Teal Vivacqua - Andrew J. Marsh - Chief Executive Officer, President and Director David P. Waldek - Former Interim Chief Financial Officer.

Matt Koranda - Roth Capital Partners, LLC, Research Division Jeffrey D. Osborne - Cowen and Company, LLC, Research Division Benjamin Tainter - FBR Capital Markets & Co., Research Division.

Greetings, and welcome to Plug Power's Third Quarter Earnings Call. [Operator Instructions] It is now my pleasure to introduce Ms. Teal Vivacqua, Director of Marketing and Communications for Plug Power. Thank you. You may begin..

Good morning, and welcome to the Plug Power 2014 Third Quarter Earnings Conference Call.

This call will be -- will include forward-looking statements, including, but not limited to, statements regarding our expectations for future business and financial performance, bookings, product shipments, revenue, margin, EBITDA, geographic and market expansion and inorganic growth.

We intend these forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. We believe that it is important to communicate our future expectations to our investors.

However, investors are cautioned not to unduly rely on forward-looking statements because they involve risks and uncertainties, and actual results may differ materially from those discussed as a result of various factors, including, but not limited to, the risks and uncertainties discussed under Item 1A, Risk Factors, and annual -- in our annual report on Form 10-K for the fiscal year ending December 31, 2013, as well as other reports we file from time to time with the SEC.

These forward-looking statements speak only as of the day on which the statements are made, and we do not undertake or intend to update any forward-looking statements after this call. At this point, I'd like to turn the call over to Plug Power's CEO, Andy Marsh..

in under 1 year, Plug Power has deployed GenFuel sites to 5 sites and are commissioning another 5 sites as we speak. We believe no other company in the world has successfully installed 10 sites in a single year, and these are sites that are used not by customers, like a futuristic hydrogen gas station.

Success has been demonstrated in high-throughput facilities. Our customers are using 6 tons of hydrogen daily. During the quarter, Plug has taken some purposeful steps to retain the worldwide leader as this market develops. We remain disciplined and focused on our approach in order to come up with the right hydrogen solutions for the market.

The first step of this evolution was to design and build our own large-scale hydrogen system infrastructure for manufacturing and distribution centers. This has been completed and proven at customer sites across North America.

Constantly evolving design of our current infrastructure products will increase performance and reliability and will reduce cost and complexity, which will lead to a broad broader set of customers and circumstances where the product can be deployed. We also, as you know, developed a source of hydrogen gas with Praxair.

We're evolving our road map for hydrogen, and we have a great deal of work going on, on infrastructure development to support smaller sites using more gaseous hydrogen, which will reduce the overall infrastructure cost and allow us to move in other areas.

We've also -- as we've talked before, have had a great deal of focus on hydrogen distribution and working through methodologies in which we can use the hydrogen storage systems that we have in place at sites like Walmart and be able to distribute that hydrogen to stores and other smaller sites.

And we also have been spending -- and I've not been hasty. We've been spending a great deal of time on hydrogen generation. We see hydrogen generation as both a margin as well as a revenue opportunity for Plug.

Plug Power has looked at reformers with customers, looked at reformers we've been -- as we've discussed before, we have a number of discussions going on looking at the options of building a larger-scale hydrogen plant with an industrial player. The road maps and progress is focused on many different elements. Some items, we will do ourselves.

Some, we'll do with partners, and other where we may be -- there may be a potential for acquisition. Making hydrogen simpler for customers is crucial for the future growth of the fuel cell industry. I'd now like to call -- turn the call over to Dave Waldek to provide our third quarter financial results..

Thank you, Andy, and good morning, everyone. Before I jump into the details of the third quarter numbers, I'll first provide a few financial highlights. Our cash balance at the end of September was $156.5 million.

Additionally, right after the quarter ended, we received a $5 million customer payment, which had been expected to be received prior to the end of the quarter. As of September 30, our working capital was $177.6 million compared to our working capital at December 31, 2013, of $5 million.

During the third quarter of 2014, we shipped out 857 GenDrive units compared to 155 units during the first quarter of 2014. As of September 30, our backlog was comprised of 2,534 unit orders with a value of $35.7 million.

