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Executives

Andrew J. Marsh - Chief Executive Officer, President and Director

David P. Waldek - Interim Chief Financial Officer

Analysts

Matt Koranda - Roth Capital Partners, LLC, Research Division

Plug Power (PLUG) Q1 2013 Earnings Call May 14, 2013 10:00 AM ET

Operator

Greetings and welcome to the Plug Power First Quarter 2013 Financial Results. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Andy Marsh, President and Chief Executive Officer for Plug Power. Thank you. Mr. Marsh, you may now begin.

Andrew J. Marsh

Good morning. Thank you for joining Plug Power to discuss our 2013 first quarter results. I'm Andy Marsh, CEO, and we'll be joined by Dave Waldek, our Interim CFO, on today's call.

This call will also be archived on our website at plugpower.com in the Investors section under Presentations. The 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 revenue and product orders for 2013.

These statements are based on our current expectations that are subject to certain assumptions, risks and uncertainties, any of which are difficult to predict, are beyond our control and then may cause our actual results to differ materially from the expectations in our forward-looking statements. We encourage our listeners to refer to our SEC filings for a complete recital of our Safe Harbor statement as well as any other risks and uncertainties discussed under Item 1A, Risk Factors, and our annual report on Form 10-K for the fiscal year ended December 31, 2012, filed with the SEC on April 1, 2013.

Plug Power does not intend to and undertakes no duty to update any forward-looking statements as a result of new information for future events.

I would now like to talk to you a little bit about our business. Plug Power has made significant strides in 2013 in building customer support and enhancing our shareholder base. Many of these improvements were not yet indicated in our financial performance but I believe the benefits will be forthcoming in coming quarters. Some highlights in 2013 include Plug Power's raised over $12 million being investment and asset sales to support the ongoing marketing, development and shipping of GenDrive products. As was announced last week, Air Liquide, one of the largest industrial companies in the world -- gas companies in the world with over $10 billion in annual revenue and a respected industry player has invested directly in Plug Power at a premium above market. In my opinion, the Air Liquide investment is a great validation of Plug Power's strategy as well as the additional funds will be instrumental in providing the liquidity we need for growth.

Our board has also been strengthened with the addition of Air Liquide, providing industrial insights, and Johannes Minho Roth, a financial investor with broad international experience. Mr. Roth is the founder of the Zurich-based fund FiveT, which has been an investor in Plug Power for a number of years. The 2 new board members provide a combination of international experience, product marketing insights, and financial wherewithal that will be quite beneficial to Plug Power going forward.

Additionally, the company's continued to ship products to customer such as Lowe's, Sysco and P&G in the first quarter. We are also quite excited to announce that the Wal-Mart Washington Courthouse Ohio Distribution Center completed deployment of over 250 GenDrive units powering their forklift truck fleet and have removed their battery room. Plug Power in our history has shipped over 4,000 GenDrive units to over 23 different customers. These units consume more than 90% of hydrogen fuel used to power fuel cell trucks in North America. This is a clear indication of Plug Power's leadership position in the fuel cell industry.

And these products are performing. Product quality has dramatically improved in the last 6 months, and the uptime for the units is approaching 99% at some sites. A few months ago, quality was perceived as a weakness and it is evolving into a strength. Over the past month, I've had a number of manufacturing and food distribution companies call me to praise my quality team and our efforts. The professionalism from our staff in addressing in a forthright manner customer concerns and assisting and finding a resolution will pay dividends in the long run. I believe this provides us a unique advantage over our competition, lead-acid batteries.

I would also like to note that our service cost for the first quarter was slightly lower than expected, and by the middle of next year, we plan for our service activity to be a profit center for the company.

We've also been leveraging government contracts for developing fuel cells for ground support equipment for use at airports and transportation refrigeration units for food distributors. For example, we will be demonstrating in early 2014, 15 ground support units powered by fuel cells with Federal Express at the facility in Memphis, Tennessee. This product is of interest to Federal Express and the government because it reduces emissions, service cost and operational costs. There are over 1,300 of these units at the Federal Express's Memphis facility alone. Plug's strategy is to test horizontally market expansion via support from third-parties without using shareholders' funds.

