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Executives

Leah Gibson – IR Manager

Steve Rhoades – President and CEO

John Peacock – Corporate Controller

Analysts

Dale Pfau – Cantor Fitzgerald

Colin Rusch – ThinkEquity Partners

Jon Hickman – MDB Capital

Adam Krop – Ardour Capital Investments

Alex Marin [ph] – Raymond James

Jeff Osborne – Thomas Weisel Partners

Steve Ferranti – Stephens, Inc.

SatCon Technology Corporation (SATC) Q4 2009 Earnings Call March 4, 2010 5:00 PM ET

Operator

Good afternoon, and welcome everyone to SatCon’s fourth quarter 2009 conference call. Today’s call is being recorded. You may listen to the webcast on SatCon’s website located at www.satcon.com. In addition, today’s news release is posted on the site for those of you who did not receive it by e-mail.

With us today are SatCon’s President and Chief Executive Officer, Mr. Steve Rhoades; Investment Relations Manager, Ms. Leah Gibson; and Corporate Controller, Mr. John Peacock.

At this time for opening remarks, I would like to turn the call over to Ms. Gibson. Please go ahead.

Leah Gibson

Thank you, Devon, and welcome to the call everyone. Before we begin, please note that the comments made on this conference call today may include forward-looking statements that involve a number of risks and uncertainties. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements and may include the words believes, anticipates, plans, expects, intends and similar expressions which are intended to identify forward-looking statements.

Important factors that could cause actual results to differ materially from those inferred by such forward-looking statements are set forth under the caption “Risk Factors” in SatCon’s annual report on Form 10-K for the year ended September 31st, 2009. These factors are included there for reference. Once filed with the SEC, copies of the 10-Ks will be available from SatCon upon request and will be posted to the company’s Investor Relations website at www.satcon.com.

In addition, today’s call is being recorded, and a webcast replay will be available on the Investor Relations website. This conference call and associated recordings belong to SatCon and are prepared for the benefit of our investors. Finally, I would like to mention that we will be participating in a number of upcoming investor conferences. These events include the Commerz Inc. Growth and Responsibility Conference in Frankfurt on March 10, and the Jefferies Global Cleantech Conference in New York on March 16.

I will now turn the call over to our President and Chief Executive Officer Steve Rhoades. Steve?

Steve Rhoades

Thanks, Leah and good afternoon everyone. I am pleased to report back to you a successful quarter here at SatCon. SatCon posted revenues of 21.5 million in the fourth quarter, which includes record sales of our renewable energy solutions. Through our stronger presence in emerging utility scale solar markets in North America, Europe and China, and with the introduction of our industry-leading large scale inverter solutions, including SatCon’s Solstice and Prism. SatCon grew 24% from the same period in 2008 and a 113% over the third quarter of 2009.

The momentum we experienced in the back half of 2009 has continued to contribute to a solid trend in our backlog, which currently represents about 32.5 million of firm fixed purchase orders from our renewable energy customers. In January, we closed the sale of our Applied Technology division, which developed R&D projects for a variety of defense and commercial applications. The sale of AT completed our plan to focus our financial technical and marketing resources, exclusively on our core renewable energy solutions business. With that all of our financial results presented today has been adjusted to exclude the Applied Technology division.

During the quarter we shifted 354 units of PowerGate Plus and Prism solutions. Our 500kW PowerGate Plus inverter continued to be our strongest performing product as utility scale solar projects became more common and global demand for utility grade solutions climbed. Our 500kW generated 84 units sold during the quarter, doubling the number of units sold compared with the fourth quarter of 2008, demonstrating the superior performance and the liability of our SatCon solutions, our 500kW has became the most highly deployed utility scale solution in the world. It has powered the world’s largest solar installations, provided unparalleled scalability, efficiency and reliability and is the inverter of choice among utility scale solar adaptors.

We generated gross margins of 13.2% during the fourth quarter of 2009, a marked improvement over the previous three quarters. This was driven primarily by increased sales volume in Q4 and the transfer of about 60% of our manufacturing production volume to our new facility in China over the course of 2009, which resulted in significant unit cost savings.

We're pleased with the gross margin improvement, but the transition has taken longer than anticipated. We expect the transition to our China facility to be complete by the end of the second quarter. We’ve also been aggressively pursuing a lower cost supply chain in China, which will be complete in the third quarter of 2010. The result of these two initiatives is expected to drive down material and overhead cost for the next four quarters and continue to improve our gross margins.

In addition to migrating our core manufacturing to China, we are also realigning our internal resources to fit global demand. As part of this restructuring effort, we have moved much of our operation's management team to our corporate headquarters in Boston to align with our growing R&D and new product introduction organization there. We’re also recycling our Canadian operation to the anticipated size of the Ontario feed-in tariff opportunity in 2010.

