Greetings, everyone, and welcome to the Plug Power First Quarter Earnings Call. As a reminder please note, today's conference is being recorded Tuesday, May 9, 2023. It is now with pleasure that I turn today's conference over to Teal Hoyos, Senior Director of Marketing and Communications. Please go ahead.

Thank you. Welcome to the 2023 first quarter earnings call. This call will include forward-looking statements. These forward-looking statements contain projections of future results of operations or our financial position or other forward-looking information. 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 investors. However, investors are cautioned not to unduly rely on forward-looking statements, and such statements should not be read or understood as a guarantee of future performance or results. Such statements are based upon the current expectations, estimates, forecasts, and projections as well as the current beliefs and assumptions of management and are subject to significant risks and uncertainties that could cause actual results or performance to 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 in our annual report on Form 10-K for the fiscal year ending December 31, 2022, quarterly reports on Form 10-Q and other reports we file from time to time with the SEC. These forward-looking statements speak only as of the date which the statements are made, and we do not undertake or intend to update any forward-looking statements after this call or as a result of new information. At this point, I would like to turn the call over to Plug's CEO, Andy Marsh.

Good morning. Thank you, everyone, for joining the call, and thank you, Teal. Before I begin the conference call, I want to talk about two items. One is that we had a filing this morning where we made a mistake with the date. It certainly got us excited here. We put 2024 instead of 2023. So if you're reacting to a Plug change, it is guidance for 2023 from $1.4 billion as our expected results we have. So sorry for any confusion that may have caused. The second, I really would like to share a video. Participants on the phone, you'll hear kind of a brief three minutes of 30-second periods of silence, while those on the webcast can sit back and enjoy the video. If you're on the phone, I suggest you click into the webcast. It's really worth watching. So if you miss it, it will be included in our archives for later viewing. So Teal, let it roll. Thank you. I hope you enjoyed the video. Really, it showcases our Georgia plant, and you can find more detailed information on the status in the investor letter. Really to summarize, our plant is already producing gaseous hydrogen for our customers, and we expect to achieve full production by the end of June. Although we always strive for greater speed, it's really worth noting we accomplished what we've accomplished since issuing full notice to proceed under our EPC contract, full production in just 48 weeks. This is a remarkable feat, considering that conventional gas companies usually estimate four years for a project of this scale. Additionally, by the end of June, our Georgia plant will be the largest green hydrogen play in the world that utilizes electrolyzers. That's a significant achievement. We plan to commission more plants in Texas, New York, and Louisiana this year. This year, our focus is really to execute. Our primary goal is to achieve revenue of $1.4 billion, and that's in 2023, which is supported by several activities, including learning to scale for 5-megawatt electrolyzer systems in partnership with our fabricators, and scaling our stationary products to facilitate 20 megawatts in shipments. One of the real competitive advantages is the infrastructure we've established in Rochester and Vista, which enables us to support our business growth. Our customers really recognize our ability to deliver our promises, thanks to the tools and facilities we possess. Our ability to construct green hydrogen plants is evident in Georgia, and we plan to further demonstrate this in Texas and New York, which will eliminate any doubts about our capabilities. I'm going to be in Georgia today, and I'm excited. These plants have garnered interest from both equity and debt investors. Moreover, Plug has a range of non-dilutive solutions that can eliminate the necessity for future equity investments at the present level based on the current business plan. And look, this year, we remain focused on government policies. This is an energy company, and energy and government policy go hand in hand, including the IRA and the European Renewable Energy Directive. Although these policies have been helpful, Plug has the opportunity to shape their development further. We have built this chart to show the lower and expected case for Plug in 2023. In the expected case, Plug will achieve $1.4 billion in revenue and $140 million in gross margin dollars. There are really just a couple of key ingredients to meeting that goal. It's shipping our 275-megawatt electrolyzer systems, which we have orders for, as we learn to build them more efficiently in coordination with our three fabricators around the world. We're close to closing out about 500 megawatts of a large electrolyzer plant system order, and there's many more behind that. In those opportunities, we recognize revenue on an ongoing basis. Selling 60 liquefiers in the next three months. I'm sure Sanjay will be happy when the Q&A comes around to talk about that. I also should add, we have opportunities beyond those listed above to achieve $1.4 billion. If all of these items do not come to pass, revenue would be about $1.2 billion and gross margin to be approximately $50 million, still an 80% increase in revenue for the year. Finally, I'd like to highlight, this is really important, the application business, as you look at that slide, has very little variability since it's more established. During the early years of our application business, we did experience some challenges of predictability. In some years, we exceeded and in others, we missed our projections. The methodology we just shared gives us a very high level of confidence in the range of outcomes over the next seven months. Be clear, this is really important because it sometimes gets lost in the chatter. Plug is leading the way in terms of building actual products, real things every day, and constructing plants. No other company is doing what we're doing in the field. Our Georgia plant is exceptional, and we're excited to showcase it to analysts in the coming months. The feedback we have received from our customers has been overwhelmingly positive. When it comes to the application business, we have a remarkably stable business model compared to other companies in the fuel cell industry. This is due to our focus on pedestal customers. Lastly, our range of energy products is unparalleled in the industry, and we are rapidly learning how to scale more efficiently than any of our competitors. But more importantly, our customers really like our products. Finally, I don't want to shy away from the facts. Once again, no one is building real products and building plants like Plug. It really separates us. Paul, Sanjay, and I are now available for your questions.

