Ener1, Inc. Q1 2010 Earnings Call Transcript

May.11.10 | About: Ener1 Inc (HEV)

Ener1, Inc. (NASDAQ:HEV)

Q1 2010 Earnings Call Transcript

May 10, 2010 5:00 pm ET

Executives

Rachel Carroll – VP, Corporate Communications

Jerry Herlihy – CFO

Charles Gassenheimer – Chairman and CEO

Rick Stanley – President, EnerDel, Inc.

Robert Kamischke – Chief Financial Officer, EnerDel, Inc.

Jeff Seidel – Chief Strategy Officer

Analysts

Dan Galves – Deutsche Bank

Steve Milunovich – Merrill Lynch

Dilip Warrier – Thomas Weisel

Paul Clegg – Jefferies & Co.

Matthew Crews – Noble Financial Group

Chris McDougall – Treaty Oak Capital

Operator

Good afternoon, and welcome to Ener1's 2010 first quarter earnings conference call. Today's call is being recorded. If you have any objections, you may disconnect at this time. Your lines are being placed on listen-only mode until the question-and-answer session – segment of today's conference call.

I would now like to turn the call over to Rachel Carroll, VP of Corporate Communications for Ener1, Inc.

Rachel Carroll

Great, thank you. Good afternoon, and welcome to the Ener1 management call to discuss first quarter results for 2010. Joining me on the call today is Charles Gassenheimer, Chairman and CEO of Ener1; Jerry Herlihy, CFO of Ener1; Jeff Seidel Chief Strategy Officer for Ener1; Rick Stanley, President of EnerDel, Ener1’s lithium-ion battery subsidiary; and Robert Kamischke, CFO, Controller of EnerDel.

Prior to the call, I would briefly like to remind listeners that certain statements made on this call constitute forward-looking statements that are based on management's expectations, estimates, projections, and assumptions. These statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Therefore, actual future results and trends may differ materially from what is forecast in forward-looking statements due to a variety of factors.

I will now turn the call over to Jerry Herlihy who will discuss the financial highlights during the quarter.

Jerry Herlihy

Net sales for the quarter were $11 million compared to $8.2 million in the first quarter of 2009. Excluded from sales are approximately $1.1 million of intercompany cell sales that is deferred into the cells sold to third parties. Net loss was 15.3 million in the first quarter 2010 compared to 7.3 million in the first quarter of 2009.

Research and development expenses increased $3.6 million as we increased our engineering activities for current and prospective customers. Other income or expense declined $3.5 million primarily related to a decline in derivative gains stocks – common stocks, warrants an increase in non-cash interest expense.

Basic net loss per share was $0.12 in the 2010 first quarter compared to $0.06 in the 2009 quarter. Quarterly diluted loss per share was $0.13 in 2010 compared to $0.08 in the prior year. Weighted diluted shares outstanding were 125 million in the first quarter of 2010 compared to 113.5 million in the prior year quarter.

During the quarter we recorded the first 19 million or 118.5 million in grants from the Department of Energy under the automotive battery manufacturing initiatives. 6.6 million was received by the quarter end and the remainder was $19 million was received in April. The grants related to the purchase of equipment are capitalized in our financial statements and amortized into income for the life of the equipments. The amortization will be reported in future financial statements as a reduction of operating expenses.

With the help of the DOE grant funding our investment in property and equipment increased $37.5 million since year-end. Ener1’s total assets are 237 million at March 31, shareholders equity is 110 million.

I will now hand the call over to Charles Gassenheimer Chairman and CEO who will begin with the customer update for the quarter.

Charles Gassenheimer

Thanks Jerry. The last two months have been productive as EnerDel ramped its manufacturing facility to begin commercial production for THINK. THINK is an important launch customer for EnerDel and has seen tremendous traction in Europe expanding coverage to new geographies and capitalizing on its early leadership position.

THINK has over 30 million miles of accumulated mileage data, well above the industry average and has the first fully vehicle homologated vehicle to meet the new stringent consumer electronic standards in Europe. For municipal and corporate police as well as every day consumers THINK is the first only battery electric vehicle available for purchase today.

On a planned production timetable this gives THINK a considerable head-start over its peers. Ener1 has been heavily involved in the restructuring of THINK over the past 18 months. The THINK EnerDel partnership is a powerful combination allowing both companies to launch volume production months ahead of the competition.

The drive train business that we developed with THINK has also seen considerable traction particularly in Asia where THINK and EnerDel are involved in four projects with EnerDel’s key investor ITOCHU Corporation. With the latest and final investment round, THINK now has a fully-funded business plan allowing it to accelerate its product plan, increasing right-hand drive which is critical for the UK and Japanese markets as well as maximizing its early need advantage.

To help steer and more closely align both companies through the following months, I have assumed the Chairman’s position in THINK. The obvious advantage in doing this is to bring to bear Ener1’s additional resources to facilitate and most importantly accelerate THINK’s market entry not just in Europe and Asia but in the United States also.

