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Valence Technology Inc. (VLNC)F

F4Q10 (Qtr End 03/31/2010) Earnings Call

June 14, 2010 4:30 PM ET

Executives

Pierre Dubois – Director of Investor Relations

Robert Kanode – President and Chief Executive Officer

Ross Goolsby – Chief Financial Officer

Analysts

Rob Young – WM Smith

Robert McCourt – Private Investor

Bob Engbinder – Garden State Securities

Brian Caramadre – Private Investor

Paul Riney – Private Investor

John Schroepfer – UBS Financial

Patrick Metcalf – Newbridge

Michael Lew – Needham & Company

Ron Stewart – Private Investor

Operator

Good day, ladies and gentlemen, and welcome to the Valence Technology Fourth Quarter 2010 Earnings Conference Call. My name is Alysia and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Pierre Dubois, Director of Investor Relations. Please proceed, sir.

Pierre Dubois

Thank you. Well, good afternoon, everyone and we appreciate you joining the Valence Technology fourth quarter and fiscal year-end 2010 conference call to discuss reported results. With me today are Robert Kanode, President and Chief Executive Officer and Ross Goolsby, Chief Financial Officer. This conference call is being recorded and it will be available for replay at the Investor Relations section of our website at www.valence.com.

And just a reminder to everyone that during this conference call, Valence Technology management may make comments that will reflect our intentions, beliefs and expectations for the future. As a result, some of the information disclosed on this call will include forward-looking statements and such statements are subject to a number of factors which could cause actual results to differ materially from those statements. For a discussion of those factors, please refer to Valence’s annual report on Form 10-K and the other periodic reports and documents filed with the SEC. After opening remarks, the operator will provide instructions on how to ask questions. I would now like to turn the call over to Bob.

Robert Kanode

Thanks, Pierre. And I also would like to welcome everyone to our call today. Many of you may remember during our last call, we discussed that in spite of difficult economic conditions, we expected 2010 will be a good year for Valence. I am therefore pleased to report both existing business and new business is moving forward and our backlog is at a high level that we have not seen in recent times.

We are ramping our manufacturing to respond to increasing demand from a growing customer base and expect continued growth throughout 2010 and beyond. I am also pleased to report the addition of R.J. Adleman to our Senior Management team as VP of Sales and Marketing. R.J. brings extensive sales and marketing experience to our Senior Management Team.

While we are pleased with the recovery of our existing customers and our new business opportunities, I also must caution everyone that we are experiencing short-term electronic component and sale shortages. Our electronic component shortages are driven by unexpected high demand across multiple manufacturing sectors.

Our cell shortages are driven by delayed capacity expansion of our primary sales supplier and what we believe to be short-term manufacturing quality issues. These problems are being aggressively addressed by Valence and our suppliers and we believe our supply will ramp to fulfill our customer’s current demands by summer’s end. All other components and materials are available to fulfill our customer’s requirements.

Looking beyond this summer as demand continues to grow, we expect to further -- be further challenged by isolated component shortages. To combat these shortages in the short and long term, we are relying on the experience of our senior management team who have dealt with these issues in the past, also securing additional buffer stock of critical components as well as do sourcing of selected printed circuit boards and cells.

Beyond this summer’s supply challenges, we believe component availability will improve and have minimal impact on our ability to fulfill the future demands of our customers. When I first joined Valence, we revisited and redefined our marketing and sales approach.

We recognized that although we had proven capabilities to develop custom systems like Segway, we also had a proven family of standard U-Charge products. We realized there were no developed lithium energy storage standards and that no single market sector was driving the rollout of our high-capacity lithium energy storage solutions. These factors led us to pursue a strategy targeting customers that could immediately benefit from the safety, superior performance and long-term economic advantages of our U-charge products.

And since no single market had yet emerged as the early champion for lithium applications, we chose to pursue multiple opportunities across a broad base of markets. After years of testing by numerous corporations, we belief the strategy is coming together in 2010 and will serve us well.

We are working with a growing number of corporations that are represented in their market sectors as pioneers and innovators, such as Segway, Smith Electric Vehicles, Wrightbus, Optare bus, Beneteau Yachts, Tennant and others.

We have over four years on the road and inserts commercial experience working with system development partners such as Siemen’s Corporation, Enova, Zytek, Ziad Corporation, Tennant and others designing advance electric automotive drive symptoms, Marine propulsion systems, Stationary energy systems and industrial cleaning and material handling systems.

Our U-charge family of products offers years of proven in-use reliability, system configuration flexibility upto 1000 votes, long life and safety with distribution on three continents. Our interactive command and control logic that can report 60 data points, three kinds per second to a central command center is built into every U-charge XP system, offering extensive battery monitoring and control capabilities.

Our patented technology that includes cylindrical and prismatic cells, two families of cathode materials, interactive command and logic, advanced manufacturing capabilities and flexible system configuration capability upto 1000 volts enables us to serve a broad base of application -- applications in numerous markets.

For many applications, our U-charge family is the obvious choice with the right flexibility and immediate availability, early adopters of lithium technology need. And for other customers that require custom solution, we have all the tools to quickly respond to their system requirements. In fact as we speak, our high-capacity prismatic cells have matured to the point they are being tested by two tier one OEM automotive suppliers.