Through these key initiatives, we expect to maintain the margin momentum we saw in Q4, and reached gross margins of low to mid 30s in the second half of this year. So, overall we are very pleased with our performance during the quarter. And despite the typical seasonality of our industry, bookings remained strong. One driver behind our strong performance in the typically slow sales cycle was our 2009 diversification in the international market, such as China, which accounted for nearly 41% of our total bookings for the quarter.

These sales were driven by our recently established sales and marketing team of seasoned industry veteran, including Jim Zhang, [ph] our new VP of Sales for Greater China. This new organization was instrumental in signing key some partnership agreements. Our recently announced partnership with GCL Solar Limited, it is perfect example. Our agreement with GCL, one of China’s largest utility solar power plant developers has already generated orders for over 60 megawatts of our 500 kilowatt PV inverters.

The first two projects totaling 23 megawatts included a 20 megawatt order to power Asia’s largest ground-mounted solar system in Jung Soo province with the additional 3 megawatts supply for China’s largest rooftop installation. The next 38 megawatts will be installed across three separate solar power plants in China which are expected to be completed in the first half of the year.

Our relationship with GCL has been a great stepping stone in terms of market penetration in China. And we are honored to have partnered with such an industry leader in the global utility scale solar market. Our global footprint also continues to grow in a highly competitive European market where we shipped over 54 units in 2009. With so many pushes to secure a solar project prior to the mid-year reduction of (inaudible) another European countries begin to accelerate solar developments through their own local programs our pipeline for 2010 continues to grow dramatically. Already in the first quarter, we received an order to deliver over 30 megawatts of our PowerGate Plus PV inverters to one of Europe’s largest private utilities ENERGY 21 group.

Our solutions will be used to power 15 solar plants in the Czech Republic qualified under the country’s Feed-In Tariff program. ENERGY 21’s EPC division, CE Solar will maintain the solar PV plants with construction expected to be completed in the first half of this year. Capitalizing on the local feed-in tariff program in Greece, second was also selected to power 25 installations on the Island of Rhodes as part of a 2.5 megawatt project with integrator EasyPower. This order was secured by our preferred reseller, Athens based Survey Digital. SatCon’s inverters were chosen for this project for their innovative features and ability to address the unique requirements of the local grid.

Other European installations in the quarter included several rooftop and ground-mounted multi-megawatt installations in Germany and Belgium as we continue to expand our presence in the EMEA region. As Asia and Europe become key components of our growing global market share we remain committed to our dominant position in North American Solar PD market.

In Q4, we delivered solutions for several key utility scale projects including the 5 megawatt CalRENEW I installation which is the first utility scale Photovoltaic Solar Farm to be approved by the California Public Utilities Commission under the States Renewable Portfolio Standard Program.

The nine megawatt Exelon City Solar voltaic installation which is the nation’s largest urban solar power plant and a three megawatt installation at Denver International Airport that is expected to generate 3.5 million KW hours of clean electricity annually.

Federal based incentive programs such as the American Recovery and Reinvestment Act have also bolstered our North American revenue and pipeline. During the fourth quarter, we secured over seven megawatts of orders funded under the ARRA program bringing SatCon’s total shipment of ARRA backed solar projects to over 20 megawatts in 2009.

These projects include 16 rooftop and ground mounted installations for the US Navy across eight naval bases in Southern California, as well as seven installations across the 29 Palms Marine Base in California, and a three megawatt project at the Davis Mountain Air force base in Arizona. These bases are some of the first to implement solar initiatives under the US military’s renewable energy strategy and are a clear example of boosting adoption of most large scale solar power production as a direct result of ARRA.

Our pipeline at ARRA funded programs remained strong with an additional 73 projects identified in 2010. Ontario's feed-in tariff has also generated a generous pipeline and significant backlog for us in the first half of this year. As the largest Ontario based manufacturer of three-phase large scale inverter solution in the province, SatCon is uniquely position to take advantage of this government backed program. In February, we received an order from Sky OZZ International, a large developer of commercial scale solar in Canada, to supply 18 megawatts of our PowerGate plus PV inverters for 40 rooftop power plant across Ontario.

The combined 78 units of our 100 kilowatt and 250 kilowatt solutions will be manufactured at our Burlington, Ontario facility, making them the only large scale solar PV inverters that are 100% compliant with the Ontario feed-in tariff local content requirements. Through the hard work of our product development organization to deliver customized solutions tailored to the Ontario grid and the development of key partnerships in the province, our anticipated future volume for this business is robust with an additional 50 large scale projects identified. Underlying all of this success is our unique set of offerings for the utility scale solar market.

