FORM 10-Q

10-Q 1 d10q.htm FORM 10-Q FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

Commission File Number: 0-27527

PLUG POWER INC.

(Exact name of registrant as specified in its charter)

968 ALBANY-SHAKER ROAD, LATHAM, NEW YORK 12110

(Address of registrant’s principal executive office)

(518) 782-7700

(Registrant’s telephone number, including area code)

Delaware

22-3672377

(State or other jurisdiction

of Incorporation)

(I.R.S. Employer

Identification Number)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨

The number of shares of common stock, par value of $.01 per share, outstanding as of April 30, 2005 was 73,461,442.

PLUG POWER INC.

INDEX to FORM 10-Q


		Page
PART I. FINANCIAL INFORMATION

Item 1 – Financial Statements

	Condensed Consolidated Balance Sheets – March 31, 2005 and December 31, 2004	3

	Condensed Consolidated Statements of Operations – Three month periods ended March 31, 2005 and March 31, 2004 and Cumulative Amounts from Inception	4

	Condensed Consolidated Statements of Cash Flows—Three month periods ended March 31, 2005 and March 31, 2004 and Cumulative Amounts from Inception	5

	Notes to Condensed Consolidated Financial Statements	6

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations		12

Item 3 – Quantitative and Qualitative Disclosures About Market Risk		19

Item 4 – Controls and Procedures		19

PART II. OTHER INFORMATION

Item 1 – Legal Proceedings		21

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds		21

Item 6 – Exhibits and Reports on Form 8-K		21

Signatures		23

Plug Power Inc. and Subsidiaries

(A Development Stage Enterprise)

Condensed Consolidated Balance Sheets


	March 31, 2005			December 31, 2004
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	26,019,527		$	18,976,767
Restricted cash		365,000			365,000
Marketable securities		30,321,688			47,872,662
Accounts receivable		1,924,998			2,989,481
Inventory		4,344,844			3,527,140
Prepaid expenses and other current assets		1,260,982			1,230,713

Total current assets		64,237,039			74,961,763
Restricted cash		3,965,274			3,965,274
Property, plant and equipment, net		21,600,713			21,829,254
Intangible asset		—			687,500
Investment in affiliate		5,334,903			5,785,358
Goodwill		10,388,980			10,388,980
Other assets		350,828			379,361

Total assets	$	105,877,737		$	117,997,490

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	1,691,418		$	2,339,143
Accrued expenses		2,766,008			2,447,316
Deferred revenue		5,209,372			5,675,227
Current portion of capital lease obligation and long-term debt		410,824			427,238

Total current liabilities		10,077,622			10,888,924
Long-term debt		3,998,391			3,998,391
Other liabilities		1,011,734			997,349

Total liabilities		15,087,747			15,884,664

Stockholders’ equity:
Preferred stock, $0.01 par value per share; 5,000,000 shares authorized; none issued and outstanding		—			—
Common stock, $0.01 par value per share; 245,000,000 shares authorized; 73,456,180 shares issued and outstanding at March 31, 2005 and 73,350,878 shares issued and outstanding at December 31, 2004		734,562			733,509
Additional paid-in capital		458,704,001			457,880,663
Unamortized value of restricted stock		(346,611	)		(680,459	)
Accumulated other comprehensive loss		(428,313	)		(482,391	)
Deficit accumulated during the development stage		(367,873,649	)		(355,338,496	)

Total stockholders’ equity		90,789,990			102,112,826

Total liabilities and stockholders’ equity	$	105,877,737		$	117,997,490

The accompanying notes are an integral part of the condensed consolidated financial statements.

Plug Power Inc. and Subsidiaries

(A Development Stage Enterprise)

Condensed Consolidated Statements of Operations

(Unaudited)


	Three months ended March 31,						Cumulative Amounts from Inception
	2005			2004			Cumulative Amounts from Inception
Revenue
Product and service revenue	$	1,056,370		$	1,351,087		$	25,879,315
Research and development contract revenue		2,164,317			1,934,518			50,657,708

Total revenue		3,220,687			3,285,605			76,537,023
Cost of revenue and expenses
Cost of product and service revenues		707,665			894,844			25,907,461
Cost of research and development contract revenue		2,914,459			2,589,886			71,991,704
In-process research and development		—			—			12,026,640
Research and development expense:
Noncash stock-based compensation		372,274			474,183			7,604,349
Other research and development		9,448,988			9,257,202			270,722,601
General and administrative expense:
Noncash stock-based compensation		135,544			252,209			15,009,943
Other general and administrative		1,967,733			1,654,490			46,627,348

Operating loss		(12,325,976	)		(11,837,209	)		(373,353,023	)
Interest income		270,248			366,818			19,782,908
Interest expense		(28,970	)		(15,879	)		(1,060,687	)

Loss before equity in losses of affiliates		(12,084,698	)		(11,486,270	)		(354,630,802	)
Equity in losses of affiliates		(450,455	)		(465,818	)		(13,242,847	)

Net loss	$	(12,535,153	)	$	(11,952,088	)	$	(367,873,649	)

Loss per share:
Basic and diluted	$	(0.17	)	$	(0.16	)

Weighted average number of shares outstanding		73,449,444			72,922,796

The accompanying notes are an integral part of the condensed consolidated financial statements.

Plug Power Inc. and Subsidiaries

(A Development Stage Enterprise)

Condensed Consolidated Statements of Cash Flows

(Unaudited)


	Three months ended March 31,						Cumulative Amounts from Inception
	2005			2004			Cumulative Amounts from Inception
Cash Flows From Operating Activities:
Net loss	$	(12,535,153	)	$	(11,952,088	)	$	(367,873,649	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		846,611			1,010,767			24,451,434
Equity in losses of affiliates		450,455			465,818			13,242,847
Amortization of intangible asset		687,500			687,500			15,124,501
Noncash prepaid development costs		—			358,481			10,000,000
Amortization of deferred grant revenue		—			(50,000	)		(1,000,000	)
Stock based compensation		959,613			1,264,911			23,099,911
Loss on disposal of property, plant and equipment		—			—			32,493
In-kind services		—			—			1,340,000
Amortization and write-off of deferred rent		—			—			2,000,000
In-process research and development		—			—			7,042,640
Changes in assets and liabilities:
Accounts receivable		1,064,483			622,536			(1,705,657	)
Inventory		(817,704	)		(1,242,287	)		(3,990,271	)
Prepaid expenses and other current assets		126,805			(280,007	)		(3,140,379	)
Accounts payable and accrued expenses		(484,974	)		911,243			2,622,251
Deferred revenue		(465,855	)		(442,350	)		6,209,372

Net cash used in operating activities		(10,168,219	)		(8,645,476	)		(272,544,507	)

Cash Flows From Investing Activities:
Proceeds from acquisition, net		—			—			29,465,741
Purchase of property, plant and equipment		(576,285	)		(398,839	)		(32,281,084	)
Proceeds from disposal of property, plant and equipment		—			—			310,666
Purchase of intangible asset		—			—			(9,624,500	)
Investment in affiliate		—			—			(1,500,000	)
Proceeds from sale of marketable securities		21,635,881			3,237,853			764,101,053
Purchases of marketable securities		(4,030,829	)		(40,404,183	)		(794,851,054	)

Net cash provided by (used in) investing activities		17,028,767			(37,565,169	)		(44,379,178	)

Cash Flows From Financing Activities:
Proceeds from issuance of common stock		—			—			140,342,782
Proceeds from public offerings, net		—			—			201,911,705
Stock issuance costs		—			—			(2,384,072	)
Proceeds from shares issued for stock option exercises and employee stock purchase plan		198,626			441,988			9,673,468
Cash placed in escrow		—			—			(4,330,274	)
Principal payments on long-term debt and capital lease obligations		(16,414	)		(20,803	)		(2,270,397	)

Net cash provided by financing activities		182,212			421,185			342,943,212

Increase (decrease) in cash and cash equivalents		7,042,760			(45,789,460	)		26,019,527
Cash and cash equivalents, beginning of period		18,976,767			88,685,255			—

Cash and cash equivalents, end of period	$	26,019,527		$	42,895,795		$	26,019,527

The accompanying notes are an integral part of the condensed consolidated financial statements.