Those backlog numbers are GenDrive units only and don't include orders for service hydrogen infrastructure and hydrogen molecule delivery. Total product and service revenue for the quarter was $19.5 million compared to $4.2 million for the third quarter of 2013. Breaking out the revenue.

Product revenue for the third quarter was $12.6 million with a gross margin of 12%, an improvement compared to product revenue of $2.5 million at a negative 54% gross margin for the third quarter of 2013.

Service revenue for the third quarter was $6.9 million with a gross margin of negative 33% compared to a service revenue of $1.6 million at a negative 139% gross margin for the third quarter of 2013. Research and development contract revenue for the quarter was $371,000 compared to $461,000 during the third quarter of 2013.

In our operating expense categories, selling, general and administrative expenses were $5 million for the quarter compared to $2.8 million in the third quarter of 2013. The increase in SG&A primarily relates to the acquisition of ReliOn, the expansion of our sales force, and additional $500,000 in noncash stock compensation cost.

Research and development expense for the quarter was $1.6 million compared to $769,000 during the third quarter of 2013. The increase in R&D primarily relates to the acquisition of ReliOn and internal stack development costs.

Included in the quarter was also a nonrecurring charge of $2.4 million related to litigation dating back to 2008 with Soroof Trading Development Company. Net loss for the third quarter of 2014 was $9.4 million or $0.06 per share on a basic and diluted basis.

Excluding the $2.4 million litigation accrual, net loss for the third quarter of 2014 would have been $7 million or $0.04 a share. Net loss for the third quarter of 2013 was $15.9 million or $0.19 per share on a basic and diluted basis.

The net loss for the third quarter of 2013 included an $8.2 million nonoperating charge related to the change in fair value of common stock warrants. Excluding this item, adjusted net loss for the third quarter of 2013 was $7.7 million or $0.09 per share.

EBITDAS loss for the third quarter, including the $2.4 million legal accrual, was $8.4 million, and this compares to an EBITDAS loss of $6.4 million in the third quarter of 2013. Please reference the financial tables on the press release for a reconciliation of EBITDAS to operating loss and net loss to adjusted net loss.

Weighted average shares outstanding for the quarter were 169.6 million on a basic and diluted basis. Net cash used in operating activities for the quarter was $11.1 million, and as I mentioned earlier, the company also received an anticipated $5 million customer payment in the days immediately following the end of the quarter.

I'll now turn the call back over to Andy..

Well, thank you. We would like to open the line for questions at the moment..

[Operator Instructions] Our first question comes from Matt Koranda with Roth Capital..

So product revenues were $12.6 million for the quarter.

Can you just remind us how much of that was for GenFuel infrastructure during the quarter? And were there any significant revenues from ReliOn during Q3?.

Yes.

So Matt, I'll let Dave take that, but the hydrogen infrastructure, I believe, Dave, is in your service numbers at the moment, correct?.

That's correct, yes..

Okay. So Matt, that was primarily GenDrive units. There may have be $300,000 or $400,000 of ReliOn product revenue in that. I think what's interesting in ReliOn, we expected, when we purchased the company, that we would do about $4 million to $5 million with AT&T this year.

And after AT&T's DirectTV sales, like, I think, many companies have experienced, we saw that revenue stream disappear. On the positive side, I think that today, we announced the deal that we were able to close, which will be $20 million over a 4- to 5-year period, which is a nice start for a North American company.

We have a couple other items, which are growing. I never thought ReliOn to generate revenue for me, I bought it for fuel cell stacks, and we're beginning to see some revenue opportunity there..

Okay. That's helpful. So what I back into here though is about a $15,000 per unit ASP during the quarter. Could you just talk about what was kind of driving the lower blended ASPs? I mean, typically, I think you guys are in the, what, $18,000 to $20,000 range.

Can you just talk about what drove that?.

Yes. So if you go in -- I think, probably, 80% of our shipments, Matt, were to food distribution companies, and there, you have a much -- a greater number of Class 3 products, and I think that drove a good deal of that.

So most of the units were to Kroger and most -- and the Walmart were large users this quarter, and that actually drove the higher numbers.

I mean, kind of just to give you a feel, the 22 units we weren't able to count went to a manufacturing customer, and those 22 units had over $600 million (sic) [ $600,000 ] in revenue we had to take off the books..

Okay, all right. That is helpful. So -- are you $6 million in revenue.