Our worldwide intellectual property estate offers freedom to practice and sell in major markets throughout the world and a clear path to future technology improvements. And finally, experience counts and word of mouth recommendations are growing. I encourage everyone to look beyond our enabling technology and consider how our lives can be changed for the better with our customer’s unique applications that use our dynamic energy storage solutions.

For example, at the recent Miami boat show, I joined a group of engineers and the press on a demonstration ride on board Brunswick’s new 43 foot hybrid yacht powered by Valence. I cannot describe the sense of pride we all felt as we left the harbor, no engine noise, no pollution, just silence.

We believe we have focused on the right market segments, targeted the right early-technology adopters to gain experience and are now moving forward across a broad base including automotive, marine, industrials, stationary and military with our patent new lithium phosphate technology.

As we move beyond the current component shortages and continuing ramping our production, we believe our 20 years of technology advances and some missteps, 2010 will be a clear inflection point in our commercial evolution. Ross will brief you on our financial results and provide specific revenue outlook and then we will welcome your questions. Ross?

Ross Goolsby

Thank you, Bob. I will provide some brief comments about our fourth quarter and full-year financial results. We filed our 10-K today, which provided more detailed information about our company and business. Links to all of our SEC filings are posted on the Investor Relations section of our website for your convenience.

For the fourth quarter, we generated revenue of $3.9 million, which was towards the high end of the revenue guidance we provided in February. This compared to $4.7 million in the fourth quarter of last year. The decrease in revenue was primarily due to reduced sales to Segway offset by 1.3 million increase in sales to Smith Electric Vehicles U.S. in the fourth quarter of fiscal 2010.

Segway was impacted by the weakened economy over the last 12 months and comprised less than 10% of our revenue for the quarter. This compares to 63% of total revenue in the fourth quarter of last year. We were able to offset most of this decrease with increased sales to the U.S. division of Smith, EVI and Howard Medical.

For the full year, we had revenue of $16.1 million, which was 39% lower than fiscal 2009. This decrease was primarily due to decreases in revenue to Segway of $7.9 million and decreases in revenue to Smith U.K. of $4.2 million.

We are seeing increasing orders and an improved positive longer-term outlook from our existing and potential new customers after seeing the economic conditions of the last several quarters dampen demand for their products and thus our energy storage solutions. Our customer base continues to grow and includes companies in automotive, industrial, medical and marine markets.

Gross margin was 12% for the fourth quarter of fiscal 2010, compared to 9% gross margin in the fourth quarter of last year. Our gross margin for the full year was 12% compared to 2% in fiscal 2009. The reason for the higher gross margin in the current quarter and fiscal year was due to a shift in sales to more profitable products in our U-charge family and the charges for inventory obsolescence in the prior year related to the discontinued N-Charge and Epoch productlines.

As we have said before, in terms of our gross margin, we expect cost of sales as a percentage of sales to continue to decrease as production volumes increase, inventory levels stabilize and manufacturing efficiency improved. Our operating expenses increased by $900,000 in the recent quarter, compared to the same period last year, mainly due to higher litigation expense associated with our intellectual property.

For the full year, our operating expenses were $19.8 million, compared to $17.2 million in fiscal 2009. The year-over-year increase was also primarily due to the increased litigation expense as well as non-cash stock-based compensation expense. Our operating loss for the quarter was $4.2 million, compared to $3.3 million last year and our net loss available to common stockholders was $0.04 per share in both quarters.

For the full year, we reported an operating loss of $17.8 million, which compared to $16.7 million in fiscal 2009. Our net loss per share available to common stockholders for both fiscal 2010 and fiscal 2009 was $0.18.

Moving to cash flow and the balance sheet. Our net cash used in operating activities for the fiscal year was $9.7 million, compared to $15.4 million for fiscal 2009, while cash provided by financing activities was $9.1 million and $20.4 million respectively. In terms of liquidity, we finished the year with $3.2 million in cash and cash equivalents.

We saw our working capital decrease over the year, primarily due to a decrease in inventory of $5.1 million as we managed inventory levels during the economic downturn. We do expect working capital will increase during fiscal 2011 as our revenue increases.

During the fourth quarter, we received proceeds from our previously disclosed insurance claim totaling $3.2 million. We also agreed to amend our loan with iStar Tara. The amendment extended the maturity date of this $20 million loan from July of 2010 to February of 2011.

Historically, we have relied upon the ability to periodically arrange for additional equity or debt financing to meet our liquidity requirements and we anticipate this to continue until our product sales reach higher levels. During the third quarter of our fiscal year, we completed an equity financing which provides for bi-weekly sales of our common stock to Seaside 88, an investment limited partnership.

Thus far, we have raised $6.4 million from nine completed closings under this financing agreement, but did not complete nine of the scheduled closings. This was due to the floor price as defined in the agreement exceeding our then current stock price at the time of the scheduled closings. We are continuing to explore alternatives relative to raising capital to grow our business.