At the beginning of Q4, we made generally available our 100 kilowatt Solstice solution. SatCon’s Solstice is the first complete utility grade solution for large scale solar power plants, boosting total power production by 5% to 12% while reducing balance-of-system cost by 20% to 25%. Since its introduction we have received an overwhelming response from our customers and are pleased to report we have shift our first orders of our 100 kilowatt Solstice solution. Looking forward into 2010, we will continue to expand our Solstice solution portfolio to include European and Asia certified offerings as well as a wider selection of power ratings.

Over the past two years, we have build an engineering, manufacturing and sales organization that can design, certify and launch our new products quickly and effectively, allowing us to successfully introduce the industry’s most advanced inverter solutions. We continue to set the standard for quality, performance and return on investment. This combination of technological innovation and a rapid time to market, why this was a significant competitive advantage, will remain a central factor to our leadership position within the worldwide utility scale solar PV market.

With that, I’ll turn it over John, who will talk about our financial results.

John Peacock

Thank you, Steve. Revenue for the fourth quarter ended December 31, 2009 was $21.5 million, an increase of 24% or $4.1 million over the same period in 2008. For the year ended December 31, 2009, revenue was $52.5 million, a decrease of approximately 3% or $1.8 million over 2008. It is important to note that all numbers have been adjusted to reflect the sale of our Applied Technology division, which closed in January 2010.

Revenue for the fourth quarter of 2009 consisted of renewable energy product revenue of $21.4 million and $100,000 in industrial power supply products revenue. Total revenue for the year consisted of renewable energy product revenue of $47.7 million combined with $300,000 in industrial power supply product revenue and 4.5 million in legacy product revenue.

Gross margin for the fourth quarter was 13.2%. Margins were directly impacted by the double mortgage or double manufacturing overhead we continue to carry during the quarter as we continue to aggressively transfer manufacturing to our low-cost China facility. Work on the transfer resulted in increased cost associated with raw materials purchased within our chain supply as well as increased freight costs related to both purchasing of raw materials, shipping of these raw materials to our China facility in freight cost associated with delivering our products to our customers.

Our freight costs were further impacted by the availability of shipping capacity globally during the holiday season. The increased overhead, supply chain and freight related costs accounted for a decrease of approximately 5% in our gross margin for the period.

Costs associated with new product introductions required utilizing our Canadian plant more than initially anticipated also impacted our gross margin. Going forward, with the completion of our Canadian resizing full realization of the benefits of our global supply chain and the completion of our product transfer to China in the first half of the year, we anticipate improved gross margins in the low- to mid-30% range in the second half of 2010.

Our operating loss for the quarter was approximately $4.1 million compared with the loss of $1.8 million for the same period in 2008.The main drivers for the increase in our operating loss during the period compared to the same period in 2008 were lower margins on our product revenue of $1.5 million and an increase of $700,000 in research and development cost related to our Solstice product launch and additional engineering staffing, and increases in global sales and marketing of approximately $400,000 due to our continued international expansion in China and Europe. The decrease was offset by $200,000 and lower restructuring charges during the period.

Our operating loss for the year ended December 31, 2009 was approximately $23.6 million compared with an operating loss of $12.5 million for the same period in 2008. The main drivers for the operating loss during the period as compared to 2008 was due to lower margins on our product revenue of approximately $5.3 million and increase in research and development expense of approximately $3.2 million over that of 2008 and an increase in sales and marketing cost of approximately $3.6 million to support our increased global expansion efforts. These increases were offset by a reduction in restructuring charges during the period of approximately $1 million.

Net loss attributable to common shareholders per weighted average share basic and diluted was $0.11 for the quarter and $0.57 for the 12-month period ended December 31, 2009 compared to a loss of $0.02 and a loss of $0.34 for the same period in 2008 respectively.

Now, turning to the balance sheet. We ended the year with $13.4 million in cash, up $3.4 million from net of December 31st, 2008. We have a Line of Credit with Silicon Valley Bank for $10 million. At the end of the year December 31, 2009 we had availability under line of approximately $8.4 million of which $3 million was outstanding.

Accounts receivables at the end of fourth quarter were approximately $17.6 million, up from $11.5 million at December 31, 2008. The overall increase in accounts receivables was due to the timing of order shipments during the period and increase in revenue during the fourth quarter of 2009.

Our day sales outstanding or DSO was 52 days at the end of the period compared with 57 days in the same period last year. We have not experienced any significant collection issues and continue to work closely with our customers to ensure collections are received in a timely manner.

Inventory at quarter-end was $11.9 million, up from $11.5 million at December 31, 2008. This slight increase in inventory was a result of inventory in transit from our factory in China for which list of loss entitled passed [ph] when the units are containerized in Asia which was related to orders that are to be fulfilled in the first quarter of 2010. This increase was buffered by our continued focused efforts to manage our working capital.