Thank you. And our first question comes from the line of Andrew Percoco of Morgan Stanley. Please proceed with your question.

Great. Thanks so much for taking my question here. So just first, I want to ask a question around the IRA and some of the treasury interpretations around hourly matching and deliverability, and additionality. What might that mean for some of your first few plants that you're bringing online? Or do you still think you'll qualify for the whole $3 per kilogram? And what might that mean for your 2025 and 2028 green hydrogen ecosystem targets?

So I'll go ahead and take a step back further than that. I've spent a lot of time, especially in the last two months in D.C., talking to folks in the administration. And remember, the primary purpose of the IRA is jobs, climate, and national security. That really is driving the thinking of the folks in the administration. From my discussions, I believe that when you look at the European renewable energy directive, that certainly has had a great deal of influence on those in D.C. If you interpret that, you can see it's very favorable to the approach Plug takes in support. The way I look at it, I'll give you two examples where I think that resonates with administrators. In my house in Saratoga Springs, I buy power from Vermont Power. Vermont Power, every time I buy electricity, is generating more renewable energy. It doesn't matter that the electrons that come through my house come from NYSERDA or national grid. That's really what's going on. Fundamentally, Plug supports generating more renewables, Plug supports generating electrolyzers. I believe from my discussions, that's in line ultimately with what the administration will do.

Great. That's some helpful context. And maybe just switching over to the OpEx trends in the quarter. I think, Paul, you had mentioned $125 million of OpEx per quarter is the right run rate for 2023. You came in a little bit above that in the first quarter. How should we think about that trending through the rest of the year? And do you still feel comfortable with your operating income guidance for 2023?

Yes. So I think what we have been talking about was like in that $125 million, $130 million range. But the biggest delta in the quarter had to do with our acquisitions. They continue to do better than we expected. And as you can see, we had to accrue more of consideration in terms of the earn-out structures that we set up. Should they be successful, we would only pay when and if that happens. So that's a high-class problem, and it was the primary delta for the quarter. But I think in the balance of the year, if you look at it, $125 million to $130 million is the right run rate.

Great, thank you for that.

Thank you.

Thank you. One moment please for the next question. Our next question comes from the line of James West of Evercore ISI.

Good morning, James.

Hey, good morning, how are you doing?

Okay.

So Andy, I wanted to talk about hydrogen hubs for a minute. Given that we're really close to the commission that's going to buy the DOE or make recommendations to the DOE on what's been submitted so far and the DOE should start allocating capital. I believe at some point in the fourth -late third or fourth quarter, and there'll be a big build-out, and we've got, of course, applications from Texas, California, from Los Angeles and then obviously, the Northeast, as you know as well. What role does Plug play in that process? I know we have to establish production of green hydrogen and end market for hydrogen. I'd love to hear your thoughts on that.