The Volvo relationship continues to make considerable stride. And I am pleased to announce that after a successful initial development phase, EnerDel was selected as the exclusive supplier for the C30 Pure Electric Vehicle platform. This is a considerable achievement for us on many fronts.

First the President of Volvo’s special vehicles who oversees approximately 30% global automotive production for Volvo cars has publicly stated that EnerDel was chosen for having the safest battery chemistry in the industry. Clearly this is a great accreditation given Volvo’s reputation for safety and vehicle design.

Second, I believe that the collaborative partnership between Volvo Cars and EnerDel is unique. The battery is now a strategic asset within the automobile. We work hand in hand with the engineering team at Volvo to solve technical issues, develop cutting edge performance and design and work together to commercialize new platforms. I will speak to this a little bit later in the call.

For now, I would like to hand the call over to EnerDel President, Rick Stanley who will give you more detail on the start-up production for THINK from a manufacturing and operations perspective, Rick?

Rick Stanley

Thanks Charles. During the first quarter, we took possession of our new manufacturing facility Mt. Comfort, Indiana, just a few miles from our headquarters in Indianapolis. Over a very short period of time, the facility was prepped and readied to receive to equipment. The existing pack assembly operation was relocated from Noblesville engineering, a test site, into the new plant.

On April, 29th THINK supplier quality personnel conducted the production part approval process or PPAP, EnerDel received four PPAP approval and we are now in production and shipping packs to THINK. To view the first battery packs coming off the production line please go to the EnerDel website where you can view photos and a short video.

Starting the commercial production for THINK marks the completion of a substantial milestone under the terms of our exclusive supply agreement with THINK; EnerDel is the exclusive battery supplier for a period of six months after which we become the predominant supplier for Europe and the exclusive supplier for the US market.

EnerDel has gone from the announcement of our production project last August to full production approval in less than eight months. The purpose of PPAP is to provide the evidence that all customer engineering design and specification requirements are properly understood by the supplier and has a process that has the potential to produce product consistently meeting these requirements during an actual production run at quoted the production rates.

This is a standardized process that has been adopted across automotive industry as part of the international standard for quality systems known as ISO/TS 16959. Obtaining PPAP approval requires the supplier to provided sample parts and documentation showing that first, customer’s requirements have been understood; second, the product supplied meet those requirements; third, the process including the sub-suppliers capable of producing conforming products; fourth, production control planning, quality management systems will prevent non-conforming product reaching the customer.

In order to achieve our PPAP approval from THINK EnerDel has obtained PPAP approval from over 120 discreet part numbers from 37 different suppliers over the past several weeks. In achieving compliance we learnt that this level of rigor is not common practice within the existing lithium-ion supply chain. Obtaining PPAP approval is further evidence that EnerDel is a leader in the industry and it’s fully prepared to meet the stringent demands of customers.

I will turn the call over now to Robert Kamischke, CFO and Controller at EnerDel to provide an update on the capacity ramp plan.

Robert Kamischke

Thanks Rick. Many of the EnerDel team members regularly listen in on this call. I would like to start by congratulating each of them on the achievement of this significant milestone. PPAP approval and the first production part shipments.

It hasn’t been easy ramping up production in eight months, but the EnerDel team stayed focused and delivered on our customer commitments. With PPAP approval behind us, we have entered our acceleration phase, ramping up our capacity to fly [ph] up to 900 THINK packs per month.

Since April 29th, EnerDel is building and shipping at a rate of 25 packs per week. The EnerDel team is fully engaged and exercising its manufacturing expertise to satisfy customers and generate automotive production revenue in the second quarter of 2010 just as planned.

The ramp up of Korean cell and Indianapolis cell and pack capacity is also proceeding as planned. Much of the new equipment has already completed initial machine qualification and installation run-off events are all trailing [ph] accordingly.

In select cell process areas, production trial runs have already begun ahead of exercising the full cell production system.

While the bulk of the installed cell capacity is destined for THINK vehicles we anticipate additional cell demand for both automotive and stationary energy storage customers. As an example, fully building out our Portland General Electric frequency regulation project in 2011 would consume up to additional 85,000 EV cells. Meeting this demand will require EnerDel to stay flexible to stretch its capacity in innovative ways.

An example of this in action today is where our Korean plant built nearly complete cells and EnerDel completes the final processing steps in Indianapolis. This has allowed us to break through capacity constraints in cell final processing and create additional throughput across the manufacturing system.

On our last call, we discussed the methods EnerDel is using to achieve cost balance across the system. And many of these methods such as volume sourcing of cell bulk materials have already yielded good results. Activities to qualify cell material second sources and localization of supply continue to make progress.

And then recently, we have ramped up value engineering activity, which will initially focus on three classes of parts. Pack mechanical parts, electro mechanical parts, and pure electrical parts. You know, EnerDel’s customers demand value-pricing from us and we will deliver on cost downs that support our customers’ requirements.