Is that what you meant?.

No, $600,000 revenue for those 22..

$600,000..

Yes. I wish $6 million, Matt. But $600,000..

Okay, all right. That's helpful. And then in terms of service gross margins, I know they're flat sequentially here, but what needs to happen operationally to get you to breakeven next year? And then I believe you said you were targeting, on the last call, about 15% to 20% service gross margins by the end of next year.

Am I hearing correctly you said -- are you targeting breakeven now? Is that the another target for next year?.

So we're targeting operating income of 0 by the end of next year, Matt. And since the service business is fairly highly loaded up, there's very low overhead there. So I would think gross margins are more probably in the 10% region.

Biggest problem we've had, Matt, is -- and I think I referred to it on the call, is that failures of high -- failures of liquid-cooled stacks. Some of those issues are Plug issues, quite honestly, and some of those issues are Ballard issues. And we've worked through many of the issues.

I still see a few lingering problems, and I think that when we look at that -- look at the high-powered stacks, it's really the difference between a business that's stable and profitable next year early, versus now. It's a large percentage of our cost..

Okay. That makes sense. And then speaking of....

Let me say though, as I mentioned during the call, Ballard has been very helpful over the past month, 1.5 months, trying to get their hands around their portion of the issues..

Okay. That's helpful.

So maybe touching on that and just the diversification of supply chain because you talked about -- I mean, you talked about the integration of ReliOn during the prepared remarks, but longer term, what do you think we can anticipate as a reasonable mix between the Ballard stacks and maybe the ReliOn stacks? Maybe if you could touch on what the mix could be next year, in 2015, and then, longer term, what you anticipate the mix would be..

I think so much of it depends on performance and cost. I -- if Ballard provides me the best overall solution, their percent and share of the market will be higher, and that's the message we've talked to them about.

And so I think, probably next year, that I wouldn't be surprised if by year-end, up to half of the air-cooled stacks could be coming from Plug, could be greater, could be smaller. What I really want is supply diversification, better performance and lower cost, and we'll make those decisions quarterly as the products roll out.

I also need choice, and the reason we've developed our own stack is that we need an alternative for all our components as the volumes grow and the business becomes stronger. And that was a large driver in our diversification efforts. On the liquid -- and on the liquid-cooled side, Matt, there will be very little Plug stacks, as I mentioned.

It will be late third quarter, early fourth quarter before we're launching the liquid-cooled stack..

Our next question comes from Jeff Osborne with Cowen and Company..

I wanted -- I just wanted to -- I might have missed this, but are you reaffirming the $150 million in bookings that you talked about in the press release on October 10? I didn't hear you say that number today..

I – Teal, why don't you pull the last slide up? Yes, I am, Matt -- yes, I am, Jeff..

Okay, perfect. I just wanted to double check there. And then can you talk about on the backlog that you reported, what the mix is of Class 3 versus 1 and 2 there? Is that still skewed heavily 70%, 80% towards the Class 3. I'm just trying to think about....

Good question. I would say 2/3 Class 3, Jeff..

Okay. And then, obviously, you've had a pretty significant ramp in the headcount, on the sales side and a bit on the R&D side.

I'm just trying to get a sense of kind of the cadence of OpEx in the fourth quarter, but more importantly, as we look out to 2015, are you still intending to hire quite a few more? Or has everybody been hired and now it's really around the execution of the new sales force?.

Yes. I think that's a good question. I think -- Jeff, I think domestically, I do not see a huge growth in any U.S.-based operations. So I think we're fairly set. There could be plus or -- could be plus $500,000 to $1 million in the States. We've built out the financial organization. We've built out the sales team.

We -- the R&D team at -- the ReliOn R&D team we acquired, we're really pleased with. There is -- I think there are probably additional -- I think you'll see -- us talking now, we're going to have a January update call for year-end and for projections for next year. I think you'll see some expense growth in Newark..

A couple of million dollars seem reasonable there. I'm just trying to get a sense of what the magnitude....

I think that's a good question. I think it could be in the $2 million to $3 million range. It depends how our -- it kind of depends how much control we take over HyPulsion in the coming year..

Understand. Last 2 questions from me is that I know in the call, Andy, we talked about your hydrogen strategy and the evolution there.