So James, I need to be cautious because I'm under NDAs regarding hydrogen. Plug has been involved at various levels with all the sites you mentioned. In particular, our name has been publicly associated with the New York hub and West Virginia, where Senator Manchin is involved. I can tell you that we are engaged in many hubs concerning the expansion of our hydrogen plants and leveraging them. Our products, especially our stationary solutions for peaker plants, are part of numerous hubs. Like you, I expect some funding to begin flowing around November and December. However, I don't anticipate significant funding ramping up until late 2025 or early 2026. My government affairs colleague here is in agreement.

Understood. Okay. Good. As long as you’ll be involved there. I have a follow-up not related to the hubs part. The startup in Georgia was pushed back, but now it’s going extremely well. What key learnings have you gained from that startup that will help make the launches of the additional facilities more efficient and keep the timeline on track?

We probably have 100 learnings, James. I think the most important one, and you see that it's going on in Texas. In Texas, we've been able to sign an EPC contract where the EPC contractor won't sign up ahead of time for praise and performance. That’s I think a statement that what people have seen you know you can repeat. I think that when we look at scaling, this plant itself, we’ll expand it to 30 tons. I don’t think we’ll be doing too much. It will be less than 50 tons per day just from the costs; it kind of follows a typical cost curve that going from 15 tons to 30 tons probably only increases your construction cost by 40% and your overall cost by 40%. So I think we're much more focused on plants like Texas and New York that are large. There could be some smaller plants like Golan where the infrastructure is much simpler. But I think that's really one of the key learnings we've had. But I probably could go on and on, but that's really the heart, I think, of what we found important. Sanjay, do you want to add anything?

No, I agree with that. James, that's really it. I think we understood that scale has a tremendous benefit. And all the components you got to manage and think through it, right? And the learnings from Georgia, as Andy said, is now allowing us to really go into a more predictable time and material basis.

Okay, got it. Thanks Sanjay, thanks Andy.

Our next question comes from the line of Manav Gupta of UBS.

Guys, I have two questions and they're kind of related. So I'm going to ask them right upfront.

Okay, good morning.

Good morning, sir. So your press release states something very interesting. It says that you are in the final stages of negotiating large-scale project opportunities in U.S., Europe, and Asia Pacific, representing potential backlogs of 1 gigawatt. So if we can get some more details on that? And second is on March announcement, you won a contract to build a 100-megawatt electrolyzer with Uniper. As I understand, this was a competitive bidding process and you were selected versus your competitors. It kind of indicates you have a very good product out there. So if you could talk a little bit about the March 7 announcement with Uniper.

Yes. Again, thank you for that question. First off, when we talk about this over a gigawatt booking opportunity on the electrolyzer side of the house here in the near term, we're looking at a 500-plus megawatt opportunity in Asia Pacific. We're looking at a 500-plus megawatt opportunity here in North America. We're looking at another 100 megawatt opportunity in Europe. So please stay tuned. Obviously, in some cases, we're in the contract negotiation. In some cases, we're actually having a lot of discussions about it. We certainly plan to close on one, two, or all three of them here over the course of the next 90 days. And that's really what we're referring to when we talk about that gigawatt plus of bookings outlook in the near term in our electrolyzer business.

Any details on the Uniper contract?

Go ahead, Sanjay.

Yes. Again, I think one of the key things.

Let me start. One of the key items Plug is really focused on is customers, not competitors. When people look at Plug, they see that we know how to scale, engage with customers, and execute projects. This distinguishes us from our competitors. We have been showcasing our Georgia plant to many customers, which gives us a significant advantage over others. When you visit our factory in Rochester, you can see people making electrolyzer stacks and MEAs, something you can't find at this scale elsewhere. That's why we win contracts. Our attention is on the vast market and what we can provide and offer. Right now, we are not overly concerned about competition; our focus is on ourselves and our customers.

Thank you, guys.

Okay, thank you.

And our next question comes from the line of Greg Lewis of BTIG. Please proceed with your question.

Good morning, Greg.

Yes, thank you. Good morning, and I appreciate you bringing me in. Andy, you recently announced the joint venture in Korea with SK set to start in 2025. I was hoping you could provide some details about the capital expenditure associated with that. Additionally, will there be more projects arising from this initial joint venture?