Also in the past quarter, we continued to develop new products for the market both in North America and Europe. For example, 5 products have been completed for Europe with additional products being released in the coming months. And newer high power product for North America is scheduled for release this quarter. With respect to product cost in the first quarter, we met our product cost targets except for freight cost. Product innovations coupled with quality improvement and global sourcing has allowed the company to stay on track. In the coming quarters, an increase effort's being placed on managing shipping cost.

In the long run, booking sales is the key to the company's eventual success. To date, this year bookings have been approximately $2 million. Bookings have been challenging over the past 6 months, first, due to quality issues and then financing challenges. As I already mentioned, we have seen improvements in quality, and with the addition of Air Liquide as an investor, Plug Power's well positioned for future financing. Batteries' bookings now have significantly lowered. There's pent up demand for our products. Our near-term sales funnel was strong, and we are in negotiations with some of our largest customers for multiple distribution centers. The next 120 days are critical to our sales effort. I expect order flow of over $20 million in that time frame, but also, we will be seeing business steps by some customers to position large orders before year's end.

Closing deals is the top priority of the organization and the entire business is to align to achieve this goal. Finally, I believe our financials have been very difficult for the financial community to understand. The impact of warrant fluctuations, extraordinary service costs, 1603 timing and one-time charges have even made them more difficult. We've developed a simplified financial model to establish what an EBITDA profitable quarter for Plug Power requires. We believe EBITDA is a best model for measuring Plug's success since the infrastructure is in place with minimum added investment that support a $200 million annual business. We suggest investors make as few assumptions when reviewing our income statements and our future projections.

By mid-2014, the combined government and service activity is net income breakeven. Two, the worst case for material cost to sales price is targeted at 67% in mid-2014. Three, fully production labor will be approximately $1.2 million on a quarterly basis. And four, cash expense for design SG&A will be approximately $3.1 million on a quarterly basis.

Based on these assumptions, the company will have to ship approximately 675 units and generate $13.5 million on a quarterly basis in product revenue to achieve EBITDA profitability. Our internal targets are to achieve these goals in the second or third quarter of 2014. Lessors may have gauged that required shipments to achieve EBITDA breakeven are lower than previously presented. One reason is that we have reduced our expense run rate by $3 million to $4 million annually in the past year. We also continue to make strides with reducing product and service costs. And as I mentioned, the numbers presented are not aggressive. The business is taking longer to develop than we had previously anticipated. I believe we are at the cusp of success. Costs are coming in line, expenses have been reduced and our products are performing now as expected at customer sites.

The pent-up customer demand is visible to the team at Plug Power. That is why during the past 5 months, the toughest in the company's history, we have not lost the design or sales employee, except for extraordinary personal reasons, because they recognize how close we are to success. I perceive this also, and in the near future, path to success will be visible to shareholders, new investors and especially our competition. I know many will be surprised, but not us. We're building the business every day. I now like to turn the discussion over to Dave Waldek for a discussion of our first quarter financial results.

David P. Waldek

Thank you, Andy. And good morning, everyone. We shipped out 282 GenDrive units during the first quarter of 2013. Of those 282 units, 44 were in transit at the end of the quarter, and the related revenue for those units will not be recognized until the second quarter. So from a revenue standpoint, 238 of the 282 units shipped were included in revenue for the first quarter. As of the end of March 2013, our backlog comprised of 1,133 unit orders for 10 different customers.

Product and service revenue for the first quarter was $6.0 million, up from $5.7 million from the preceding fourth quarter of 2012 and down from $7.2 million from the prior year. Cost of goods sold for products and services for the first quarter of 2013 was $8.0 million. The gross margin for products and services for the first quarter 2013 was a loss of $2 million, an improvement compared to the gross margin loss of $3.4 million for the preceding fourth quarter 2012. The products and services gross margin loss for the first quarter of 2012 was $1.8 million.

The gross margin loss in the first quarter of 2013 resulted primarily from fixed overhead costs associated with the number of units shipped compared to our capacity as well as costs incurred to service the installed base. Research and development contract revenue for the quarter was $400,000 compared to $200,000 during the preceding fourth quarter 2012 and $500,000 from the prior year.