Now, let me turn the call over to Jeff Seidel Ener1’s Chief Strategy Officer.

Jeff Seidel

Thanks Robert. Since our last quarterly conference call, we have begun full implementation of the $118.5 million grant awarded under the American Recovery and Reinvestment Act of 2009. Our environmental assessment has been signed and we have submitted and received five separate reimbursements from DOE for capital expenditures and infrastructure build during the quarter.

To date, this process is working very smoothly with all reimbursements occurring in short order. As a result of the grant, pack assembly is now taking place at our new Mt. Comfort facility as we embark on our capacity expansion plan, utilizing the grant proceeds and subsequently the ATVM loan.

In terms of the ATVM loan, we have received the initial draft term sheet from the US Department of Energy as we have moved through the due diligence process, we have learned the deal via transaction advisory firm Grant Thornton, who will be used in specific situations that will not be required to fully bet our business model as we had previously expected.

Once the term sheet is finalized, the draft conditional commitment letter is formed, which is then evaluated by DOE’s credit committee. Once there in the Credit Committee the conditional commitment is finalized and presented to the credit review board for final review and approval.

We believe much of the upfront work we are conducting this year, we should help streamline this process. We have incorporated known requirements of the credit committee into the financial model already, which should help ease the application through this portion of the ATVM process.

I will now turn the call over to Charles for closing remarks.

Charles Gassenheimer

Thanks Jeff. 2009 was a similar year for the electric vehicle industry. It received its increased attention from governments, from the capital markets and from the world’s media. While every automotive company has electrification program of some description, many are starting to realize the unique challenges including electric vehicle on the road.

EnerDel is focused on differentiating itself as a company that delivers. We are steadily tracking against every one of our mile stone and delivering quality products to programs we believe are important from a positioning and proof of concept standpoint.

To this point, through THINK, EnerDel delivers in the context it will be the first to market in Europe with a homologated battery electric vehicle available for purchase today. Through Volvo EnerDel delivers and that it will continuously develop in technology alongside the most sophisticated car company in the world when it comes to vehicle safety, something we believe will be in the forefront of customers’ minds when these vehicles hit prime time.

China continues to be a key focus for Ener1. As of November 2009, China is the largest automotive market in the world with car sales rising 53% to 10.3 million units. And this is only the beginning. For every 1,000 people in China, only 30 own a car. This compares to approximately 7,000 or 8,000 people in the US.

Domestic production continues to accelerate. Of the 89 car models that were made – their debut with the Beijing Auto Show this year, 75 were domestic Chinese brands. The public transportation market has also seen significant traction with multiple city governments releasing RFQs from March volume heavy duty box contracts.

Entry into this market requires strategic partnership with Chinese players. Ener1 continues to be aggressive and to pursue these markets on multiple fronts.

TO that end, EnerDel alongside partners Cummins, Allison, Delphi and Remy are hosting an Advanced Technology Vehicle summit in the State of Indiana later this month. Over 100 automobile executives from China, including the Chief Executive Officers of First Autoworks, (inaudible) will be attending.

This is an industry-led summit focused on exploring the development of partnerships to accelerate commercialization of advanced technology vehicles in the US and China.

I look forward to sharing the fruits of these discussions with you on our next call.

EnerDel is not subscribed to the theory that it is a mere component supplier to its customers. With the advances is EV and battery technology that model is going through a rapid change. EnerDel leverages the considerable skill set of its engineers and battery systems expert to work hand in hand with vehicle manufacturers to produce the most sophisticated electric vehicle technology in the world. This is the path of creating sustained competitive advantage in my mind as vehicle manufacturers increasingly look to quality, safety and reliability of product as well as technology collaboration with their suppliers.

To this end, we believe THINK and Volvo will position EnerDel as a technology leader. Although much of the discussion has been around the automotive business, EnerDel has made significant stride in demonstration projects for grid storage working with utility companies such as Portland General Electric and industry partners such as ITOCHU and THINK.

One such project is called the collaboration between ITOCHU, EnerDel, THINK and Mazda and it involves an ITOCHU on convenience store chain called Family Mart. After many months of development, this project is being showcased in SCUBA Japan this Wednesday to over 100 journalists from all over Asia. It is indeed a ground breaking project showcasing how renewable energy electric vehicles and energy storage systems all work in harmony as a complete off-grid systems.

This project is being watched very closely by the industry as it enables EnerDel to collect invaluable end of life data for battery. This is going to be a key component in determining the residual life value of the battery and one of the most important functions within pricing the battery we believe will be the secondary use model.

Ener1 has worked over the last few years to lay out the foundation to exploit the huge growth potential as the electric vehicle industry and applications for energy storage technology gather momentum. I look forward to showing our progress with you over this coming year.

Now I would like to stop there and open up the call for questions and answers. Operator?