Sure. Greg, we've been working with SK now for over two years and the JV was finalized last year at this time with the final IP agreement done on December 31 of 2022. We're focused on our stationary products. In the investor letter, I highlight the fact that there will be a good deal of activity for the stationary products for areas where the grid doesn't exist today. In Korea, because of the high electrical cost, our plans with SK, starting in '25, '26, is to build 400 megawatts of stationary products and then every year to 2040, 200 megawatts. That in itself, this factory, which between the both of us will probably be in the $150 million type range, $150 million to $200 million, which will be jointly split is really just the beginning of the deployment of the JV. We're already doing with the JV. We're shipping cryogenic trailers this year from Plug. We're shipping ProGen modules for use in buses in Korea, which we think ramps to over 1,000 units shortly. We're engaged in electrolyzer projects, and our first electrolyzer projects are being shipped. So on a wide range of basis, this is going to be a very, very powerful JV. Take a little bit of time, but we're together really accelerating. I think that if you went to the event, look, I was in Australia working on deals and our Chairman was nice enough to go for me, but our Chairman was with the President of South Korea. I think that says a lot about the relationship.

Okay. Great. I wanted to discuss the green hydrogen network. Last week at the Advanced Clean Transportation Conference, it was evident that California is expected to be the center of hydrogen demand in the U.S. for the near future. There appears to be significant investment in that area, with many hydrogen vehicles planned. Considering the network and the importance of green electricity or renewable power for this service, should we be contemplating additional hydrogen production facilities in California, given the rising demand there? Or will we primarily be transporting products to that region?

I'm going to let Sanjay answer that, but I'm going to make one comment. It should not be overlooked Greg. The demand for hydrogen itself in applications like creating e-fuels like mixing with natural gas in the pipeline, with industrial applications like ammonia, probably will be nationwide and probably the ramp will be much larger than California. That being said, I'll let Sanjay talk about our California plan as well as other activities we have going on.

I mean, Greg, you're spot on, right? That is going to be where a lot of demand is going to come for some of the mobility applications and things like that. So this is how we're looking at it. One, we already do have a location that we have identified that we're going through all the permitting process going through PG&E, going through Calia SO, to move that project. One of the dynamics as you think about California is, while it's a demand center, you also have a very high price of electricity, and you also have a situation where the permitting actually takes longer than many other states. So that's a bit of a dichotomy that you've got to deal with when you think about how many plants and how you really build in California. But having said that, we actually are looking at multiple projects. Now I mean, multiple, okay, in neighboring states to be able to support California. We're even looking at some of the opportunities that eventually might even end up making it all the way to California, even in the West Texas area because we've done that before. It really comes down to what is the lowest possible renewable electron we can get? What is that peaker cost of hydrogen? And does it make sense to build a plant even look at delivery distance and ends up making it a lower cost as it gets into the California market, right? So neighboring states, even our projects in California and other locations is really how we plan to actually support as you rightfully pointed out, the meaningful demand that we see coming from the State of California.

Okay, thanks. Super helpful Andy. Sanjay, thanks for the time.

Thanks, Greg.

And our next question comes from the line of Bill Peterson of JPMorgan. Please proceed with your question.

Good morning, Bill.

Hi, good morning, guys. Good morning, Andy and team, nice to speak with you on. I wanted to go to the guidance for the year, just to make sure I understand. I think you said it was largely Energy Solutions. But in the last quarter, you talked about 55% kind of mature business. I think 30%-plus electrolyzer, $100 million stationery. I think the rest you call it fuel cryo and so forth with that 15%, which I think is around $200 million. So what is the difference? Where does it come in at $1.2 billion and where does it come in at $1.4 billion? Is it electrolyzers primarily or fuel? If you could help us understand kind of what's changed in the guidance.