In our operating expense categories, selling, general and administrative expenses were $2.9 million for the quarter, down 28% from $4 million in the preceding fourth quarter 2012 and $3.9 million in the first quarter of 2012. The decline in SG&A expenses is attributable to the restructuring plan announced in December of 2012.

Research and development expense for the quarter was $800,000, down from $1.3 million in the preceding fourth quarter 2012 and $1.2 million during the first quarter of 2012. The decline in R&D expense is a result of our continued management of discretionary and personnel expenses. The operating loss for the quarter was $6.4 million compared to an operating loss of $9.5 million in the preceding fourth quarter 2012 and $7.8 million in the first quarter of 2012.

Our net loss for the quarter was $8.6 million or $0.18 per share on a basic and diluted basis. Included in that net loss for the first quarter of 2013 was a $2.1 million noncash charge related to the change in fair value of common stock warrants. In total, noncash costs for depreciation, amortization, noncash stock compensation and a change in fair value of stock warrants included in our net loss for the quarter was $3.8 million. The net loss for the preceding fourth quarter of 2012 was $8.5 million or $0.22 per share, and the net loss was $6.6 million or $0.28 per share for the first quarter of 2012. Weighted average shares outstanding for the quarter were $48.6 million. EBITDA loss for the quarter was $4.8 million compared to an EBITDA loss of $7.9 million in the fourth quarter of 2012 and an EBITDA loss of $6.2 million in the first quarter of 2012. Net cash used in operating activities for the quarter was $5.9 million. As of March 31, 2013, the company had $4.5 million in cash and cash equivalents and $7.9 million in working capital.

We'd now like to open the call to any questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Philip Shen with Roth.

Matt Koranda - Roth Capital Partners, LLC, Research Division

This is Matt, on for Phil. Just wanted to start off with the Air Liquide strategic investment first. Maybe if you could provide some additional color on the timing of the cash receipts from that investment. And then also maybe if you could just talk about how potential and current customers view that investment, and sort of how does that help them get comfortable around their continued transition towards fuel cell technology?

Andrew J. Marsh

Let me address first the customer's response, Matt. I spent a good deal last week on the road listening to 3 or 4 of our top customers. And I would say, in general, that the reception was extremely positive. Many of them -- I would tell you, of all the business I've been, many of these customers have been cheering for us on the sideline and really looking forward to the fact that we had a large industrial player provide the validation in the market that many of these users experience every day. I spoke with VP levels at all of our key customers. The response has been enthusiastic, as it has been for many investors when I speak with them. The deal will close by May 22, and most likely -- and by the way, we probably should add that we have received a portion of that money already, about $3.8 million associated with sections of that contract have already been received by Plug Power.

Matt Koranda - Roth Capital Partners, LLC, Research Division

Great, that's helpful. And then I also wanted to explore the sales funnel for a moment if I could. You mentioned order flow potentially of about $20 million. And I think you said that was over the next 120 days, so maybe if you can clarify that and just share the latest sales funnel for us as well.

Andrew J. Marsh

Sure. And Matt, the -- I would call the high probability sales funnel is over $100 million. And I did use the 120 days for the $20 million. And I also coupled in that there are a number of customers that the deals may not close in the next 120 days. But we are -- 3 or 4 of our largest customers discussing multiple distribution centers, up to 5 in some case, where they're looking to migrate to fuel cells, where they're working through their expansion plans internally. So we're -- we've had some challenges with the sales funnel with our financial position. The Air Liquide investment, the market reception of that, has certainly been beneficial. And we are already beginning to see that customers are taking the next step and there are negotiations to finalize some deals. So the 120 days, $20 million target, I believe, is a conservative number, the one we feel very comfortable with. But probably what's more important is we see a great deal of traction beyond that.

Matt Koranda - Roth Capital Partners, LLC, Research Division

Great, that's helpful. And then one more, if I may, you mentioned the 282 units shipped during the quarter. How many of those were outright sales versus leasing agreements?

Andrew J. Marsh

I believe all were sales, and Dave is shaking his head, all were sales.

Operator

[Operator Instructions] It appears there are no further questions at this time. I would like to turn the floor back over to Mr. Marsh for any concluding remarks.

Andrew J. Marsh

I would like to thank everyone for attending the call today. And we are committed and we see the traction that the business will be successful in the near future. So thank you for your time.

Operator

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.

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