Our backlog, which consisted of firm fixed purchase orders from our renewable energy customers was $32.5 million as of today, compared with $17.1 million the last time we reported on October 27, 2009.

Now, back to Steve.

Steve Rhoades

Thanks, John. We are very pleased with our performance in Q4, and believe we have laid the foundation for a very successful 2010. We have effectively established our sales and marketing organization into international markets, such as Europe and China as well as introduced an ambitious product development program. And we continue to innovate and remain the technology leader in large scale solar PV. This coupled with our efforts to reduce our overall cost structure position us for profitability in 2010.

For the first quarter of 2010, we are introducing top line guidance of $14 million to $16 million. Despite expecting lower sequential revenue over Q4 of 2009 due to typical seasonality in the industry, we anticipate Q1 sales of our PV inverter solution to more than double over the same period, Q1 of 2009. Gross margins will also continue to improve over 2009 levels to our target margins in the second half of 2010, as we increase sales volumes and complete transition of our manufacturing to our lower cost facility in China.

With that we’ll take questions. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question is from the line of Dale Pfau with Cantor Fitzgerald. Please proceed with your question.

Dale Pfau – Cantor Fitzgerald

Good afternoon. Congratulations on a nice quarter.

Steve Rhoades

Hi, Dale, how are doing?

Dale Pfau – Cantor Fitzgerald

Good. I like your backlogs. Couple of questions here, so I can get the model right. How much revenue did you take out of the fourth quarter for the Advanced Technologies Group?

Steve Rhoades

All the numbers have been adjusted to reflect that, there is no revenue in there for that.

Dale Pfau – Cantor Fitzgerald

I know, how much revenue would there have been?

Steve Rhoades

1.5.

Dale Pfau – Cantor Fitzgerald

1.5, okay. That’s great.

Steve Rhoades

I think that’s right, why the model you have though.

Dale Pfau – Cantor Fitzgerald

Yes, that’s right in line with what I was expecting, so I just wanted to make sure that that was clear. Let’s talk a little bit about your gross margins, how do you see them moving throughout the year, Steve? I know you gave us some targets for the second half, are we going to be gross margin flattish in the first quarter and then maybe up a little bit in the second or down in the first and flat in the second, how should we model the margin?

Steve Rhoades

You know I think we are going to see teens kind of margins for Q1, it’s flattish for Q1 but I think we are going to see a significant improvement into the 20s in Q2. And then we’ll be into our target margins as we move into Q3 and Q4. So, we are going to see good volume, you’ve seen our backlog rise, so we should see good volume in Q2, that’s going to help us a lot. We have already done the restructuring work in Canada, those costs are still in Q1 but they’ll start to come out in Q2.

And then we are getting more and more everyday of our supply chain established in China, we had a big impact in Q4, while we did a lot of our manufacturing in China in Q4, that helped a lot. A lot of the component still came out of Canada and the US, and so we will see less and less of that as we move through the first half of the year.

Dale Pfau – Cantor Fitzgerald

Fabulous. Okay, could you talk a little bit about these order trends we have seen – the strong order trends here in the first part of the first quarter here? Is your pipeline pretty robust?

Steve Rhoades

In a pipeline at large we are particularly pleased with what we are seeing in China. The Ontario Feed-In traffic pipeline and Europe as people kind of push to get projects in place for ahead of the German Feed-In Tariff reduction and as Feed-In Tariffs come up in some of the other they get real in places like Greece and Czech, where we done pretty well. The US, every year, for the last three year has been a second half year market. And so, that’s – we have a good pipeline in the US and I think it’s kind of we are looking forward to that continuing to be the trend at the US becomes a stronger market as we look at the second half of the year.

Dale Pfau – Cantor Fitzgerald

One more question and I will let it go. When you take a look at one of your largest European competitor out there makes a big deal about forecasting his own market shares, how do you see your market share? Do you have any calculation of what you think your market share is in the markets you compete?

Steve Rhoades

Well, we have said that we think we have more than half of the US market above 100 kilowatts I say that many times. I think it’s hard to get market share numbers that of China. I think it’s challenging to know what the overall size there. We think we are doing extremely well. We’ve got the largest ground mount in the country. We’ve got the largest rooftop. We have closed quite a bit of business since the beginning of the year, but I think it’s challenging to know what share numbers are there. We are the only large manufacturer right now in Ontario.

So we are doing very well on Ontario. Other people will move in, it’s a good Feed-In Tariff but today we’re the leader. I am very proud of what the team has done in Europe this year. I mean, we have shipped a lot of units, we have shipped 54 units in the Europe this year mostly of our larger systems. But frankly, we are in single digits in the European market right now. But that’s I think it’s going to grow substantially over the year and I am not ready to put an overall number on top of this, but I think we remain dominant in North America. We are doing very well in China and we are growing quickly in Europe.