It sounds like you've done a lot more work and obviously, the Praxair arrangement is a definite positive, but as you look at either acquiring or building out through partners, your own development efforts, I think in the last call, we talked about a kind of $20 million to $40 million expense to do that.

Is that still -- as you've done more work, is that still a reasonable assessment of what the cost would be? Or have things trended a bit higher?.

I think that's a fairly -- that's a reasonable expense, Jeff..

Okay. The last question I had is....

That's a -- just to be fair to you, Jeff. Look, we are spending a good deal of time more on hydrogen, and -- but as you can see, we've -- the steps we've taken to date have been more partner-oriented. I think -- and anything we do, especially in the hydrogen generation side, it will be with somebody who's an expert in the area who can help us..

Good to hear. The last question, Andy, I had was just on the $20 million multiyear deal with a North American company.

I assume that's on the telecom services side, but can you just talk about the scope of that, when it would start and perhaps name the customer if you're allowed to?.

Well, Jeff, I would name the customer if I could. We're working through the press release. I think you may see us more on the utility side, and as you know, utilities have some sophisticated telecommunication networks associated with them..

[Operator Instructions] Our next question comes from Aditya Satghare with FBR Capital Markets..

This is actually Ben Tainter on for Aditya today. So I have a couple questions.

First, I know that you said you reiterated your sort of bookings target for the year of $150 million, but how confident are you in being able to meet that bookings target? And then sort of -- and in line with that question, have you seen any changes in the customer base going forward into 2015?.

I think the answer is that the confidence levels were -- if you go back and look at the notes, where exactly where we said we felt we'd be on this call and -- we've booked more since.

I think that from a customer take point of view, as we've increased the sales force -- and quite honestly, as the Walmart deals become more widely known, not only in the U.S. but globally, we've had a lot more activity.

I think over the past 2 months alone, we've taken 8 customers who've asked us to take them to Walmart facilities, to BMW facilities, to VW facilities, who are actively engaged in discussions with us. So we're -- we see a great deal more customer interest.

And I think next year, to be successful, we will need about 20% new customer take as far as the revenue numbers go, but overall, we are seeing a great deal more interest.

I mean, I had a call from companies in places like Australia, China, Singapore, elsewhere that saw what Walmart were -- was doing, and even much of what's going on in Europe, that Walmart deal has actually generated a great deal of interest with many, many customers, who we had trouble getting them to open the door initially..

Okay. That's very helpful. And then sort of a follow-up. On the ReliOn product, I know you recently talked about ReliOn is going to be Plug Power's stationary product for the backup power and grid support market.

Could you maybe elaborate if you're going to be applying a GenKey-type solution for that product and then sort of how you see that side of the business growing going forward?.

So I think what you -- what we did with the one customer was we actually partnered with a hydrogen distribution provider to provide a turnkey solution for those customers.

So backup power, I mean, the big issue is how do you bring hydrogen to the sites, and we were able to construct a deal and develop a partnership to allow it -- the customer just to turn it all over to us, and we worked it with a partner. We had the assets to help deliver the products, and I think, that's the key.

Be it backup power -- so quite honestly, there's other challenges in backup power. I've always been quite honest about that, but you've got -- it's a new fuel. It's a new logistic model. It's a new technology. You have to make it easy for customers to change, and we're trying to use the same philosophy in backup power..

Ladies and gentlemen, at this time, we would like to turn the floor back to Andy Marsh for closing comments..

I'd like to thank everyone for joining the call today. We're going to book over $150 million in revenue this year, as I talked to Jeff about.

We're going to a revenue of $70 million to $75 million, which is almost a threefold increase from last year, and I think when you listened to Dave talk about the operation improvement, product margins are positive. We're deploying hydrogen infrastructure.

We're looking to become a powerhouse in supporting customers with hydrogen not only here in North America but around the world. And finally, I know it's important that we continue this dialogue and communication. I'm excited that Paul is joining us, and we've been building out a financial team for him and an organization he can take over running.

He'll be on board before the 1st of December, and on mid-January, we want to have an update call with everyone who's on the line today to discuss not only our performance in 2014 but to go in much greater detail in 2015. So thank you once more for taking the time today and joining the call..

Thank you. Ladies and gentlemen, this concludes today's conference. You may disconnect your lines at this time. Thank you, all, for your participation..