Plug Power Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Nature of Operations

Description of Business

Plug Power Inc. and subsidiaries (Company) was originally formed as a joint venture between Edison Development Corporation (EDC) and Mechanical Technology Incorporated (MTI) in the State of Delaware on June 27, 1997 and succeeded by merger to all of the assets, liabilities and equity of Plug Power, L.L.C. in November 1999.

The Company is focused on its proprietary proton exchange membrane (PEM) fuel cell and fuel processing technology platforms, from which multiple products are being offered or are under development. The Company is currently offering for commercial sale its GenCore^® product, a back-up power product for telecommunications, broadband, utility and industrial uninterruptible power supply (UPS) applications. The Company is also developing additional products, including a continuous power product, with optional combined heat and power capability for remote small commercial and remote residential applications; and an on-site hydrogen generation product for use in a variety of industrial gas applications.

Liquidity

The Company’s cash requirements depend on numerous factors, including completion of our product development activities, ability to commercialize our on-site energy products, market acceptance of our systems and other factors. The Company expects to continue to devote substantial capital resources to continue its development programs directed at commercializing on-site energy products for worldwide use, hiring and training our production staff, developing and expanding our manufacturing capacity, and continuing expansion of our production and our research and development activities. The Company will pursue the expansion of its operations through internal growth and strategic acquisitions and expect that such activities will be funded from existing cash and cash equivalents and to a lesser extent, issuance of additional equity or debt securities or additional borrowings subject to market and other conditions. The failure to raise the funds necessary to finance our future cash requirements or consummate future acquisitions could adversely affect its ability to pursue its strategy and could negatively affect its operations in future periods. The Company anticipates incurring additional losses over at least the next several years.

At March 31, 2005, the Company had unrestricted cash, cash equivalents and marketable securities in the amount of $56.3 million and working capital of $54.2 million. Management believes that the Company’s currently available cash, cash equivalents and marketable securities will provide sufficient capital to fund operations for at least the next twelve months.

2. Basis of Presentation

Principles of Consolidation: The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany transactions have been eliminated in consolidation.

Interim Financial Statements: The unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, all adjustments, which consist solely of normal recurring adjustments, necessary to present fairly, in accordance with generally accepted accounting principles, the financial position, results of operations and cash flows for all periods presented, have been made. The results of operations for the interim periods presented are not necessarily indicative of the results that may be expected for the full year.

Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K filed for the fiscal year ended December 31, 2004.

The information presented in the accompanying condensed consolidated balance sheet as of December 31, 2004 has been derived from the Company’s December 31, 2004 audited consolidated financial statements. All other information has been derived from the Company’s unaudited consolidated financial statements for the periods as of and ending March 31, 2005 and 2004.

Cash Equivalents and Restricted Cash: Cash equivalents consist of money market accounts, overnight repurchase agreements and certificates of deposit with an initial term of less than three months. For purposes of the condensed consolidated statements of cash flows, the Company considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents.

At March 31, 2005, the Company had restricted cash in the amount of $4.3 million that is required to be placed in escrow to collateralize debt related to the purchase of real estate. The escrowed amounts are recorded under the captions, “Restricted cash” in the accompanying condensed consolidated balance sheets.

Marketable Securities: Marketable securities include investments in corporate debt securities and US Treasury obligations which are carried at fair value and are considered available for sale. At March 31, 2005, the difference between the cost and the fair value of these securities result in an unrealized loss in the amount of $428,000, which is reflected as a component of stockholders’ equity under the caption, “Accumulated other comprehensive loss”. At March 31, 2005, the Company held marketable securities with maturities up to twenty six months.

Inventory: Inventory is stated at the lower of average cost or market and generally consists of raw materials.

Goodwill and Other Intangible Assets: Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142 “Goodwill and Other Intangible Assets”. SFAS No. 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 144, “Accounting for Impairment or Disposal of Long-Lived Assets”.

Goodwill represents the excess of costs over fair value of net assets acquired pursuant to the March 25, 2003 merger transaction with H Power Corp. (H Power). Amortized intangible assets, including purchased technology and other intangible assets, are carried at cost less accumulated amortization. The Company amortizes these intangible assets on a straight-line basis over their estimated useful lives. The range of estimated useful lives on the Company’s identifiable intangible assets is two to ten years.

Impairment of Long-Lived Assets: Long-lived assets, such as property, plant, and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposed group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet.

Product and Service Revenue: The Company applies the guidance within SEC Staff Accounting Bulletin No. 104, “Revenue Recognition in Financial Statements” (SAB 104) in the evaluation of its contracts to determine when to properly recognize revenue. Under SAB 104 revenue is recognized when title and risk of loss have passed to the customer, there is persuasive evidence of an arrangement, delivery has occurred or services have been rendered, the sales price is determinable, and collectibility is reasonably assured.

The Company’s initial sales of GenSys^™ and GenCore^™ 5T are contract specific arrangements containing multiple obligations, that may include a combination of fuel cell systems, continued service, maintenance and other support. While contract terms require payment upon delivery and installation of the fuel cell system and are not contingent on the achievement of specific milestones or other substantive performance, the multiple obligations within contractual arrangements are not accounted for separately based on the Company’s limited commercial experience and available evidence of fair value. The Company’s contractual arrangements under its initial commercial sales are with a limited number of customers and the arrangements are separately negotiated and not combined. As a result, the Company defers recognition of product and service revenue and recognizes revenue on a straight-line basis over the stated contractual terms, as the continued service, maintenance and other support obligations expire, which are generally for periods of twelve to twenty-seven months. At March 31, 2005 and December 31, 2004, the Company had deferred product and service revenue in the amount of $4.6 million and $5.5 million, respectively.

As the Company gains commercial experience, including field experience relative to service and warranty based on the sales of initial products, the fair values for the multiple elements within future contracts may become determinable and the Company may, in future periods, recognize revenue upon delivery of the product or may continue to defer recognition, based on application of appropriate guidance within EITF 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables”, or changes in the manner contractual agreements are structured, including agreements with distribution partners.

Research and Development Contract Revenue: Research and development contract revenue primarily relates to cost reimbursement research and development contracts associated with the development of PEM fuel cell technology. The Company generally shares in the cost of these programs with cost sharing percentages between 20% and 60%. Revenue from “time and material” contracts is recognized on the basis of hours utilized, plus other reimbursable contract costs incurred during the period. At March 31, 2005 and December 31, 2004, the Company had deferred contract revenue of $620,000 and $200,000, respectively.