Question-And-Answer Session:

Operator

Certainly. (Operator Instructions) Our first question comes from the line of Dan Galves with Deutsche Bank. Please proceed.

Dan Galves – Deutsche Bank

Good afternoon.

Robert Kamischke

Hey Dan, how are you?

Dan Galves – Deutsche Bank

Good, good and thanks for the call and all the information. I am wondering if you could give us any additional color on the Volvo supply agreement. Can you tell us what type of agreement it is, and if there is any risk that that could change once the sale of Volvo to Geely happens.

Charles Gassenheimer

Thanks for the question Dan. We are not at liberty to disclose further information at this time. As soon as we are, we will make that information publicly available in the form an 8-k. But one of the things that we felt pretty compelled to share with the market at this time and one of the reasons why we are confident to disclose to the market at this time is, is that we understand that deal was not closed. We understand that Geely is doing its diligence and this is a quiet period where the companies are not working together. But we understand that Chairman Li is coming to Gothenburg and plans to drive the C30 battery electric vehicle there and thinks there could be a very large market opportunity for this vehicle in China.

So one of the things that we are absolutely critically clear on is that Volvo is bringing a tremendous wealth of technology to Geely including the electrification platform which I understand to be one of the most, one of the key aspects due to potential deal.

As I also mentioned we will be meeting with tier management team at Geely later in the month this month in Indianapolis and we have made it relatively clear that we expect the Volvo relationship to help us blossom further relationships with Geely.

So without being too transparent on our customer planning, I should probably leave it there. But the nature and level, the exclusivity is clear. And on e of the things Volvo has also said is they do plan now to go into volume production of the C30 around the 2013 time frame.

Remember that when we invited yourself and the other analysts out to the plant in January, they had been only talking about a 1000 vehicle running in 2011 and 2012 and I think the important distinction that we are now making is that they are planning to build this car volume which is of course great news.

Dan Galves – Deutsche Bank

Okay, thanks for that Charles. I was wondering also if you could give us an update on your liquidity picture like CapEx with 16 million in the quarter, do you have any update on what you think CapEx would maybe net of grant for the year. I don’t know if you have – if you can disclose that number?

Charles Gassenheimer

Sure.

Dan Galves – Deutsche Bank

And also the credit agreement with Credit Suisse ends on June 23rd. Is there any update on future funding after that?

Charles Gassenheimer

Sure. Couple of different questions. Let me answer the CapEx question first and then I will answer the liquidity question. On the CapEx side, we have no changes to report in our CapEx schedule for the year. We always knew this year would be front-end loaded from the CapEx perspective because of the equipment that we needed to order here for Indianapolis to start production on the both the battery pack side which we have now done and then to start production on cell side which we plan still around the August time frame.

Remember that the cell side is potentially more expensive than the pack side. So, no changes it is still 50/50. $1 of equity matched with a $1 of grant, so you could see that we have spent a good portion of the money we expect to spend for the year in terms of the 62 million number still is a good number for us.

On the liquidity side, one of the things I announced in our year-end call is that we fully acknowledge that we needed to have more transparency around our capital raising plans. We fully acknowledge that market would like to see cash on the balance sheet and so we went through a change in our strategy from the at-the-market agreement where we would pay as you go and we took down the Credit Suisse bridge as a means of then putting in place permanent capital.

We are on track on our plans with permanent capital on the balance sheet. And clearly understand that while the June target was where we had flexibility with the Credit Suisse bridge we believe we are on track to beat that target and put permanent equity on the balance sheet. So that’s what we are working toward.

I don’t want to get into too much detail on that except again until it is done, but we are confident that we have got the funding lined up and that we will put it all in place. One of the other reason to do that is as Jeff has mentioned, we are now getting into very late stage negotiations with Department of Energy and clearly we want to be able to show them as well on the loan side that we have the equity in place.

So I think we are killing multiple birds with one stone by changing our strategy and we feel very confident that things are going in the right way.

Dan Galves – Deutsche Bank

Okay, thanks a lot. Appreciate it.

Charles Gassenheimer

Thanks for your questions. Operator next question.

Operator

Your next question comes from the line of Steve Milunovich with Merrill Lynch. Please proceed.

Steve Milunovich – Merrill Lynch

Great. Thank you very much. First off, can you talk about where you are in terms of your cost per kilowatt hour at this point and as best as you can where you think that stacks up to the competition?

Charles Gassenheimer

Sure. Steve thanks for the questions. You know I am obviously glad to have an opportunity to talk about this philosophically and then perhaps Robert will share some more details. We like the rest of the market saw the “news” last week about Nissan’s pricing at $375 a kilowatt hour. One of the things that struck on as complete on that analysis is that the level data associated with that number.