Operator

Thank you. Our next question is from Colin Rusch with ThinkEquity Partners. Please proceed with your question.

Colin Rusch – ThinkEquity Partners

Thanks so much and congratulation, guys. Can you give us an update on the lead times on both your North America and China?

Steve Rhoades

We are for standard product in the US and in Europe. We are at eight weeks lead time. There are some specialty systems that are longer than math. We manufacture in China, so our lead times can be that competitive there as well. And, I think we are at similar position for our Ontario Feed-In business which is manufactured primarily out of our rolling type facility in Ontario. There are some products where we are longer but for our 500 kilowatts for our 30s, 50s, 35s, 100s to 135s were generally in that weak range.

Colin Rusch – ThinkEquity Partners

Okay. And for the target margins can you remind us what the factory utilization levels are assumed to be to get to those target margins?

Steve Rhoades

We believe that revenue needs to be in the mid-20s for million for revenues to hit those, taken after the year…

Colin Rusch – ThinkEquity Partners

On a quarterly basis.

Steve Rhoades

On a quarterly basis, yes.

Colin Rusch – ThinkEquity Partners

Okay, great. And can you clarify the distribution agreements with Canadian Solar and Solyndra. It looks like you’ve got mutual marketing efforts with both those companies. You have exclusive rights to sell with them, and just how does those arrangements look on a practical basis, you’re selling what and, and are their fees or royalties associated with those now?

Steve Rhoades

We do not have any – they are resellers of the product, both of us, but most of the work right now with both of those groups is co-marketing arrangements, and both sides are churning their own marketing cost for that. We do make some products specifically for thin-film, thin-film applications, and those work very well with the solar application, so we are working with them on marketing those solutions along with their thin-film solutions. I think that’s all the detail I can give for those particular agreements.

Colin Rusch – ThinkEquity Partners

Sure. And then just one final one from me. Have you been evaluating and do you have any interest in doing any sort of white label inverter manufacturing for any specific power manufacturers?

Steve Rhoades

We are not going to do white label agreements where our brand is completely buried. We have made open to other kinds of solutions for getting our products introduced, if they are specific technology associated with our partners but we are not looking to be just an OEM supplier that’s underneath the brand of another kind of manufacturing.

Operator

Thank you. Our next question is from the line of Jon Hickman with MDB Capital. Please proceed with your question.

Jon Hickman – MDB Capital

Could you talk a little bit about, in the past you mentioned that there wasn’t any money available for projects. So obviously with your pipeline expanding and all these new orders, can you just talk about the environment out there for project financing?

Steve Rhoades

That's a great question, Jon. We have seen Project Finance free up, and it's been – this time last year it was extraordinarily difficult for developers to obtain Project Finance. We are definitely seeing Project Finance free up, I wouldn’t say that it's easy. It's still difficult to get money out there but it's a very dramatic improvement over where we were at this time last year. That's true pretty much in each of the markets that we operate in, in US and Canada and Europe. There never was much of a Project Finance barrier in China, still China is kind of an early market, and only started to come on for multi megawatt projects near the end of last year.

Jon Hickman – MDB Capital

Okay. And then if all goes well towards the end of the year, you are ramping like you expect, you can finance those levels of orders and manufacturing with the current capital structure you have?

Steve Rhoades

Well, we’ll evaluate our needs for capital as we go along. We have a very solid contract manufacturing agreement with our partner in China that helps tremendously with our working capital needs. We have a line of credit from Silicon Valley that's, but that we’ve only drawn a relatively small amount on in. AR continues to grow and that allows us to tap more and more of that line. So, we will continue to evaluate our capital needs, but we need a good access right now through those two arrangements.

Jon Hickman – MDB Capital

Okay. Thank you.

Operator

Our next question is from the line of Adam Krop with Ardour Capital. Please proceed with your question.

Adam Krop – Ardour Capital Investments

Hi, guys.

Steve Rhoades

Hi, Adam, how are you doing?

Adam Krop – Ardour Capital Investments

Just a few questions on the applied technology sales, can you give us a little bit more details, more color behind that I guess it sounds like a closed in January, can you just tell us maybe the cash value or who bought it and maybe a little bit behind the know just the logic of the sales, it seems like that would be a business that could possibly kind of iron out or smooth out some of the cyclicality in the solar business with high margins. Can you just talk about that briefly for us?

Steve Rhoades

Margins for that business, Adam, were always below where we’re targeting to get to you by the end of the year for our renewably business. And really the strategic focus of the company is on renewable energy power conversion, and I want to make sure that all of our sales, all of our marketing, all of our R&D is aimed at that, we think there is giant opportunity is what we – we all want to go work on. So, it makes sense for us to go ahead and move that portion of the business to an owner that would value it more highly. It was a relatively small number for the sale. So we didn’t report out, what if really material to our overall revenue, and can we disclose the name of the group we sold it to …

John Peacock

RCT.