Income Taxes: Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. We did not report a benefit for federal and state income taxes in the consolidated financial statements as the deferred tax asset generated from our net operating loss has been offset by a full valuation allowance because it is more likely than not that the tax benefits of the net operating loss carryforward will not be realized.

Stock-Based Compensation: The Company applies the intrinsic value-based method of accounting prescribed by Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations including Financial Accounting Standards Board (“FASB”) Interpretation No. 44, “Accounting for Certain Transactions involving Stock Compensation an interpretation of APB Opinion No. 25”, to account for its fixed plan stock options. Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. SFAS No. 123, “Accounting for Stock-Based Compensation,” established accounting and disclosure requirements using a fair value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123, the Company has elected to continue to apply the intrinsic value-based method of accounting described above, and has adopted the disclosure requirements of SFAS No. 123. The following table illustrates the effect on net loss if the fair-value-based method had been applied to all outstanding and unvested awards in each period:


	Three months ended March 31,
	2005			2004
Net loss, as reported	$	(12,535,153	)	$	(11,952,088	)
Add: Stock-based employee compensation expense included in reported net loss		507,818			726,392
Deduct: Total stock-based employee compensation determined under fair value based method		(1,459,230	)		(1,828,137	)

Proforma net loss	$	(13,486,565	)	$	(13,053,833	)

Loss per share
Basic and diluted – as reported	$	(0.17	)	$	(0.16	)

Basic and diluted - proforma	$	(0.18	)	$	(0.18	)

On June 20, 2003, the Company issued 607,804 shares of restricted stock and cancelled 1,810,048 options to purchase common stock in connection with the Company’s offer to eligible employees to exchange options to purchase shares of common stock with an exercise price of $8.53 or greater per share for shares of restricted stock on a three for one basis. The shares of restricted stock received in this exchange will vest in three equal installments effective 21 months, 24 months and 27 months from the date of the exchange. During the three month period ended March 31, 2005, the Company recorded employee compensation expense of $124,000 relating to the issuance of the restricted stock awards, net of forfeitures. This amount represents recognition of compensation expense on a straight-line basis over the vesting periods of the restricted stock.

Use of Estimates: The unaudited condensed consolidated financial statements of the Company have been prepared in conformity with accounting principles generally accepted in the United States of America, which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Impact of Recently Issued Accounting Standards: In December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment.” SFAS No. 123R requires employee stock options and rights to purchase shares under stock participation plans to be accounted for under the fair value method, and eliminates the ability to account for these instruments under the intrinsic value method prescribed by APB Opinion No. 25, and allowed under the original provisions of SFAS No. 123. SFAS No. 123R requires the use of an option pricing model for estimating fair value, which is amortized to expense over the service periods. On April 14, 2005, the Securities and Exchange Commission (SEC) delayed the effective date of SFAS No. 123R from the first annual or interim fiscal period beginning after June 15, 2005, to the first quarter of the first fiscal year beginning after June 15, 2005. If the Company had applied the provisions of SFAS No. 123R to the financial statements for the period ending December 31, 2004, net loss would have been increased by approximately $7.5 million. SFAS No. 123R allows for either prospective recognition of compensation expense or retrospective recognition, which may be back to the original issuance of SFAS No. 123 or in the year of adoption. We are currently evaluating these transition methods.

3. Loss Per Share

Loss per share for the Company is calculated as follows:


	Three Months Ended March 31,
	2005			2004
Numerator:
Net loss	$	(12,535,153	)	$	(11,952,088	)
Denominator:
Weighted average number of common shares		73,449,444			72,922,796
Loss per share:
Basic and diluted		(0.17	)		(0.16	)

No options or warrants outstanding were included in the calculation of diluted loss per share because their impact would have been anti-dilutive. These dilutive potential common shares at March 31, 2005 and 2004 are summarized as follows:


	2005	2004
Number of dilutive potential common shares	6,199,755	5,580,782

4. Investments in Affiliates

GE Fuel Cell Systems, LLC

In February 1999, the Company entered into an agreement with GE MicroGen, Inc. to form GE Fuel Cell Systems, LLC (GEFCS), to exclusively market, distribute, install and service certain of its PEM fuel cell systems under 35 kW designed for use in residential, commercial and industrial stationary power applications on a global basis, with the exception of the states of Illinois, Indiana, Michigan and Ohio, in which DTE Energy Technologies, Inc. (“DTE”), has exclusive distribution rights. GE MicroGen, Inc. is a wholly owned subsidiary of General Electric Company that operates within GE Energy.

In connection with the original formation of GEFCS, the Company issued 2,250,000 shares of its common stock to GE MicroGen, Inc. in exchange for a 25% interest in GEFCS. As of the date of issuance of such shares, the Company capitalized $11.3 million, the fair value of the shares issued, under the caption “Investment in affiliates” in the accompanying consolidated financial statements. In accordance with the terms of the agreement, General Electric Company will provide capital in the form of a loan not to exceed $8.0 million, to fund the operations of GEFCS.

In August 2001, the Company amended its agreements with GE Microgen, Inc. and GEFCS to expand GEFCS’ exclusive worldwide distribution rights to include all of its stationary PEM fuel cell systems. In addition, the Company increased its ownership interest in GEFCS from 25% to 40%. In return, the Company granted GE Power Systems Equities, Inc. an option to purchase 725,000 shares of its common stock at any time prior to August 21, 2006 at an exercise price of $15.00 per share. The Company also replaced the product specifications, prices and delivery schedule in their distribution agreement with a high-level, multi-generation product plan, with subsequent modifications being subject to mutual agreement, and extended the term of the agreement to December 31, 2014. In connection with these transactions, the Company capitalized $5.0 million, the fair value, calculated using the Black-Scholes pricing model, of the option to purchase 725,000 shares of Plug Power common stock, under the caption “Investment in affiliates” in the accompanying consolidated financial statements, and is amortizing this amount over the remaining term of the original distribution agreement.

The Company accounts for its interest in GEFCS on the equity method of accounting and adjusts its investment by its proportionate share of income or losses under the caption “Equity in losses of affiliates” in the accompanying consolidated statements of operations. GEFCS had an operating and net loss of approximately $6,000 for the three months ended March 31, 2005. For the three months ended March 31, 2005, equity in losses of affiliates, related to GEFCS, was approximately $450,000 including amortization of the related intangible asset of $448,000. Accumulated amortization at March 31, 2005 was $10.9 million.

In October 2003, the Company further amended the distribution agreement to provide for the ability to sell directly or negotiate nonexclusive distribution rights to third parties for its GenCore backup power product line and its GenSite hydrogen generation product line. In exchange the Company agreed to pay a commission, based on sales price, to GEFCS at a rate and schedule prescribed in our amended agreement. The distribution agreement expires on December 31, 2014.

Under a separate agreement with the General Electric Company, for its product development effort, the Company has agreed to source technical support services, including engineering, testing, manufacturing and quality control services. Under the initial

agreement, the Company was committed to purchase a minimum of $12.0 million of such services over a five-year period, which began September 30, 1999. During 2005, the Company and General Electric Company extended this period through December 2007. Through March 31, 2005, the Company had purchased approximately $10.0 million of such services.