I think there were couple of things that we understand and the first thing I would note is that Nissan doesn’t plan to have volume production in their Sunderland facility in the UK until 2013, which is where that speech was made from. The second thing I would note is that similar to EnerDel, Nissan has its similar philosophy and like EnerDel they have partnered with a Japanese trading house. Their Japanese partner happens to be Sumitomo as we disclosed our partner happens to be ITOCHU and both companies having very firm view that the secondary value of the battery is going to be substantial in which case what we believe is, is that we are going to be able to pass those savings to the secondary use on to the automotive customer.

So, I think there are some points in clarity that we need to be associated with to understand fully what we mean my getting down to $375 a kilowatt hour. I certainly think that EnerDel over this fine period can get there assuming some residual value for the battery and assuming an aggressive cost walk down program both of which we had previously talked about.

I don’t know, Robert, if you want to add some more color to that?

Robert Kamischke

No Charles. I think that effectively sums it up.

Charles Gassenheimer

Thank you. Steve does that help to get you some color.

Steve Milunovich – Merrill Lynch

Yeah certainly. And last quarter you talked about hopefully signing an agent OEM by year-end and perhaps kind of winning wild a three European deals that you might be involved in. You still have confidence in that? It sounds like a fair amount is going on the Asian side, so you maybe you feel pretty good about that side?

Charles Gassenheimer

Again, I would just say this. We are highly confident especially now that we have started production. We are highly confident that we are going to have a substantial uptick in business. I would confirm that we plan to sign two household names I think with the language I used on the last call, one in Asia Pacific and one in Europe. We are making excellent traction in both places. (inaudible) has moved to Europe. It is really starting to bear fruit over there and having a greater presence in Asia Pacific is really bearing fruit for us as well.

Yeah, I feel highly confident. Clearly I think a lot of the major OEs who are watching this carefully there is a lot of noise and a lot of hype in this space as we fully acknowledge which there is not too much we can do about that other than to execute and we take in the strategy to put our heads down, execute and deliver the product and let that do the talking and I think that now that we are shipping volume and we made PPAP approval, I think that’s a substantial milestone in the industry.

I clearly want to congratulate the team because I just find that to be phenomenal and doing at the time we did it. So I couldn’t be any more excited about the traction we are starting to see.

Steve Milunovich – Merrill Lynch

Okay, thank you.

Charles Gassenheimer

Thanks. Operator, next question please.

Operator

Your next question come from the line of Dilip Warrier with Thomas Weisel. Please proceed.

Dilip Warrier – Thomas Weisel

Thanks Charles. So, if you build out your capacity here in Indiana to approximately 900 EV packs by the end of the year, is the expectation to take up all the production – what is things progress in terms of building its pipeline for 2010.

Charles Gassenheimer

Sure. Thanks Dilip. So, to answer that question, I think there is a couple of thoughts. The first thought I would say is, is that we are continuing to diversify our revenue stream. Robert mentioned in his speech preserving some capacity for the Portland General Electric program. Additionally we are doing some work with Quantum for the State of California where we are building demonstrator vehicle there. So, we are really diversifying out, there’s about 20 vehicles we are building this year. So to answer your question, certainly I think it is critical to us, we have marshaled our resources to what we think are top priority.

Any time you are doing something for the first time you want to make sure you get it done correctly and right. And I think that getting PPAP certified on the first go with no defects was an impressive achievement.

So I think our focus was there. I think everybody here in Indiana, where I am actually sitting here in the plant today. Everybody here is certainly feeling very good about life. And so I think to answer your question more specifically we are going to be ramping up to that capacity. Clearly we have other ways to allocate that capacity as well, but I think we also need to understand on the THINK side, in a bit more detail how we divide up the capacity allocation to the vehicle between the US, between Europe and between Asia all three areas we are seeing a tremendous amount of demand.

And they are once again, I mean, I think we starting to get to an area where I would Richard Stanley probably to make comments rather than myself but we are getting real excited about the investment made in things, about the level of effort it took stand THINK back up again. I think in January through March of ’09 it was a leap of faith except to step into THINK given the financial difficulties and the overall automotive market at that time was certainly challenging, but I think we knew this was a marathon race and not a sprint.

And I think stepping in and funding THINK and now with the completion of their $40 million investment round, which will be announced tomorrow morning before the US equity markets open, I think it is all good news from our perspective where we are really going to start to see the fruits of that labor.

Dilip Warrier – Thomas Weisel

Thanks for that detail Charles. Just a follow up question. Is there any progress on the Japan postal service conversion opportunity at this point?

Charles Gassenheimer

In terms of progress, where we are is, we delivered the additional 10 vehicles or now up to 12. We are shifting the contract over to new conversion company, Tokyo R&D and we are going to be processing the next 500 orders with the THINK drive train and the EnerDel battery solutions. So things are progressing there.

Operator, next question.

Operator

Your next question comes from the line of Paul Clegg with Jefferies. Please proceed.

Paul Clegg – Jefferies & Co.

Hey guys, thanks for taking my questions.