Steve Rhoades

RCT was the buyer there. They are at start-up group doing government contracting in the (inaudible) region. So, it was relatively – it wasn’t a huge amount of cash to us, it was really much more about the strategic focus of the company, Adam and where we want to take SatCon and get the whole resources of our company aimed to high ended (inaudible) managed power conversion.

Adam Krop – Ardour Capital Investments

Okay, great. And then on the backlog, obviously you are having some pretty solid traction in China, can you just speak to – I guess your pricing strategy in China compared to maybe some of your other geographic regions?

Steve Rhoades

We are competitive in every region we operate in, Adam. And it’s certainly the case that in China it’s a little bit more aggressive, but we have some advantages in China as well because we manufacture there. And so, there are some quite a bit of avoided costs that we get by having the product manufactured in their local region. But we are going to be competitive in every market that we operate in.

Adam Krop – Ardour Capital Investments

Okay.

Steve Rhoades

The other thing is the big advantage for us from China as you know the lead times are really quite high because we don’t have the ocean transport that we have for some of the daily markets that we operate in.

Adam Krop – Ardour Capital Investments

And can you just describe the GCL, your relationship with them in little bit more detail, I mean is there a framework agreement in terms of how many megawatts you expect to ship to them? How should we thinking that relationship in our models goring forward?

Steve Rhoades

GCL is a reseller of the product as well as being an integrator buying products for their own projects that they are developing. They have given us a steady stream of orders and we are in the process of negotiating a framework agreement with them right now, Adam, but we are still in that process, so want to hold off on that.

Adam Krop – Ardour Capital Investments

Okay, as you look at the backlog and then your possible shipments for 2010, I mean, can you help us kind of think about or how to kind of model out the linearity of your volume shipments in the, maybe second and third quarter? Should we be expecting a big 2Q just based on all this news flow that’s we’ve seen in the last few weeks?

Steve Rhoades

We indicated in most of the big announcements when they were going to ship, right, so the GCL order is going to ship in the first half of the year. And we gave the guidance for the first quarter, so that kind of did the math, I guess. But a lot of this, our lead times are eight weeks for most products, no more than 12 weeks for all products, so we were going to see in most of what we have a backlog ship in the first two quarters. Now we do have some backlog going into Q3 and Q4 even but most of what we have seen will ship in the first half of the year.

Adam Krop – Ardour Capital Investments

That's great, and then just one final thing. In your prepared remarks I think you, maybe correct me if I am wrong, did you mention you were expanding capacity in Ontario, or did that hear that wrong?

Steve Rhoades

Well, what we have done is to size the Ontario facility, which used to provide all of our manufacturing capacity to the size of what we believe will be the feed-in tariff business in Ontario. We had always planned to reduce it to some extent the Burlington facility associated with our overall manufacturing plant. We scaled back a bit because the Ontario feed-in tariff business has come up faster than we expected. And so, but we have reduced substantially the operation there in line with getting our cost down and getting our margins where we need them to be as we look towards the back half of this year.

Adam Krop – Ardour Capital Investments

Okay, great. Thanks.

Operator

Thank you. Our next question is from the line of Alex Marin [ph] with Raymond James. Please proceed with your question.

Alex Marin – Raymond James

Hey guys, thanks for taking my call.

Steve Rhoades

No problem.

Alex Marin – Raymond James

We kind of talked about your – how active your order flows were in for the first half of the year. Would it be fair to say that most solar developers are fooling off and firming up a lot of their project plans for the second half for the year as they kind of wait and see what happens to module pricing, given the changes in Germany?

Steve Rhoades

I wouldn’t say that that’s been our experience. We have people talking to us about significant projects in the second half of the year. We don’t tend to see business booked six to nine months out in, our lead times are relatively short, and we don’t get usually that much visibility. But we do have a very robust pipeline for the second half for the year. So I guess that wouldn’t be our experience right now.

Alex Marin – Raymond James

Okay, great, thanks. And then just one other quick question. I know that the prior target for positive operating cash flow was going to be exiting 2009, I may have missed it earlier, is that still intact or is there an update on that?

Steve Rhoades

Well, as we said in the prepared remarks, we’re a bit, we are not as for along as I would like. We think we’re going to – we completed the sizing of the company here in Q1, which was at least a quarter to two quarters behind where I wanted to be, and we are completing all the trends for the manufacturing lines to China, inside of Q1 and Q2 of this year. And the way it goes as we established a line in China, and then we fully established the supply chain in China. So we will be through all of those in early Q3, both the manufacturing transfers and all of the transfers.