Additionally, General Electric Company has agreed to act as the agent in procuring certain equipment, parts and components and is providing training services to our employees regarding procurement activities pursuant to this agreement.

5. Goodwill and Other Intangible Assets

The gross carrying amount and accumulated amortization of the Company’s acquired intangible assets as of March 31, 2005 and December 31, 2004 were as follows:


	Weighted Average Amortization Period	March 31, 2005				December 31, 2004
	Weighted Average Amortization Period	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Distribution Agreement	10 years	$	16,250,000	$	10,915,097	$	16,250,000	$	10,464,642
Purchased Technology—H Power	2 years		5,500,000		5,500,000		5,500,000		4,812,500

Total		$	21,750,000	$	16,415,097	$	21,750,000	$	15,277,142

Amortization expense for acquired intangible assets during the three months ending March 31, 2005 was $1.1 million. Estimated amortization expense for the remainder of 2005 and the four succeeding years is as follows:


	Estimated Amortization Expense
Remainder of 2005	$	1,344,000
2006		1,792,000
2007		1,792,000
2008		407,000

6. Stockholders’ Equity

Changes in stockholders’ equity for the three months ended March 31, 2005 are as follows:


	Common Stock			Additional Paid-in Capital			Unamortized Value of Restricted Stock			Accumulated Other Comprehensive Loss			Deficit Accumulated During the Development Stage			Total Stockholders’ Equity			Comprehensive Loss
December 31, 2004	$	733,509		$	457,880,663		$	(680,459	)	$	(482,391	)	$	(355,338,496	)	$	102,112,826
Net loss														(12,535,153	)		(12,535,153	)	$	(12,535,153	)
Change in unrealized loss on marketable securities											54,078						54,078			54,078

Total comprehensive loss																			$	(12,481,075	)

Stock based compensation		1,446			866,283												867,729
Stock option exercises		318			198,308												198,626
Amortization of restricted stock, net of forfeitures		(711	)		(241,253	)		333,848									91,884

March 31, 2005	$	734,562		$	458,704,001		$	(346,611	)	$	(428,313	)	$	(367,873,649	)	$	90,789,990

Common stock issued during the three months ended March 31, 2005 consisted of 144,576 shares related to stock based compensation, 31,799 shares related to stock option purchases and a recovery of 71,073 forfeited unvested shares of restricted stock.

7. Commitments and Contingencies

Shareholder Class Action Lawsuit: As previously disclosed, the Company and certain of its officers and directors were defendants in a shareholder class action lawsuit filed in the federal district court for the Eastern District of New York entitled Plug Power Inc. Securities Litigation, CV-00-5553(ERK)(RML). On December 29, 2004, the plaintiffs and the defendants entered into a Stipulation and Agreement of Settlement to settle all remaining claims in the litigation, subject to final approval by the Court. The $5 million cash settlement requires no payment by the Company or the individual defendants and will be fully funded by directors and officers insurance. On April 29, 2005, the Court entered an Order and Final Judgment approving the settlement and dismissing the complaint with prejudice.

8. Supplemental Disclosures of Cash Flows Information

The following represents required supplemental disclosures of cash flows information and non-cash financing and investing activities which occurred during the three months ended March 31, 2005 and 2004:


	March 31, 2005		March 31, 2004
Cash paid for interest	$	25,314	$	15,879
Property plant and equipment financed under capital lease obligation		—		129,900

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our accompanying unaudited condensed consolidated financial statements and notes thereto included within this report, and our audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K filed for the fiscal year ended December 31, 2004 on March 15, 2005. In addition to historical information, this Form 10-Q and following discussion contain statements that are not historical facts and are considered forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements contain projections of our future results of operations or of our financial position or state other forward-looking information. In some cases you can identify these statements by forward-looking words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “should,” “will” and “would” or similar words. We believe that it is important to communicate our future expectations to our investors. However, there may be events in the future that we are not able to accurately predict or control and that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. Investors are cautioned not to 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: our ability to develop commercially viable on-site energy products; the cost and timing of developing our on-site energy products; market acceptance of our on-site energy products; our reliance on our relationship with certain affiliates of General Electric (GEFCS); our ability to perform on our multi-generation product plan in a manner satisfactory to GEFCS; our ability to manufacture on-site energy products on a large-scale commercial basis; competitive factors, such as price competition and competition from other traditional and alternative energy companies; the cost and availability of components and parts for our on-site energy products; the ability to raise and provide the necessary capital to develop, manufacture and market our on-site energy products; our ability to establish relationships with third parties with respect to product development, manufacturing, distribution and servicing and the supply of key product components; our ability to protect our intellectual property; our ability to lower the cost of our on-site energy products and demonstrate their reliability; the cost of complying with current and future governmental regulations; the impact of deregulation and restructuring of the electric utility industry on demand for our on-site energy products; fluctuations in the trading price and volume of our common stock and other risks and uncertainties discussed, but are not limited to, those set forth under the caption “Factors Affecting Future Results” in our Annual Report on Form 10-K filed for the fiscal year ended December 31, 2004, filed with the Securities and Exchange Commission on March 15, 2005. These forward-looking statements speak only as of the date on which the statements were made and are not guarantees of future performance. Except as may be required by applicable law, we do not undertake or intend to update any forward-looking statements after the date of this Form 10-Q.

Overview

We design and develop on-site energy systems, based on proton exchange membrane fuel cell technology, for energy consumers worldwide. Our architecture-based technology platform, which includes proprietary proton exchange membrane (PEM) fuel cell and fuel processing technologies, from which multiple products are being offered or are under development. We are currently offering for commercial sale our GenCore^® product, a back-up power product for telecommunications, broadband, utility and industrial uninterruptible power supply (UPS) applications. We are also developing additional products, including a continuous power product, with optional combined heat and power capability for remote small commercial and remote residential applications; and an on-site hydrogen generation product for use in a variety of industrial gas applications.

We are a development stage enterprise in the beginning stages of field testing and marketing our initial commercial products to a limited number of customers, including telecom, utilities, government entities and our distribution partners. Our initial commercial product, the GenCore^™ 5T (see Product Development and Commercialization), is designed to provide direct-current (DC) backup power for telecommunications, broadband, utility and industrial uninterruptible power supply (UPS) applications.. The GenCore^™ 5T is fueled by hydrogen and does not require a fuel processor.

Our strategy for product sales, distribution and marketing relies on forming relationships with distributors and customers and entering into development and demonstration programs with electric utilities, government agencies and other energy providers. As such, we have formed distribution, marketing and technology development relationships with companies such as General Electric Company (GE), Honda, Vaillant, Tyco, Pemeas Gmbh (Pemeas), Engelhard Corporation and DTE Energy (see Strategic Relationships and Development Agreements). We are also engaging directly with customers as the market for our products is developing. Many of our initial sales of our GenCore^™ 5T product are contract specific arrangements containing multiple obligations, that may include a combination of fuel cell systems, continued service, maintenance and other support. While contract terms require payment upon delivery and installation of the fuel cell system and are not contingent on the achievement of specific milestones or other substantive performance, the multiple obligations within our contractual arrangements are not accounted for separately based on our limited commercial experience and available evidence of fair value. As a result, we defer recognition of product and service revenue and recognize revenue on a straight line basis over the stated contractual terms, as the continued service, maintenance and other support obligations expire, which are generally for periods of twelve to twenty-seven months (see Critical Accounting Policies and Estimates - Revenue Recognition).