So Bill, I want to be clear. Our predictive ability hasn't been perfect. We've spent a lot of time since last quarter ensuring that we communicate to the market where the risks are in the $1.4 billion. If you look at the chart I've prepared with the team, there are four key items. First, we're shipping 27, 5-megawatt electrolyzers this year, which is around $100 million. We have the orders, and we've focused on execution. Another significant aspect is related to our electrolyzer plants, which could contribute around $30 million in revenue. So, combining those two, we're looking at 30 to 50 million, which accounts for most of the difference. Sanjay has numerous liquefiers he’s preparing to ship, and those are in advanced negotiations that will help us reach the 770. Additionally, I've highlighted other potential opportunities in the works that will also play a role. In our application business, the traditional segment shows a deviation of about $20 million from expectations and this is mainly due to the timing of some projects, determining if they will occur in the fourth quarter or the first quarter. I created this chart to help investors see how all the figures align. I hope that clarifies things, Bill.

Yes, sorry about that. You mentioned possibly raising additional financing and talked about the DOE loans and ABL, including more expected in the second half of the year. What is the preferred method for raising this capital, assuming you aim for the least dilutive options, as you look towards the second half of the year or into next year?

I'm going to take a step back. I'm going to hand it to the expert, Paul, and Sanjay here. We also may have people invest in the plants themselves, Bill. We have lots of people who want to take a share, for example, in Georgia. Go ahead, Paul.

Yes. And I think you touched on it. I mean, obviously, first and foremost, it's non-dilutive. Second is cost of capital, third is flexible capital. But again, as Andy said, there's a lot of parties that are interested. When you look at the breadth of what we're doing and the pace and ambition we have to grow and invest in scale, it will probably be a combination of solutions as we continue to move forward. The good news is we have an incredibly strong balance sheet that's basically unlevered and we've got this portfolio of plants unfolding that are a profitable portfolio to leverage up and recirculate that capital. It puts us in a great position of optionality, and that's when Andy referred to, we're working toward the second half you're going to hear more and see more as we work through that in the next few months to come.

Okay, thank you.

Thanks, Bill.

Thank you. Our next question comes from the line of Alex Kania of Wolfe Research. Please proceed with your question.

Great, thanks. Good morning.

Good morning, Alex.

Good morning. I'd like to revisit the guidance regarding the IRA and what it implies. Do you think there is any pent-up demand connected to this guidance in terms of matching or additionality? As you've mentioned the incremental opportunities for the next 90 days, I am curious how much of that relates to gaining clarity on the IRA rules. Furthermore, could you anticipate a rise in announcements once we have that certainty?

So Alex, I think clarity probably comes August or September, just to kind of frame it. And any time you have uncertainty, you have folks waiting. If the policy is defined very similarly to the European directive, I think they'll be up for discussion. I think that will be important because it will create more and more jobs and allow the United States to scale and allow companies to export. I think that will be the outcome. If they're very, very restrictive, I still think there will be more activity, but I think a lot of the focus for many companies will be more European-focused than U.S.-focused. So I think if the regulations are too tight, quite honestly, IRA would defeat its purpose. I don't think that's going to be the outcome. I know a good deal. I have been fortunate enough to know people in D.C. People are concerned about jobs. People are concerned about the economy. People are concerned about the climate. There's concern about America growing this industry and not handing it over to the Chinese, which quite honestly, is a big hot button. I think when the regulation comes in, everybody who's sitting here at the table with me is going to be quite happy.

Great. Thanks. And then maybe just thinking about margins for the balance of the year, I guess. Certainly, gas prices have come down incrementally even since the previous earnings report. Is that kind of a decent incremental tailwind for numbers as kind of a kind of upside? Or have you seen any kind of offsets to maybe the momentum that we've seen on the gas side?

I'm going to let Sanjay take that one.

Yes, Alex, you're right. I mean, I think, look, there is a quarter lag, as we've always said, right? So you will start to see that benefit as we go into Q2, Q3 and Q4 this year. There is going to be some incremental benefit. And obviously, we're taking a lot of time to ensure that the gas price being used by our suppliers actually matches that with how we're looking at it as well, right? So the short answer to your question is yes, that's an incremental benefit.

Thanks, Alex.

And our next question comes from the line of Ameet Thakkar of BMO Capital Markets. Please proceed with your question.

Good morning, Ameet. Good morning.

Good morning. Can you hear me?

Yes, we can.

