that business is probably somewhere between $15 million to $20 million.

Okay. And so you guys are running at about 30 -- if I just annualized these current numbers, simple math is telling me you're about 15, maybe a little above that. Other than GenSys is there anything else that you guys are supporting in there?

No, there is some government revenue, as we spoke about with Stuart. But the business essentially is GenSys, GenDrive and the G&A associated with operating the Company.

Okay. And the second question I had was on --.

Peter, if you have more financial details I'm sure Gerry would be more than happy to go off-line with you and dig into the models.

Fantastic, I appreciate that. The other question I had was on the order side. So if you're suggesting a full backlog to materialize in 2Q on the GenDrive side, it's suggesting 2Q could be a big quarter, maybe 300 to 400 type orders. Is that -- am I misreading you on that?

I think you're reading me correctly.

Okay, fantastic. Congratulations on that. What about on the GenSys side? You had mentioned you're talking to the two big guys. Is there a potential here in the next 90 days where all of a sudden this quarter is overshadowed with diesel subsidies in India. But 90 days from now if we roll forward what could go right there and surprise us to the other side here on the GenSys side of the business? Is it possible to get orders from both of those two tower companies in the next 90 days?

The answer to that is yes. I mean, Peter, we have not -- we've made sure in this call that we made clear to the market with the challenges we have been confronting. But I don't want to leave anyone with the impression that it's not possible that we will receive orders this year. And formally we have not changed any guidance.

What is the typical turn time on your GenSys? I mean, you've got a backlog of 200 -- 199, you shipped four. I'm trying to understand why there's a hold off. Is there any risk to that backlog that you see or how would you guide the analysts to think of how you're turning that business?

Well, we're at the point where we're shipping double-digit units a week. So I think the risk of the backlog is not an issue. I think that, as I mentioned before, the biggest challenge is how do you reconcile this business case, which the swing in price is anywhere between $4000 to $10,000. So we're sitting there looking at those numbers and, quite honestly, struggling as we look at it with customers and sitting there.

If you ask me, Peter, could I take orders today? I absolutely could. I just can't take them at a price that I feel comfortable with for the business. I think as customers -- as we think through with customers the long-term pricing trend of fuel, how that may change and how even maybe units should be deployed initially in the field, I think as we think through those different options with our customers we'll come up with a solution that makes sense.

On the GenSys side, is the gross margin assumption on kind of that mature model? I know it's a little further out as that market isn't to the same maturity level as your GenDrive. But is there -- there isn't the same critical component outsource. What does the margin profile look like on that business?

In October when we did our annual -- when we did our three-year forecast the margins for those businesses were approximately the same.

Okay.

You have to remember that pricing in India is always more challenging than pricing anywhere else in the world. And even though we control the supply chain much closer the pricing pressures are still great.

What is the right ASP to be using on GenSys?

I think $20,000 is a good number.

So it's no more?

No.

So basically your ASPs across GenDrive and GenSys are very similar?

Right. When I sit there at night with my yellow pad I put $20,000 down for both.

Okay. And so if I just look at kind of that -- if I say it's a $15 million business to stay in business and at best a 30% gross margin, it's suggesting that you need to make this business about a $05 million business just to breakeven.

I think that -- I think the breakeven number for the Company that we provided at the meeting -- when we did the meeting in October I think was more towards between $130 million to $150 million total revenue for the Company (multiple speakers).

For the total company.

For the total company.

Okay.

It's about half for each business.

Okay. And so that's 2500 to kind of 3000 units on the GenSys side at minimum to kind of breakeven'ish on that side on a cash basis maybe is the way to think of it. Do you see that type of market materializing there? You're talking to the two big guys in India and I think, as Stuart pointed out, it would take time to build up new geographies. Do you see that type of number being even possible in the next couple years?

I think it would be very challenging without India to achieve those types of numbers. We believe that the market for this product, probably close to 50% with what we offer is the India marketplace. So we look at India as circle about a 45,000 units a year opportunity. And to reach into all the other geographies and the complexities of that, I think that it's fair to say that without India that the number of units would be a challenge though the total gross margin dollars where it breaks even may be lower. We think that the pricing outside of India may support a price 30% to 50% higher.

Fantastic, that's helpful. Two last questions, both of them quick. Is there anything to worry about on the auction rate securities or anything that you think -- obviously every quarter I know you mark everything to market. But is there any risk that you see in the next six months coming to light there?

Peter, this is Gerry. And we don't -- we've reached settlement with UBS on the auction rate security portfolio. And if you look at the balance sheet, the amount that's in trading securities along with the put option adjustment exactly offsets our revolving line of credit balance. And upon settlement with UBS on that, and this is noted in our 10-K as well as our SEC filings, we have a right to put back those securities with that non-recourse loan at the end of June of this year.

Fantastic. And then very last question is you had mentioned -- I didn't get the exact context around the statement, it was in your materials handling segment. You said 1500 to 2000 was the number. Can you repeat that --?

I believe I said 1500 to 2500 unit orders this year.

And that's counting 1Q. So this calendar year you're expecting 1500 to 2500 unit sales and that was just for GenDrive?

That's correct.

Wow. Great. Thank you, guys.

All right. Thank you, Peter.

Thank you. There are no further questions at this time. I'd like to hand the floor back over to Mr. Andy Marsh for any closing comments.

Well, thank you, everyone, for the call today. I'd like to conclude the call and remind everyone that the Plug Power 2010 annual meeting will be held next week at the office of Goodwin Procter at the New York Times Building, 620 Eighth Ave in New York City on May 19 at 10 a.m. I look forward to seeing everyone there. Thank you.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you all for your participation.