As we gain commercial experience, including field experience relative to service and warranty based on the sales of our initial products, the fair values for the multiple elements within our future contracts may become determinable and we may, in future periods, recognize revenue upon delivery of the Unit or we may continue to defer recognition, based on application of appropriate guidance within EITF 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables”, or change in the manner we structure contractual agreements, including our agreements with distribution partners.

Our cash requirements depend on numerous factors, including completion of our product development activities, ability to commercialize our fuel cell systems, market acceptance of our systems and other factors. We expect to pursue the expansion of our operations through internal growth and strategic acquisitions. As of March 31, 2005, we had unrestricted cash and cash equivalents and marketable securities totaling $56.3 million and working capital of $54.2 million. Additionally, we have restricted cash in the amount of $4.3 million, which was escrowed to collateralize debt associated with the purchase of our facilities in 1999.

During the three months ended March 31, 2005, cash used by operating activities was $10.2 million consisting primarily of a net loss of $12.5 million offset, in part, by non-cash expenses in the amount of $2.9 million, including $847,000 for amortization and depreciation, $1.0 million for stock based compensation, $688,000 for amortization of intangible assets and $450,000 for equity losses in affiliates. Cash provided by investing activities for the three months ended March 31, 2005 was $17.0 million consisting of $17.6 million provided by marketable securities offset by $576,000 used to purchase property plant and equipment. Cash provided by financing activities was $182,000 consisting primarily of net proceeds from issuance of common stock for stock options exercised during the three months ended March 31, 2005.

We have financed our operations through March 31, 2005 primarily from the sale of equity, which has provided cash in the amount of $349.5 million. Since inception, net cash used in operating activities has been $272.5 million and cash used in investing activities has been $44.4 million, including our purchase of property, plant and equipment of $32.3 million, our investments in marketable securities in the amount of $30.8 million offset, in part, by net proceeds from acquisition of $29.5 million.

Product Development and Commercialization

We currently have one commercial product line, which we are continuing to enhance and broaden:

GenCore^®—Back-up Power for Telecommunication, Broadband, Utility and UPS Applications—We currently offer the GenCore product line, which is focused on providing backup, direct-current (DC) backup power products in a power range of 2-12 kilowatts for applications in the telecom, broadband, utility and industrial UPS market applications. Our GenCore products are fueled by hydrogen and do not require a fuel processor. In the fourth quarter of 2003, we began initial shipments of the GenCore 5T product, and have shipped 128 units through March 31, 2005. See “Strategic Relationships and Development Agreements” for additional information regarding product development and commercialization.

Additionally, we continue to advance the development of our other technology platforms:

GenSys^™—Remote Continuous Power for Light Commercial and Residential Applications—We plan to continue to develop GenSys into a platform that is expected to support a number of products, including systems fueled by liquefied petroleum gas (LPG) for remote applications and, eventually, grid-connected light commercial and residential applications fueled by LPG or natural gas.

In connection with the development of our GenSys platform, we are developing combined heat and power (CHP) fuel cell systems for light commercial and residential applications that provide supplemental heat as electricity is produced. The GenSys development effort also includes a joint development program with Vaillant GmbH of Germany, under which we are developing a product that combines our fuel cell system with Vaillant’s gas heating technology to provide heat, electricity and hot water for the European light commercial and residential markets.

GenSite^™—On-Site Hydrogen Generation—We have combined our proprietary fuel processor technology with available commercial components for gas compression, purification and storage to further develop GenSite, an on-site hydrogen gas generator. This product is expected to target certain applications now served by packaged hydrogen gas (cylinders or tube trailers) or electrolyzers. We presently have a prototype system in our research and product development facilities in Apeldoorn, Holland, and another system at our Latham, NY headquarters. In 2005, we expect to install and operate a number of GenSite systems, in application, at customer locations. During 2004, we shipped our first GenSite system and it was installed and operational during the quarter ended March 31, 2005.

Home Energy Station—We are also currently developing technology in support of the automotive fuel cell market under an agreement with Honda R&D Co Ltd. of Japan (Honda), a subsidiary of Honda Motor Co., Ltd., under which we are exclusively and jointly developing and testing a fuel cell system that provides electricity and heat to a home or business, while also providing hydrogen fuel for a fuel cell vehicle (the “Home Energy Station”). In October 2003, we successfully demonstrated a prototype Home Energy Station at Honda R&D Americas’ facility in Torrance, California. In March 2004, we signed an agreement with Honda for the second phase of our expected multi-phase product development effort. As in the first phase, Honda is funding work under this new agreement. In September 2004, under the second phase of our work with Honda, we successfully demonstrated a second-generation prototype of the Home Energy Station at our Latham NY headquarters. This system is refueling a prototype Honda FCX fuel cell vehicle that is undergoing winter testing in the Albany, New York region, as well as two FCX vehicles that Honda has leased to New York State. In 2005 we are continuing our collaboration with Honda and in February, 2005 we signed an agreement with Honda for the third phase of this multi-phase Home Energy Station product development effort.

GenDrive^™—Battery Replacement for Material Handling—The GenCore platform is expected to provide the basis for our development of the GenDrive product, a hydrogen-fueled battery-replacement module for material handling equipment. We continue to explore the potential for partnerships with end users of this product to develop the GenDrive further.

Strategic Relationships and Development Agreements

Since our inception, we have formed strategic relationships with suppliers of key components, developed distributor and customer relationships and have entered into development and demonstration programs with electric utilities, government agencies and other energy providers. Relationships have been established for sales and marketing related activity, as well as technology development. These relationships include distribution, marketing and technology arrangements with companies such as General Electric Company (GE), Honda, Vaillant, Tyco, Pemeas Gmbh (Pemeas), Engelhard Corporation and DTE Energy, and relationships with supply chain partners, including 3M, Dana, Toyo, Entegris, Parker and Arvin Meritor. Some of these relationships are described in greater detail below.

GE Entities: In February 1999, we entered into an agreement with GE MicroGen, Inc. to form GE Fuel Cell Systems, LLC (GEFCS), to exclusively market, sell, install and service our stationary PEM fuel cell systems on a global basis, with the exception of the states of Illinois, Indiana, Michigan and Ohio, in which DTE Energy Technologies, Inc. has exclusive distribution rights. GE MicroGen, Inc. is a wholly owned subsidiary of GE that operates within the GE Energy (formerly known as GE Power Systems) business. Under the terms of our distribution agreement with GEFCS, we serve as GEFCS’ exclusive supplier of PEM fuel cell systems and related components meeting the specifications set forth in the distribution agreement. We have a 40 percent ownership interest in GEFCS.

In August 2001, we amended our agreements with GE MicroGen, Inc. and GEFCS to expand GEFCS’ exclusive worldwide distribution rights to include all of our stationary PEM fuel cell systems. Under the amended agreements, we can sell systems directly to governmental and quasi-governmental entities and, under certain circumstances, to other customers.

In October 2003, we further amended our distribution agreement to provide for the ability to sell directly or negotiate nonexclusive distribution rights to third parties for our GenCore backup power product line and our GenSite hydrogen generation product line. In exchange we have agreed to pay a commission, based on sales price, to GEFCS at a rate and schedule prescribed in our amended agreement. The distribution agreement expires on December 31, 2014.