Charles Gassenheimer

Hey Paul.

Paul Clegg – Jefferies & Co.

Just a few clarification questions. The Volvo agreement that you have signed is, if I am correct, is for 2011 and 2012. Is that right?

Charles Gassenheimer

Yeah. So, we – Paul just to be clear we are not giving incremental detail yet. We have – we’ll 8-K the agreement when it is ready to be 8-Kd, I just want to steer away from that, but what we are willing to announce is the headliner which is that we will be exclusive battery supplier for that platform.

Paul Clegg – Jefferies & Co.

For that platform. But at this point, we don’t know about the volume production business. I mean, we don’t know – we haven’t signed an agreement for the volume production business for 2013. I was just wondering if there is a sense of window or (inaudible).

Charles Gassenheimer

So once again, just to be clear. We are going to be the fleet’s battery supplier for the volume program.

Paul Clegg – Jefferies & Co.

Okay, for 2013 as well and beyond that. Okay, very good, thanks for that.

Charles Gassenheimer

Yeah, no problem. The key to that and where I don’t want to run amuck of overstepping by bounds here. The key to that clearly is subject to meeting sufficient pricing goals for both the battery in the vehicle side and this is where, again a relationship, (inaudible) with EnerDel is so strong where we are really going to work together and form a joint purchasing task force to together and really try to squeeze down the cost of both to car and the battery.

So we really are in this together and so it has been a great partnership and I think it is something that we are both proud to be associated with each other and that is why I’d say there are certain provisions with in this agreement that we are not willing to discuss because we are putting together some price targets that we think are going to be very aggressive but where we think we need to be to sell a lot of these cars.

We have littled out that this is the car that the consumer would want to drive. Clearly it is about price and that’s something that we are going to be working very aggressively on.

Paul Clegg – Jefferies & Co.

On that portion, would you expect to – I guess are you expecting to know all this information once 8-Kd or once – or will you do it over multiple 8-Ks as you addressed different parts of the agreement?

Charles Gassenheimer

I think that’s probably a bit granular. So, give us about – give us some time to make that information public. Clearly at the end of the day, the relationship is a very strong one. Clearly at the end of the day we are very, very aggressive on pursuing, getting the cost down, getting the volumes up for both companies, but I just don’t think it would be appropriate to go at that level of detail at this time.

Paul Clegg – Jefferies & Co.

Understood. And we will all move on to something else. Just to be clear, where there any pack shipments to THINK that were actually included in the first quarter revenue numbers or is that all really showing up in the second quarter, even if it is a small amount?

Charles Gassenheimer

I know Jerry was on a cell phone, so I am not sure if he could hear this. Let me try to do that. So, Our booked and billed revenue was $11 million that number does not include approximately 1.1 million of revenue that was phased out as consolidation, so what that means is we produced about $1.1 million worth of sales in Korea that was shipped to US, but we recognize revenue when we ship the pack not when we ship the cell. So, that will be revenue that will obviously be captured in the second quarter.

Jerry Herlihy

Hey Charles, I actually – I am on the phone.

Charles Gassenheimer

Okay.

Jerry Herlihy

And there were no production revenues to THINK in the first quarter.

Paul Clegg – Jefferies & Co.

Okay, very good. And then, just given if I understood correctly where the pack shipments are trending right now, your run rate – would it be reasonable to expect EnerDel to be breakeven in let’s say the third quarter?

Charles Gassenheimer

You mean, when do we get to 900 packs per month?

Paul Clegg – Jefferies & Co.

Oh, I am sorry that was for month? Okay, that was for month.

Charles Gassenheimer

900 packs per month and I think what we had said is that our target is to get to EBITDA positive on EnerDel basis by end of 2010 beginning of 2011 and I think we are confirming that today. We are producing 25 packs a week currently and we expect to materially ramp that volume throughout the course of this year.

Paul Clegg – Jefferies & Co.

Very good. And then just one final question. How would you expect gross margins to trend in the second quarter given that you are going to see the full effect of the ramp in the shipments in that quarter when presumably you are not going to be using all of your capacity?

Charles Gassenheimer

Robert, do you want take a shot at that?

Robert Kamischke

Well, I don’t think the expectations should be very high because essentially we are still building out that capacity and we are still going through a ramp phase which includes having some excess – I wouldn’t say excess but additional resources that will come on earlier for the ramp up and then also we have got to do qualification and burn in of our equipment that we are installing as well. So, I wouldn’t have fleetingly high expectations for that period.

Paul Clegg – Jefferies & Co.

Do you think – I mean, incrementally does it go down over the first quarter and then turn back up as you get more volume in?

Robert Kamischke

Well, certainly we are generating a positive contribution margin as a result of these production sales that we don’t have in the first quarter.

Paul Clegg – Jefferies & Co.

Okay, thanks very much.