So we are definitely not where I wanted to be, but what I said earlier in my remarks, when Dale Pfau was on the call is, I think we will see flattish kinds of margins to slightly up in Q1, margins in the 20s in Q2 and they will be in our target – on our target of north of 30% in the second half of the year. But it’s not gone, this far, some of that was because the market really got hard in Q4 and some of our work was aimed at getting product out. But we are a bit behind, so we are now on track to deliver those target margins in the second half of the year.

Alex Marin – Raymond James

Okay, thanks.

Operator

Our next question is from the line of Jeff Osborne with Thomas Weisel Partners. Please proceed with your question.

Jeff Osborne – Thomas Weisel Partners

Great. Good evening and congratulations on the strong margin performance. Steve, I was just wondering in term of the market share you are getting back to Dale’s question, could you just disclose the 47.7 million in renewable revenue this year, how many megawatts you shipped for the year?

Steve Rhoades

Do we have that number? Sorry, just looking upon a sheet here; Jeff will get it in a second. – 162 megawatts.

Jeff Osborne – Thomas Weisel Partners

162, great. And then will you be publishing in the K or some other documents the quarterly expense profile of the company, the report today only have the annual figures and so, my understanding is the Applied Technology’s Group would have been in the prior R&D and SG&A figures, is that correct?

Steve Rhoades

That’s correct. There will be eight quarters, sequential quarters shown in right above our MD&A section that will be adjusted for all discounted operations. So that will provide you all the information you will need.

Jeff Osborne – Thomas Weisel Partners

Okay. And when would you expect that to be out?

Steve Rhoades

We have to file before the 16th of March, so hopefully next week.

Jeff Osborne – Thomas Weisel Partners

I understand. And just a couple of quick ones, as you move to profitability in the middle and late part of 2010, what would be your expectations with the current financial structure of the company and what share count we should be using?

Steve Rhoades

It depends as you know a little bit on your calculation of where warrants would be exercised, but the number that I would use is 110 million shares for the total count. But you can get a different number depending what your assumption is on the final conversion of everything to common, Jeff. That’s when I use I think that’s a pretty realistic assumption.

Jeff Osborne – Thomas Weisel Partners

Okay. And then what percentage of the ALPA [ph] you mentioned that you are behind your kind of transformation plan if you will, and you mentioned – alluded the market got hot in the fourth quarter and that was one of the issues at play. Maybe if you could just look back retrospectively over some of the other issues and then, if you could just give us a sense of flavor reporting 13% gross margins, what percentage of your production was actually done in China either for the quarter in the second half so that we can kind of look at the success of that working for you?

Steve Rhoades

We did about 50% of our production in China in the fourth quarter in terms of megawatts, more than that actually in units because they are all of our smaller units in China, but we did do a lot, we did, actually do a quite bit of product in the Canadian operation. Those things that impacted us is that even though we were manufacturing in China, a lot of the supply chain was still in North America. So, we were shipping products over to China from US and Canadian suppliers that’s expensive – that had to be manufactured in China and then shipped back out in many cases back to the United States, not our long-term model, and I think we are going to be within a couple of quarters here.

The other thing that happened to us is, we were very, very focused on not disappointing our customers, and in many cases we put big burgers [ph] on airplanes because we needed again and I want to make sure that they could go forward with their projects. Overall that really impacted our freight revenue. So that combination of the supply chain and what happened with freight revenue probably cost us five points in the quarter. And I think that those are things that are tough but come through, and we are going to beat through them in the first half of this year.

We won't have those freight charges going forward. We have already taken steps to size Ontario, which is going to help tremendously in terms of our overhead and, excuse me, our Burlington factory, which will help in our overhead, and we’re working very, very aggressively to get our supply chains established in China. The factory is up and humming, it's still – they are doing great work over there. Quality is very high, and we’re getting a lot of inverters out of China right now.

Jeff Osborne – Thomas Weisel Partners

Great. Just one last quick one. So most of the other participants in the solar value chain haven't really highlighted seasonality as the factor impacting their business in the first quarter, but clearly you focused on more emerging markets. I don’t have as much of a presence in some of the key European markets, I guess, that have this strength in the first half. So I was just wondering, as you look into the first quarter, what are the key regions that you are seeing the seasonality, is it really just Canadian winter and just the timing of very lumpy Chinese projects or is there something more at play?

Steve Rhoades

Well, we have served both in North America and China is real. Not a lot of projects done, in Canada and lot of the US and in China. We have been in the solar in a sense 2004, and we have seen every year that Q1 is weak, and then we grow all the way through the year in terms of our bookings. Maybe that’s not been such a big thing in the Germany market, we are not as big a player there, and that represents such a large section of the overall solar market, but that’s certainly been our pattern for the last five years.