Okay. Great. Just real quick, I just wanted to kind of level set on CapEx since you will be bringing on a lot more production online. I think you guys had said about $1 billion for the year. It looks like the first quarter was a little bit less than that from a ratable standpoint. I just wanted to make sure that $1 billion number was still the right number to think about for CapEx for the year?

Yes, that's our target. I think the good news is the big manufacturing plants are pretty close to done in terms of the spend. So the balance of it is predominantly, if not all, around the green hydrogen platforms. So the answer is yes, that's our target and continue to invest to advance that agenda.

Okay, great. Andy mentioned earlier that the significant funding from the DOE program won't begin until 2025 or 2026. Should we consider the other options you are exploring, such as ABLs or selling down equity in the individual plants, as a temporary solution until we reach that point? Or was that something you always had in mind?

Yes. I don't think I should comment further. I don't see the hydrogen hubs as being linked to our plant development; they are distinct activities. Our goal is to obtain as much hydrogen as possible, quickly and sustainably. We are looking to attract investors from sectors like big oil wells, which is relevant to our model. We plan to grow significantly, collaborating with partners while also pursuing independent projects. We aim to secure the most favorable financing arrangements available. However, there is no direct connection between the hubs and our financing options. Paul, do you want to add anything?

Just to clarify, there's multiple things going on at the same time, right? So we're working on the hub conversation processes with industry partners as well as the DOE. But apart from that and separate from that and specific to Plug, we're also working a conversation around a specific DOE loan that could very well fund this year. We talk about all of our capital options in the past that we're working. And you mentioned ABL and the DOE as two of them. There's multiple different capital sources. With the strength of our balance sheet and the portfolio we're building, we've got lots of parties that are interested that will be this year activities, not '25, '26. Just want to make sure that's truly clear.

Understood. Thank you so much.

Thanks, Ameet.

Thank you. Our next question comes from the line of Eric Stine of Craig Hallum. Please proceed with your question.

Good morning, Eric. Eric? Hello?

Mr. Stine, your line is open. Please verify your mute function, lift your handset, please. Mr. Stine, your line is open. Please verify your mute function, lift your handset. We will proceed with the question-and-answer session. Our next question comes from the line of Colin Rusch of Oppenheimer. Please proceed with your question.

Good morning, Colin.

Hey, Andy. As you guys are working through the potential ABL finance providers, can you talk a little bit about what sort of feedback you're getting on the operational metrics you need to meet and the duration you need to run these facilities before folks will close on one of these deals?

Yes. The good news is scale matters. When you look at how big our balance sheet is, it affords us that opportunity to leverage that up without meeting necessarily traditional metrics. Having said that, as we've publicly talked about, given the path that we're on, the trajectory we're on, we're strongly very confident that early next year, we're moving into positive operating cash flows, given the growth in margin trajectory. So we haven't had a lot of constraints put on us in terms of those traditional metrics because we have such a big balance sheet and such a big green hydrogen portfolio. Step back. I think the real key for us is to bridge that, leverage it into that next year, and then move into the operating cash flow, that opens up, as you know, significantly more institutional opportunities as we move. So far, so good and lots of opportunities without worrying too much about that in the short term.

Okay. Okay. And then just from a working capital perspective, as you guys ramp up manufacturing, I just want to get a sense of what the working capital needs are going to be and how much finished goods are in that inventory number that you posted this quarter.

Yes. As we've mentioned publicly, we have been rapidly increasing our electrolyzer and stationary product platform. The changes this quarter were specifically related to that. We noted that we will be doubling the production of our electrolyzer program in the second quarter compared to the first quarter. We are beginning to ship our first large-scale stationary products this quarter. Therefore, we expect that to stabilize. Looking ahead for the rest of the year, with the leverage we anticipate, we actually expect it to decrease. Overall, we do not expect to be flat year-over-year; rather, we anticipate a slight decline in working capital.

That's incredibly helpful. Thanks, guys.

Thank you. Our next question comes from the line of Chris Dendrinos of RBC Capital Markets. Please proceed with your question.