Charles Gassenheimer

Meanwhile, yeah Paul thanks and just to clarify. Right, so remember that we phased our CapEx into 15,000 pack increments on the pack side, but remember it, it is awfully hard to do that on the cell side, right either buy a large machine or you don’t.

And so, it is going to be a bit lumpy, the way the business plan come together. If you look at it on a quarter over quarter basis, in 2010 it will be a bit lumpy, but that should all come together around the end of this year.

Paul Clegg – Jefferies & Co.

Okay, very good. Thanks.

Charles Gassenheimer

Thank you. Operator, next question.

Operator

Our next question comes from the line of Matthew Crews with Noble Financial Group. Please proceed.

Matthew Crews – Noble Financial Group

Hi yes. Thank you for taking my call. Just, did you mention, I didn’t catch that what the quarter backlog is as of the end of the quarter or currently? I know we have had numbers in the past. Are there orders and/or letters of intent?

Charles Gassenheimer

Sure. Hi Matthew, thank you for your question. THINK to date has shipped 466 cars, that was against an order backlog of about – or an order bank of about 2000 vehicles for the year. What THINK has done in the last two months is they have signed supply agreements or I guess distributor agreement in Europe. They have divided up distribution range by region. So, they have signed an agreement in Austria, Switzerland, and now with Noroto [ph] in France that we think is going to be a very successful distributor agreement.

So, that order backlog is growing. We are putting the infrastructure in place on both the sales and marketing and perhaps most importantly on the service side because clearly once you put cars in the field you need to have the infrastructure to be able to service them. And so I think the infrastructure is now coming together and so we are pretty excited about that. And clearly again, just to bear in mind that the company came out of bankruptcy in Norway in August of last year. So, dramatic production ramp and dramatic sales and marketing ramp here.

So, we are bringing on some very, very good talent within the company and we are really starting to see things coming together and I know lot of that is sort of is behind the scenes but you will start to see the fruits of that labor as well in terms of investment on the human capital side. So, I think there are some very good things going on there.

Matthew Crews – Noble Financial Group

I read, you had been – THINK had begun selling cars in New York, any update on that, if there has been any? How that’s working? I know that they were.

Charles Gassenheimer

In New York, yes. So, the – in fact real time the sales and marketing force were in Las Vegas this weekend for a big automotive show and demonstration. I think they are still compiling the order backlog in the US, the other avenues that they’ve looked at here in the US is potentially partnering with a big box retailer. And again, without sort of overstepping by bound, I think I prefer to let Richard Stanley speak to some of these issues, but we again, – just given the fact that we are fully homologated and road-ready and we are producing cars in volumes.

Anybody who wants to buy an electric car today, THINK is the only game in town. SO, there is a tremendous amount of interest in the car. And we are starting to see some real backlog and I think that you will see some more information come out of THINK over the next coming months, on the progress they are making.

Matthew Crews – Noble Financial Group

Okay, great. So, I think that probably won’t be Best Buy or – they are already doing their motorcycles there. Just one quick question on the cost down or how to get the cell’s costs down kilowatt hours. I am just curious haven’t really heard much on NanoEner do you see any progress on that business and that R&D efforts as part of the process for manufacturing the cells, if you look at the cost down, any update there?

Charles Gassenheimer

Sure. Thanks for the question. I am going to have Jeff Seidel address that question.

Jeff Seidel

Yeah. Hi, we continue to look at that business as a way of basically improving the electric footing process within cell manufacturing. Nano is working on a project internally and then also potentially a project externally which would revamp or be a redesign of cell electro coating. So, we think that there is potential in that business. Potentially revolutionizing the entire coating process.

So, behind the scenes we – the technology roadmap for Nano is part of the EnerDel R&D process.

Matthew Crews – Noble Financial Group

Okay great. Thank you very much for your time.

Charles Gassenheimer

Thank you for your questions. Operator, any more questions?

Operator

Yes sir. Final question comes from the line of Chris McDougall with Treaty Oak Capital. Please proceed

Chris McDougall – Treaty Oak Capital

Hey thanks a lot for the call. The – I want to understand –

Charles Gassenheimer

Operator, is the line still open?

Operator

Yes, a moment, I apologize. Mr. McDougall, your line is open.

Chris McDougall – Treaty Oak Capital

Okay. Can you hear me now guys?

Charles Gassenheimer

Yes. Go ahead.

Chris McDougall – Treaty Oak Capital

Okay, thanks a lot. So, in understanding your operating leverages, you ramp up to 900 packs and hopefully beyond. When I look at your financials right now, you have a gross profit of 1.1 million and what fixed costs are in there since the depreciations are taken out, I assume you have some salaries and such, but can you give me an idea of – in that COGS line, how much of that is more or less variable materials cost and so forth and how much of it is truly fixed that we are going to see some operating leverage on?

Jerry Herlihy

(inaudible).

Charles Gassenheimer

Jerry, do you want to address that question?

Jerry Herlihy

Yeah, actually it is –

Charles Gassenheimer

Yeah, go ahead.