Jeff Osborne – Thomas Weisel Partners

Great, and then one last quick one, is just as you – it sounds like decommission some capacity in Canada and ramp up in China. How do we think about middle of the year, currently what’s your current manufacturing capacity, is sort of getting, touching on Colin’s question when you were talking about the target gross margins in the mid twenties?

Steve Rhoades

Our current capacity in the China factory is 400 megawatts, that can go to 600 megawatts with adding a shift in China, and our current capacity out of Burlington, with the staffing we have there is about 200 megawatts a year. That factory is capable of 400, and really it’s a matter of adding direct labor. But we have sized it more towards the lower end of that number because we – while the feed business in Ontario is excellent and coming up much faster than I expected. It’s nothing – it’s not large compared to the overall business, and we used to get all of our product out of the Burlington factory.

Jeff Osborne – Thomas Weisel Partners

Understand, thanks so much.

Operator

Our next question is from the line of Steve Ferranti with Stephens Incorporated. Please proceed with your question.

Steve Ferranti – Stephens, Inc.

Thank you, good afternoon guys.

Steve Rhoades

How are you, Steve?

Steve Ferranti – Stephens, Inc.

Good. Steve, if I were to look at the sort of growth opportunities you have for the remainder of the calendar year, just kind of in broad buckets those would be in China, Ontario, US and Europe, can you sort of give us some sense for order of magnitude in terms of which you think might be the biggest contributor for you over the calendar year ‘10.

Steve Rhoades

Good question. We are seeing very robust pipeline in Canada. I think it’s coming up faster than I expected. The US for us has been a second half of the year business for multiple years and our pipeline would indicate that we are going to get well over half of our business still from the US this year. And then China could be – it’s kind of wild card, I think we are not going to see the big multi-hundred megawatt plants built in China this year.

I think this will be the year of 5 to 20 megawatt plants. But we can make a real good business on 5 to 20 megawatt plants in China. So, I think it’s going to be a substantial portion of our business. So, you know overall I would not surprise you this year on what we expect to be robust volume to see half come from the US and half from international. And that’s not in our pattern in the past as you know we were a US dominated company before.

Steve Ferranti – Stephens, Inc.

Right. Right. And then I guess a follow-up to that, if we were to look at your backlog today, which looks quite strong, does that the backlog sort of reflect the land that you just sort of gave us in terms of growth opportunities or is it still a predominately North America based?

Steve Rhoades

The backlog today is actually the offset. We reinstated [ph] 38 megawatt booking with GCL in China. We announced 30 megawatts with CE Solar and Czech Republic 18 megawatts with Sky OZZ for the Ontario Feed-In Tariff business. So, three of our largest deal that are in the backlog were our international deals. So, as I said earlier the US is little bit slower in the first quarter, but we have been quite fortunate this year that, that we have more than made up with it because we focused really hard last year on expanding our sales and marketing and service in Europe, in China, in Canada.

We focused on getting our products certified to work in all the countries that we want to operate. We’ve focused on bank ability in Europe so that we can beat bank and we can project developers can use us in Europe. So, I think that strategy is really paying dividends for us right now.

Steve Ferranti – Stephens, Inc.

Very helpful. Last one from me, just sort of 40,000 foot question, the markets you guys serve, do you think they are more or less correlated to level of Feed-In Tariffs and say small residential and commercial markets, or maybe it’s just the same but, I mean, my sense would be maybe there is a little bit less correlation there, but love to get your thoughts on your that?

Steve Rhoades

Well, if you look at the places where we have had some really good wins, Czech, Greece, Ontario and to a lesser extent China they’ve all got Feed-In Tariff programs. So, whether, we are dependent on that, where we think the US is going to be real big market on their own here. So, we think that’s going to still be a good market for us, but I do think that in the regions that we’ve targeted, the Feed-In Tariff is important.

Now, when you talk to developers and field panel companies and other groups in China, they’ll tell you that the current Feed-In Tariff in China is not really driving business. It’s not big enough to make them profitable in those projects, but they are going to add anyway because they think it’s going to be a big market and that’s why I say that, I think this is the year of the 5 to 20 megawatt projects in China. But in Ontario, in Czech Republic, in Greece, in other markets in Europe, I do think feed-in tariffs are going to drive a lot of business, even for the multi-megawatt project.

Steve Ferranti – Stephens, Inc.

Okay, fair enough. That’s it from me, thanks. Good luck going forward guys.

Steve Rhoades

Thanks a lot, Steve,

Operator

At this time I’d like to turn the floor back over to Mr. Rhoades for closing comments.

Steve Rhoades

Well, thanks everyone. We appreciate everybody’s participation on the call today and we look forward to talking to you next month. Thanks a lot.

Operator

This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for participation.

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