Good morning, everyone. Paul, you just mentioned the potential for positive free cash flow starting maybe early next year, and I understand you have a goal for operational breakeven later this year, possibly in the fourth quarter. Can you discuss the factors that will help you reach that point compared to your current situation? I'm noting that some of the margins, particularly in the PPA area, seemed weak this quarter. What will enable you to move from your current state to operational breakeven by the end of the year, followed by positive free cash flow next year?

There are several factors to consider. First and foremost, we generate a positive margin on equipment. For example, in Q1, every additional dollar of equipment sold contributes positively. Most of the growth, nearly 90%, is driven by equipment sales. This, along with increasing the efficiency of our plants and investing in new products, will enhance our margin profile. For the rest of the year, we expect around $1 billion out of $1.2 billion to come from product and equipment sales. Historically, our scaling margin has been in the 25% to 30% range, leading to a significant increase in margin and profitability. The next major factor is fuel. We've introduced green hydrogen plants, reduced natural gas usage, and collaborated with partners on distribution networks to enhance efficiency. We aim to reach a breakeven run rate on fuel by the end of the year, with plans to shift rapidly into a more favorable position next year. These two elements are our primary drivers. Additionally, we're making substantial improvements in service and reliability, though as we grow, service will represent a smaller portion of our operations. Going forward, the focus will remain predominantly on product and fuel, particularly product, for the remainder of the year.

Got it. And I guess maybe as my follow-up here…

Paul, maybe you should mention PPA is down just because of the warrant charges.

Yes, we have a lot of non-cash charges. And so that's up year-over-year. It was $2 million or so in Q1 of '22 and was $14 million this year in Q1. So that's a non-cash charge. It particularly affects PPA and fuel in terms of the association with the customer associated with it. And then on the whole, just so everybody has some context, we run at about $60 million to $70 million a quarter of non-cash charges holistically. That's why I feel I'm incredibly excited and confident about the growth, the margin leverage back with that non-cash run rate that gives me confidence to get to those numbers as we move on into next year.

Got it. Okay. Thank you. And then I guess just as my follow-up here, reading the front page of the shareholder letter here, it looks like you maybe added a qualified on the 200 TPD of build-out to maybe include under construction. So can you maybe talk about, A, I guess, is that true? Are you kind of delaying that a little bit? And then what are the drivers? I think you mentioned some ABL loan, the DOE loan coming in later this year. There's some treasury clarity coming, the hub announcements earlier this year. So is that a function of just timing? Or are you maybe slowing things down just to see how these announcements coming that might impact your plans?

So Chris, we are not changing anything at all. In fact, we aimed to provide more detailed insights based on our experiences in Georgia regarding the duration from construction commissioning to full production. We have no changes in our plans, and we’re not waiting for any specific events to continue progressing towards the 200 tons goal. Our intention was simply to offer you more clarity about what we learned from Georgia concerning construction, commissioning, and full production. That’s the only adjustment we made.

Got it. Okay, thank you.

Thank you. Our next question comes from the line of Kashy Harrison of Piper Sandler. Please proceed with your question.

Good morning, everybody. Thanks for taking the questions.

Good morning, Kashy.

Good morning, Andy. So I want to go back to the multiple financing options. Can you give us a sense of what milestones, if any, need to be met from a project perspective before you can get financing? And then should we be thinking about a transaction as a 2023 or 2024 catalyst?

Want to go for it, Sanjay.

Sure, I can address the project side related to the hydrogen plant. As Paul mentioned, we are looking at our loan guarantee program and our asset-based lending opportunities as part of project-level financing. Specifically, once our plant has been operational for about 12 months, we anticipate establishing a stable cash flow that we can present to an underwriter. This will enable us to explore the debt market and determine our appropriate debt service coverage ratio. Additionally, with these plants becoming operational, we are considering strategies to secure the plant’s revenue through power purchase agreements, which could potentially offer floor pricing on hydrogen. This approach would expand our financing options to support the plant. Historically, during the early stages of the solar and wind industries, projects were entirely equity financed until the introduction of production tax credits and investment tax credits, which unlocked financing markets and reduced the cost of capital. We foresee similar developments in the hydrogen sector. As Paul indicated, we are engaged in numerous discussions aimed at identifying the most advantageous and cost-effective capital solutions to sustain our growth trajectory.