As a result of the October 2003 amendment to our distribution agreement with GEFCS, we have formed our own marketing and sales force to channel the GenCore and GenSite products to the market. In addition to direct sales to customers, we actively seek distribution partners within target markets for these particular products.

General Electric: In addition to the distribution agreement described above, we have entered into a separate agreement with GE relating to product development and we have agreed to source technical support services from GE, including engineering, testing, manufacturing and quality control services. Under the initial agreement, the Company is committed to purchase a minimum of $12.0 million of such services through September 2004. During 2005, the Company and GE extended this period through December 2007. Through March 31, 2005, we had purchased approximately $10.0 million of such services. Additionally, GE agreed to act as our agent in procuring certain equipment, parts and components and is providing training services to our employees regarding procurement activities pursuant to this agreement.

Honda: As described above, we have an agreement with Honda to exclusively and jointly develop and test the Home Energy Station, a fuel cell system that provides electricity and heat to a home or business, while also providing hydrogen fuel for a fuel cell vehicle.

Tyco: In September 2004, we completed an agreement with Tyco Electronics Power Systems, Inc., (Tyco) to market, promote and sell our GenCore^®5T fuel cell systems for telecommunication backup applications through its direct sales force, under both the Tyco Electronics and Plug Power brands. This agreement is complemented by the June 2004 nationwide service and installation agreement for GenCore between the Company and Tyco Electronics Installation Services Inc.

Vaillant: We have a development agreement with Vaillant GmbH (Vaillant), to develop a fuel cell heating appliance that combines our fuel cell system with Vaillant’s gas heating technology to provide heat, electricity and hot water for the European light commercial and residential markets. Under the agreement, we will sell fuel cell subsystems directly and exclusively to Vaillant and Vaillant will distribute Fuel Cell Heating Appliances throughout Europe on a non-exclusive basis. In exchange for the right to sell fuel cell subsystems directly and exclusively to Vaillant, we have agreed to pay GE MicroGen, Inc. a commission, based on a prescribed percentage of sales of fuel cell subsystems as defined in the agreement.

Pemeas: We have a joint development agreement with Pemeas (effective April 1, 2004, the fuel cell activity of Celanese AG and former Hoechst AG were combined to form a new company, Pemeas GmbH), to develop, on an exclusive basis, a high temperature membrane electrode unit for stationary fuel cell systems with net electrical output of 750 watts up to 25 kilowatts. Additionally, we have the option to work with Pemeas on a non-exclusive basis to develop a high-temperature membrane electrode unit for stationary fuel cell systems with net electrical output of less than 750 watts and greater than 25 kilowatts. Under the agreement, the Company and Pemeas will each fund their own development efforts.

Engelhard: We have a joint development agreement and a supply agreement with Engelhard Corporation for development and supply of advanced catalysts to increase the overall performance and efficiency of our fuel processor. Over the course of the joint development agreement we have contributed $10.0 million to fund Engelhard’s development efforts and in turn Engelhard has purchased $10.0 million of our common stock. As of September 30, 2004 all funding obligations related to development efforts had been met and the Company and Engelhard have been funding their own development efforts. Additionally, a supply agreement with Engelhard specifies the rights and obligations for Engelhard to supply products to us until 2013.

DTE Energy: We have a distribution agreement with DTE Energy Technologies, Inc. under which DTE can exclusively market, sell, install and service our stationary PEM fuel cell systems in the states of Michigan, Ohio, Illinois, and Indiana. Under an amendment to the agreement in February 2004, we can sell directly or negotiate nonexclusive distribution rights to third parties for our GenCore backup power product line, and our GenSite hydrogen generation product line. In exchange we have agreed to pay a commission, based on sales price, to GEFCS at a rate and schedule prescribed in our amended agreement. The distribution agreement expires on December 31, 2014.

Results of Operations

Comparison of the Three Months Ended March 31, 2005 and March 31, 2004.

Product and service revenue. Product and service revenue was $1.1 million for the three months ended March 31, 2005 compared to $1.4 million for the three months ended March 31, 2004. We defer recognition of product and service revenue at the time of delivery and recognize revenue as the continued service, maintenance and other support obligations expire (see Critical Accounting Policies and Estimates - Revenue Recognition). The costs associated with the product, service and other obligations are expensed as they are incurred.

Our initial sales of are contract specific arrangements containing multiple obligations, that may include a combination of fuel cell systems, continued service, maintenance and other support. While contract payment upon delivery and installation of the fuel cell system and are not contingent on the achievement of specific milestones or other substantive performance, the multiple obligations within our contractual arrangements are not accounted for separately based on our limited commercial experience and available evidence of fair value. As a result, we defer recognition of product and service revenue and recognize revenue on a straight-line basis as the continued service, maintenance and other support obligations expire, which are generally for periods of twelve to twenty-seven months.

During the three months ended March 31, 2005, we recognized product and service revenue of $1.1 million, $1.0 million of which was deferred at December 31, 2004, compared to $1.4 million during the same quarter last year, $1.3 million of which was deferred at December 31, 2003. We delivered a total of 16 fuel cell systems during the quarter ended March 31, 2005. The revenue associated with 10 of these systems is related to product and service arrangements and has been deferred while 6 fuel cell systems were delivered under a government contract and the associated revenue is included in research and development contract revenue. For the three months ended March 31, 2005, we deferred revenue in the amount of $140,000 for the 10 systems delivered under product and service arrangements, compared to $700,000 for the 24 fuel cell systems delivered during the same period in 2004.

At March 31, 2005, we had total deferred product and service revenue in the amount of $4.6 million of which we expect to recognize approximately $3.3 million through the remainder of 2005.

Research and development contract revenue. Research and development contract revenue increased to $2.2 million for the three months ended March 31, 2005 from $1.9 million during the same period last year. The increase is due to the addition of development agreements with the U.S. Department of Defense and increased activity under U.S. Department of Energy and New York State Energy Research and Development Authority research and development contracts. Research and development contract revenue primarily relates to cost reimbursement research and development contracts associated with the development of PEM fuel cell technology. We generally share in the cost of these programs with cost sharing percentages between 20% and 60%. Revenue from “time and material” contracts is recognized on the basis of hours utilized, plus other reimbursable contract costs incurred during the period. We expect to continue certain research and development contract work that is directly related to our current product development efforts.

Cost of product and service revenue. Cost of product and service revenue decreased to $708,000 for three months ended March 31, 2005 from $895,000 for three months ended March 31, 2004. Cost of product and service revenue includes the direct material cost incurred in the manufacture of the products we sell, as well as the labor and material costs incurred for product maintenance, replacement parts and service under our contractual obligations. These costs consist primarily of production materials and fees paid to outside suppliers for subcontracted components and services.

Cost of research and development contract revenue. Cost of research and development contract revenue increased to $2.9 million for three months ended March 31, 2005 from $2.6 million for three months ended March 31, 2004. The increase in these costs related to the additional development agreements described above under research and development contract revenue. Cost of research and development contract revenue includes costs associated with research and development contracts including: compensation and benefits for engineering and related support staff, fees paid to outside suppliers for subcontracted components and services, fees paid to consultants for services provided, materials and supplies used and other directly allocable general overhead costs allocated to specific research and development contracts.

