Hydrogen fuel cell pioneer Plug Power (NASDAQ:PLUG) -- a competitor to both the eponymous company FuelCell Energy (NASDAQ:FCEL) (about which fellow Fool Seth Jayson wrote last month) and Ballard Power (NASDAQ:BLDP) -- reported its second-quarter and first-half earnings Wednesday. How did Plug Power do? Hint: The company's "financial results" section leads off with the line "Net cash used in operating activities." Not a good omen.

Read on if you dare, dear Fool, but make sure to first screw your courage to the sticking place.

Under generally accepted accounting principles, Plug Power posted a net loss of $23.25 million over the past six months, narrowing its loss from the year-ago period by nearly 13%. Revenues increased 15% on the strength of a 119% increase in revenue from research and development contracts. (Sales of actual products and services, however, declined 32%.) Unfortunately, while Plug Power succeeded admirably in winning new R&D business, this does not appear to be a very profitable line of business. The costs that Plug Power incurred in obtaining those revenues increased by more than the revenues themselves -- 127%.

From a free cash flow perspective, too, the company is a serious cash burner, with negative free cash flow approximating $40 million per year. While at that rate, the company has enough cash on hand to remain in business for the next two years, potential buyers into President Bush's hydrogen economy dream still need to pay attention to one final caveat.

Last year, Plug Power sold $85 million worth of new stock -- or a little more than you will find in its bank accounts today. Thus, unless and until the company generates positive free cash flow, investors should expect substantial ongoing stock dilution from this company as it struggles to stay solvent. Over the past five years, the company has diluted existing shareholders at an average rate of 23% per year. Meanwhile, its sales have risen at an average rate of just 3.2% per year.

Rule of thumb for investing: Companies that sell products are good; those that sell stock, not so much.

Fool contributor Rich Smith has no interest in any of the companies mentioned in this article.