Thanks for that Sanjay. And then maybe a question for Paul. Can you refresh us on what's the driver behind the high restricted cash balance on the balance sheet and whether you would expect a release to unrestricted cash in coming quarters or years? Thank you.

Yes. We have been successful in securing equipment deals in the material island space by leveraging bank benefits for these programs. Often, we need to post cash to support these deals. For instance, we have our largest customer who commits to upfront payments, allowing us to receive 70% to 80% of the cash initially. The current situation involves managing the residual balance. The positive aspect is that we are beginning to see the advantages of the new RA regarding the ITC. This quarter, we finalized our first 40% deal and are aiming for our first 50% ITC deal. This provides two advantages: increased value for the project and reduced payments to the bank since they provide most of the tax benefits and structure for the deals. We're moving from a recovery of $0.70 to $0.80 on the dollar, and in some cases, $0.50 on the dollar. With no debt, all that cash will be available to us. I estimate a 20% to 25% release each year that can be used to support our current and near-term operations. I anticipate this will change as we aim for positive cash flows. You can expect to see more releases and a shift towards traditional institutional financing in the near future.

Okay.

Thank you. Our next question comes from the line of Sam Burwell of Jefferies & Company. Please proceed with your question.

Good morning, Sam. How are you?

Doing good. Thanks for squeezing me in at the end. Wanted to unpack something on Slide 4, the financial projections on the expected case and a lower case. It looks like there's a $200 million delta on the revenue line, $90 million delta on the gross margin line. So that implies like a 45% incremental margin, let's say. Is that the margin that's associated with the key items that you call out on the right, namely the electrolyzer containers, the liquefiers, and then, I guess, the larger electrolyzer plant? Or am I thinking about that incorrectly?

I would think about those on the right on a variable basis, somewhere around 40% gross margin. And the rest of it is associated with the same inefficiencies in our operations.

Okay, I understand that. That's definitely helpful. One more question about financing. Can you quantify the difference in the cost of capital between the DOE project financing and possibly the ABLs? I recall you mentioning low single digits, but that was some time ago with previous Fed rate hikes. Will the DOE loan be based on the overnight risk-free rate? Is it a spread to that rate or lower because the DOE aims to promote green hydrogen?

Yes. So I mean, nothing is done until it's done. It’s hard to give you an exact answer, but I would tell you, high single digit is not out of the question, if not mid-single digit in that range.

I would also add, Paul, the ABL and the project financing are really two separate acts, right?

Yes. And they're not necessarily exclusive, right? It could be both.

Got it. Thanks for the color, gents.

Okay.

And our final question comes from the line of Brett Castelli of MorningStar. Please proceed with your question.

Good morning, Brett. Last but not least.

Thanks, Andy. I'll leave it at one just in the interest of time. With respect to the 2023 guidance and the 60 tons per day of liquefaction in there, is that all third-party sales? Or is any of that for Plug's sort of internal use? I just wanted to clarify.

It's all third-party. Sanjay, do you want to add to that?

No, absolutely. It's all third-party Brett, and we have multiple live discussions as we speak right now.

Anything else, Brett?

No. I am all set. Thank you.

All right. I do appreciate everyone joining our call this morning. I would like to take a step back and remind everybody that we expect to do $1.4 billion in 2023. I hope you clearly see the roadmaps and where we have challenges and opportunities. Also, I hope folks watch that video and what's the Baker plant manager again to talk about what we've built in Georgia. There's a reason that Wall Street Journal has gone to Georgia to see that plant; because they had nowhere else to go. There's a reason the economist went to Georgia to see that plant because there's nowhere else to go. We are doing real things today, whether it's building electrolyzers, whether it's building large-scale stationary projects. Let me tell you, that's an amazing project and product and we only talked about briefly. We've built factories, we scale. We're ready for this explosion in the hydrogen economy. So I want to thank you for listening today. This year is our execution year and a huge inflection point for the company. Thank you, everyone.

And that does conclude today's presentation. We thank you for your participation and ask that you please disconnect your lines. Have a great rest of the day, everyone.