Jerry Herlihy

Hello?

Charles Gassenheimer

Yeah, we can hear you Jerry go ahead.

Jerry Herlihy

There is actually depreciation in two places in our income statement. There is depreciation down in the operating expense line that is primarily related to the depreciation during the engineering and R&D phase. But actually there is $879,000 of depreciation in the COGS line that is primarily in the Korean operation. So there are non-cash charges up there.

Chris McDougall – Treaty Oak Capital

Okay. And then – so we have got that and then as far as the break down between them, I mean, truly variable costs and materials costs is primarily the big concern. And other costs, how much is that on a percentage basis?

Jerry Herlihy

So, I think it would help maybe if I spent two minutes talking about where the cost downs are coming from, so I could help you find and bottle it out. So, there were multiple cost downs. SO, the most easily understood of those is raw materials on the cell side which is things like lithium and part carbon and electrolyte things like that. And then on the pack side, it is basically electrical and mechanical parts which there are large volumes in this and we expect some pretty significant cost down actually more rapid on the tax side and on the cell side. We are hoping that they are going to come down dramatically.

Eventually, further down the road there is going to be redesign of the pack because we really built this pack for safety and therefore it is – and maybe in the future, you look back at it and say it was overbuilt, but that’s what you need in the early years. But the most dramatic change in the cost structure over the next 18 to 24 months is in our ability to increase the yields and to try to get to world class numbers.

Our Korean operation already produces in the low-mid 90% range when they produce cells and in the United States with this very large capital expenditures and with all the help from our EnerDel Japan and our Korean employees and their executives, the plan is to get that yield up and when that yield gets up into the 90s that’s when start approaching the breakeven number.

So, it is less of a fixed cost and it is a yield number right now.

Chris McDougall – Treaty Oak Capital

Okay. Well that makes sense. Thanks. Then moving on to the THINK equity raise. Actually I missed that on the call. You said there was a $400 million equity raise or something that THINK had done. Did I hear that correctly?

Charles Gassenheimer

No, apparently you didn’t.

Chris McDougall – Treaty Oak Capital

Okay, I am sorry. That wasn’t a trick right there.

Charles Gassenheimer

Oh, it is okay.

Chris McDougall – Treaty Oak Capital

So, then –

Charles Gassenheimer

What we said was that the company will announce tomorrow morning a 4-0 a 40 million raise.

Chris McDougall – Treaty Oak Capital

40 million? Okay.

Charles Gassenheimer

The raise was fully subscribed, in fact, it was oversubscribed and the raise was – okay everybody who participated in the August rounds that brought the company out of bankruptcy participated in this round. The raise was co-led by RockPort Capital, the oldest cleantech easy fund in the US, in Boston and by Ener1. And had other investors such as Element Partners, also a world-leading clean technology front and (inaudible) up in Finland who is the strategic partner along with Ener1 that has gotten together to bring – really gotten together to change the situation at THINK most dramatically.

So, we are really excited about having THINK before we started. I think that’s a critical step and it is something that really puts us on good footing.

Chris McDougall – Treaty Oak Capital

Okay, great. Thanks. And then on the Volvo agreement, I understand you are exclusive for six months and does that six months start with the commencing of production for this 1000 vehicle type round, that is more or less kind of an early stage production? Or does that commence at different time. When does that six months clock really start?

Charles Gassenheimer

So, again, I am not sure we were on same folder. So, Volvo and THINK are two separate contracts. So, let’s just separate them.

Chris McDougall – Treaty Oak Capital

Oh, yeah, yeah. I am sorry I didn’t mean to co-mingle them.

Charles Gassenheimer

That’s okay. So, let’s just make sure they are clear because I want to make sure everybody else on the call understand it as well and I want to make sure there is no confusion. So, with THINK what we announced – and confirmed again on the call is that THINK is an exclusive relationship. EnerDel is the exclusive battery supplier for a period of six months after we become the predominant supplier for Europe and exclusive supplier for US, okay? And we expect THINK to take us up to well north of 900 packs per month.

On the Volvo side, what we announced today that’s incremental, is that we are now named the exclusive battery supplier for C30 which is their pure electric vehicle platform that includes both the 2011 and 2012 start-up production as well as the volume program that is now expected to start in 2013.

We haven’t announced any further details on the Volvo program at this time that expect to filed at in an form of an 8-K with supply agreement at some point in time in the near future.

Chris McDougall – Treaty Oak Capital

Okay, yeah, thanks for clarifying that Charles. Thanks a lot for the call.

Charles Gassenheimer

Okay, thanks for your question. We are nearing the company hour now. So, thank you very, very much for your questions and participation in today’s call. We appreciate the continued and ongoing support of Ener1 and we look forward to communicating with you shortly.

Operator

ladies and gentlemen that concludes today’s conference. Thank you for your participation, you may now disconnect. Have a great day.

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