Noncash research and development expense. Noncash research and development expense for the three months ended March 31, 2005, decreased to $372,000 from $474,000 during the same period last year. Noncash research and development expense represents the fair value of stock grants to employees, consultants and others in exchange for services provided. The decrease is primarily the result of the recovery of amortization associated with forfeited shares of restricted stock.

Other research and development expense. Other research and development expenses were $9.4 million for the three months ended March 31, 2005 compared to $9.3 million for the three months ended March 31, 2004. Research and development expense includes: materials to build development and prototype units, compensation and benefits for the engineering and related staff, expenses for contract engineers, fees paid to outside suppliers for subcontracted components and services, fees paid to consultants for services provided, materials and supplies consumed, facility related costs such as computer and network services and other general overhead costs. Our approach to the design of our next generation fuel cell system uses advanced modeling and system simulation techniques, which result in lower research and development costs because we build fewer systems for internal test and evaluation.

For the quarter ended March 31, 2005, other research and development expense also includes amortization in the amount of $688,000 related to the portion of the H Power purchase price which has been capitalized and recorded on our balance sheet under the caption “Intangible assets”. During the same period last year, other research and development expense included amortization of prepaid development costs in the amount of $358,000 under our joint development program with Engelhard and amortization in the amount of $688,000 related to the portion of the H Power purchase price which had been capitalized and recorded on our balance sheet under the caption “Intangible assets”.

Noncash general and administrative expense. Noncash general and administrative expenses for the three months ended March 31, 2005 decreased to $136,000 from $252,000 for the three months ended March 31, 2004. Noncash general and administrative expense represents the fair value of stock grants to employees, consultants and others in exchange for services provided. The decrease is primarily the result of the recovery of amortization associated with forfeited shares of restricted stock.

Other general and administrative expense. Other general and administrative expense increased to $2.0 million for three months ended March 31, 2005 from $1.7 million for three months ended March 31, 2004. Other general and administrative expense includes compensation, benefits and related costs in support of our general corporate functions including general management, finance and accounting, human resources, marketing, information technology and legal services.

Interest income. Interest income consisting of interest earned on our cash, cash equivalents and marketable securities decreased to $270,000 for the three months ended March 31, 2005, from $367,000 for the same period in 2004. The decrease was the result of lower cash balances offset by slightly higher yields on our investment portfolio.

Interest expense. Interest expense was $29,000 for the three months ended March 31, 2005, compared to $16,000 for the same period last year. Interest expense consists of interest on our long-term obligation related to the purchase of real estate and interest paid on capital lease obligations.

Equity in losses of affiliates. Equity in losses of affiliates decreased to $450,000 for the three months ended March 31, 2005 from $466,000 during the same period last year. Equity in losses of affiliates, which we account for under the equity method of accounting, is our proportionate share of loss of GE Fuel Cell Systems in the amount of $2,000 and the amortization of our original investments in the amount of $448,000.

Income taxes. We did not report a benefit for federal and state income taxes in the consolidated financial statements as the deferred tax asset generated from our net operating loss has been offset by a full valuation allowance because it is more likely than not that the tax benefits of the net operating loss carryforward will not be realized.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with generally accepted accounting principles and related disclosure requires management to make estimates and assumptions that affect:

•

the amounts reported for assets and liabilities;

•

the disclosure of contingent assets and liabilities at the date of the financial statements; and

•

the amounts reported for revenues and expenses during the reporting period.

Specifically, we must use estimates in determining the economic useful lives of assets, including identifiable intangibles, and various other recorded or disclosed amounts. Therefore, our financial statements and related disclosure are necessarily affected by these estimates. We evaluate these estimates on an ongoing basis, utilizing historical experience and other methods considered reasonable in the particular circumstances. Nevertheless, actual results may differ significantly from estimates. To the extent that actual outcomes differ from estimates, or additional facts and circumstances cause management to revise estimates, our financial position as reflected in its financial statements will be affected. Any effects on business, financial position or results of operations resulting from revisions to these estimates are recorded in the period in which the facts that give rise to the revision become known.

We believe that the following are our most critical accounting policies affected by the estimates and assumptions the Company must make in the preparation of its financial statements and related disclosure:

Revenue recognition: We are a development stage enterprise in the stages of performing field testing and marketing our initial commercial products to a limited number of customers, including telecom, utilities, government entities and our distribution partners. This initial product is a limited edition fuel cell system (System or Unit) that is intended to offer complementary, quality power while demonstrating the market value of fuel cells as a preferred form of alternative distributed power generation. Subsequent enhancements to our Systems are expected to expand the market opportunity for fuel cells by lowering the installed cost, decreasing operating and maintenance costs, increasing efficiency, improving reliability, and adding features such as grid independence and co-generation and UPS applications.

We apply the guidance within Staff Accounting Bulletin No. 104, “Revenue Recognition in Financial Statements” (SAB 104) to our initial sales contracts to determine when to properly recognize revenue. We defer recognition of product and service revenue at the time of delivery and recognize revenue as the continued service, maintenance and other support obligations expire. The costs associated with the product, service and other obligations are expensed as they are incurred.

Our initial sales of GenSys^™ and GenCore^™ 5T are contract specific arrangements containing multiple obligations, that may include a combination of fuel cell systems, continued service, maintenance and other support. While contract terms require payment upon delivery and installation of the fuel cell system and are not contingent on the achievement of specific milestones or other substantive performance, the multiple obligations within our contractual arrangements are not accounted for separately based on our limited commercial experience and available evidence of fair value. As a result, we defer recognition of product and service revenue and recognize revenue on a straight-line basis over the stated contractual terms, as the continued service, maintenance and other support obligations expire, which are generally for periods of twelve to twenty-seven months.

As we gain commercial experience, including field experience relative to service and warranty based on the sales of our initial products, the fair values for the multiple elements within our future contracts may become determinable and we may, in future periods, recognize revenue upon delivery of the product or we may continue to defer recognition, based on application of appropriate guidance within EITF 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables”, or changes in the manner we structure contractual agreements, including our agreements with distribution partners.

Valuation of long-lived assets: We assess the impairment of identifiable intangible, long-lived assets and goodwill, if any, whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important which could trigger an impairment review include, but are not limited to, the following:

•

significant underperformance relative to expected historical or projected future operating results;

•

significant changes in the manner of our use of the acquired assets or the strategy for our overall business;

•

significant negative industry or economic trends;

•

significant decline in our stock price for a sustained period; and

•

our market capitalization relative to net book value.

When we determine that the carrying value of intangible, long-lived assets and goodwill, if any, may not be recoverable based upon the existence of one or more of the above indicators of impairment, we would measure any impairment based upon the provisions of Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets” and SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, as appropriate. Any resulting impairment loss could have a material adverse impact on our financial condition and results of operations.

Accounting for income taxes: As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves the estimation of our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. Included in this assessment is the determination of the net operating loss carry forward that has resulted from our cumulative net operating loss since inception. These differences result in a net deferred tax asset. We must assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent that we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we must include an expense within the tax provision in the consolidated statement of operations.

Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. We have recorded a valuation allowance of $178.8 million as of December 31, 2004, due to uncertainties related to our ability to utilize the net deferred tax assets, primarily consisting of net operating losses and credits which may be carried forward, before they expire. In the event that actual results differ from these estimates or we adjust these estimates in future periods, we may need to adjust the recorded valuation allowance, which could materially impact our financial position and results of operations. At March 31, 2005, our net deferred tax assets have been offset in full by a valuation allowance. As a result, the net provision for income taxes is zero for the three months ended March 31, 2005.

Recent Accounting Pronouncements

In December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment.” SFAS No. 123R requires employee stock options and rights to purchase shares under stock participation plans to be accounted for under the fair value method, and eliminates the ability to account for these instruments under the intrinsic value method prescribed by APB Opinion No. 25, and allowed under the original provisions of SFAS No. 123. SFAS No. 123R requires the use of an option pricing model for estimating fair value, which is amortized to expense over the service periods. On April 14, 2005, the Securities and Exchange Commission (SEC) delayed the effective date of SFAS No. 123R from the first annual or interim fiscal period beginning after June 15, 2005, to the first quarter of the first fiscal year beginning after June 15, 2005. If the Company had applied the provisions of SFAS No. 123R to the financial statements for the period ending December 31, 2004, net loss would have been increased by approximately $7.5 million. SFAS No. 123R allows for either prospective recognition of compensation expense or retrospective recognition, which may be back to the original issuance of SFAS No. 123 or in the year of adoption. We are currently evaluating these transition methods.

Liquidity and Capital Resources

Our cash requirements depend on numerous factors, including completion of our product development activities, ability to commercialize our on-site energy products, market acceptance of our systems and other factors. We expect to devote substantial capital resources to continue our development programs directed at commercializing our on-site energy products for worldwide use, hiring and training our production staff, developing and expand our manufacturing capacity, continue expanding our production and our research and development activities. We expect to pursue the expansion of our operations through internal growth and strategic acquisitions and expect that such activities will be funded from existing cash and cash equivalents, issuance of additional equity or debt securities or additional borrowings subject to market and other conditions. The failure to raise the funds necessary to finance our future cash requirements or consummate future acquisitions could adversely affect our ability to pursue our strategy and could negatively affect our operations in future periods. We anticipate incurring substantial additional losses over at least the next several years and believe that our current cash, cash equivalents and marketable securities balances will provide sufficient capital to fund operations for at least the next twelve months.

Several key indicators of liquidity are summarized in the following table:


	Three months ended March 31, 2005		Three months ended March 31, 2004		Year ended December 31, 2004
Cash, cash equivalents and marketable securities at end of period	$	56,341,000	$	93,381,000	$	66,849,000
Working capital at end of period		54,159,000		90,727,000		64,073,000
Net Loss		12,535,000		11,952,000		46,739,000
Net cash used in operating activities		10,168,000		8,645,000		33,896,000
Purchase of property plant and equipment		576,000		399,000		1,617,000

During the three months ended March 31, 2005, the Company used $10.2 million of cash for operating activities consisting primarily of a net loss of $12.5 million offset, in part, by non-cash expenses in the amount of $3.1 million, including $847,000 for amortization and depreciation, $960,000 for stock based compensation, $688,000 for amortization of intangible assets and $450,000 for equity losses in affiliates. Changes in operating assets and liabilities consumed $578,000 in cash for operating activities.

During the three months ended March 31, 2005, net cash provided by investing activities was $17.0 million consisting of $17.6 million provided by marketable securities offset by $576,000 used to purchase property plant and equipment. Cash provided by financing activities was $182,000 consisting primarily of net proceeds from issuance of common stock for stock options exercised during the three months ended March 31, 2005.

Since inception, net cash used in operating activities has been $272.5 million and cash used in investing activities has been $44.4 million, including our purchase of property, plant and equipment in the amount of $32.3 million, our investments in marketable securities in the amount of $30.8 million and offset, in part, by our net proceeds from acquisition of $29.5 million.

From inception through March 31, 2005, our stockholders in the aggregate have contributed $349.5 million in cash, including $93.0 million in net proceeds from our initial public offering and $106.6 million in net proceeds from our subsequent public offerings. Additionally, in the first quarter of 2003, we issued approximately 9.0 million shares of common stock in connection with a merger transaction with H Power Corp. which increased our consolidated cash, cash equivalents and marketable securities by approximately $29.5 million, after payment of certain integration costs and expenses associated with the consummation of the merger of approximately $7.1 million.

From inception through March 31, 2005, we have incurred losses of $367.9 million and expect to continue to incur losses as we continue our product development and commercialization programs and prepare for the commencement of manufacturing operations. We expect that losses will fluctuate from quarter to quarter and that such fluctuations may be substantial as a result of, among other factors, the number of systems we produce and install, the cost and sales price of such systems, the related service requirements necessary to maintain those systems and potential design changes required as a result of field testing.

ITEM 3—QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We invest our excess cash in government, government backed and interest-bearing investment-grade securities that we generally hold for the duration of the term of the respective instrument. We do not utilize derivative financial instruments, derivative commodity instruments or other market risk sensitive instruments, positions or transactions in any material fashion. Accordingly, we believe that, while the investment-grade securities we hold are subject to changes in the financial standing of the issuer of such securities, we are not subject to any material risks arising from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices or other market changes that affect market risk sensitive instruments.

ITEM 4—CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures

As required by Rule 13a-15(b) under the Securities and Exchange Act of 1934, our management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation as of the end of the period covered by this report, of the effectiveness of the Company’s disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report.

(b) Changes in internal controls over financial reporting

As required by Rule 13a-15(d) under the Securities Exchange Act of 1934, our management, including the Chief Executive Officer and Chief Financial Officer, also conducted an evaluation of the Company’s internal control over financial reporting to determine whether any changes occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. Based on that evaluation, there has been no such change during the period covered by this report.

PART II—OTHER INFORMATION

ITEM 1—LEGAL PROCEEDINGS

ITEM 2—UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

During the three months ended March 31, 2005, we issued 34,890 shares of our common stock in connection with matching contributions under our 401(k) Savings & Retirement Plan. The issuance of these shares is exempt from registration under Section 3(a)(2) of the Securities Act of 1933, as amended.

ITEM 6—EXHIBITS

A) Exhibits.


3.1		Amended and Restated Certificate of Incorporation of Plug Power Inc. (1)

3.2		Amended and Restated By-laws of Plug Power Inc. (1)

3.3		Certificate of Amendment to Amended and Restated Certificate of Incorporation of Plug Power Inc. (2)

4.1		Specimen certificate for shares of common stock, $.01 par value, of Plug Power. (3)

31.1 and 31.2 Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (4)

32.1 and 32.2 Certifications pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (5)

(1)	Incorporated by reference to the Company’s Form 10-K for the period ending December 31, 1999.

(2)	Incorporated by reference to the Company’s Form 10-K for the period ending December 31, 2000.

(3)	Incorporated by reference to the Company’s Registration Statement on Form S-1 (File Number 333-86089).

(4)	Filed herewith.

(5)	Furnished herewith.

Signatures

Pursuant to requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	PLUG POWER INC.

Date: May 9, 2005	by:	/s/ Roger B. Saillant
		Roger B. Saillant Chief Executive Officer

	by:	/s/ David A. Neumann
		David A. Neumann Chief Financial Officer

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