Turning to revenue guidance, our revenue outlook for the first quarter of fiscal 2011 is to be between $4.5 million and $5.5 million. This is well above the quarterly revenue we reported in the last several quarters and an indication that we are seeing topline growth again.

As Bob and I have both mentioned, we are expecting our quarterly revenue to continue to increase from these levels during fiscal 2011. We have seen a significant increase in our backlog since our last quarterly investor and are ramping manufacturing output accordingly.

This concludes our prepared remarks. So now let’s open the call to questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) And the first question comes from the line of Mr. Rob Young with WM Smith. Please proceed.

Rob Young – WM Smith

Hi, good afternoon.

Robert Kanode

Hi, Rob.

Ross Goolsby

Good afternoon.

Rob Young – WM Smith

Starting off, I was just curious if you could talk a little bit about the testing timeline for the OEMs that you mentioned on the call?

Robert Kanode

Well, I can say this, Rob, one is much more advanced than the other and looks very good. And the second one just started a few weeks ago and we don’t really have any preliminary results but we’re very happy with the testing in the first OEM.

Rob Young – WM Smith

Okay. And then on various projects that you’ve announced, specifically in April and February, can you talk a little bit about how the evolution is proceeding with those? I mean, are they still -- do they still remain on track and still expecting to accumulate revenues throughout the calendar back half?

Robert Kanode

Yeah. You know, one of the good things about customers, new customers that are coming online now, is most of these people have tested us for quite a period of time and know us well. While we suffered through up to two years of testing -- suffered probably isn’t the right word, but we were inpatient through some of these testing periods. So they now are turning around and becoming a very positive for us. So yeah, we see traction that we are very comfortable will continue to grow.

Rob Young – WM Smith

Okay. And then does that apply as well as to the energy storage markets?

Robert Kanode

It’s interesting. There have been some demonstration projects in energy storage market, and we, as I’m sure others are trying to determine where it’s really going, whose going to lead, whose going to be the appropriate partners? I was just in a meeting last week in Washington to try to make some recommendations to the Department of Energy on this very subject.

So at the moment, there is not as much definition within the storage sector as it is within other sectors. But I expect that definition will be forthcoming, definition meaning, what are they going to address first, mass energy, storage or frequency modulation, for example and who will be the partners that will address that?

Rob Young – WM Smith

Okay. Okay. And then on [Altera’s] backlog, you mentioned there is the highest is in relation to recent periods, can you quantify how much the impact of the shortages had on that backlog?

Robert Kanode

We cannot really quantify that per se but it was a significant impact on this summer that we’re working very hard to recover with both our existing customers that have come back to the table, very healthy, I might add and our new customers that are very, very impatient to move forward this year, they are ready. And we are doing everything in our power to make sure that we give them a recovery that’s as short as possible.

Rob Young – WM Smith

Okay.

Robert Kanode

I might add that our senior staff really has, just about every one of us, have done this before. I had my experience under fire, if you will, at IBM with ThinkPad and Ross has been through this. So we’re not newcomers to this. The trick here is to creatively think outside the box and come up with whatever solution is possible but controllable from a manufacturing stand point and also minimize the distribution time to the customer during this critical period. And constant communications and honesty and openness is an absolute must. And we’re doing all of that.

Rob Young – WM Smith

Okay. Perfect. And then lastly, can you just talk a little bit about how much the correlation you’ll see from the working capital growth as it relates to the revenue growth?

Ross Goolsby

I think there’ll be a pretty direct correlation. We’ve managed our inventory levels down as I mentioned in the prepared remarks because of the economic downturn. I expect you’ll see those levels come up some as well as receivables et cetera. I will say we’re shortening the cash-to-cash cycle as we get product from vendors through the manufacturing processes and into customers’ hands. So -- but I would expect as revenue grows there will be some increase to working capital in relation to that.

Rob Young – WM Smith

Okay. And then from a DSO perspective, I mean, are you expecting relatively consistent DSOs or is it expected to increase a little bit?

Ross Goolsby

I wouldn’t expect it to increase. I think they should be consistent.

Rob Young – WM Smith

Perfect. Well, that’s all I have. Thank you very much.

Ross Goolsby

Thank you.

Robert Kanode

Thank you, Rob.

Operator

And the next question comes from the line of Mr. [Robert McCourt], a private investor. Please proceed.

Robert McCourt – Private Investor

Hello, guys.

Robert Kanode

Hi, Robert.

Robert McCourt – Private Investor

I’ve got a list of questions here. So I’ll try and go through them as fast as possible. Last quarter, you provided some insight to the first quarter of 2011 as far as the backlog that looks like the guidance is a little bit over that. Can you give us an understanding of what the second quarter of 2011 order flow looks like?

Ross Goolsby

We can’t get too detailed on that. As we mentioned, there’s some manufacturing throughput issues that we’re managing. However, we do expect it will be above the first quarter levels fairly significantly.

Robert McCourt – Private Investor

Okay. The guidance -- or there’s about 11 supplier agreements that have been announced in the last year, five of which had some volume defined and others did not and I’m trying to get my arms around the FY ‘11 revenue potential. And the -- very few analysts cover this company and the range of annual revenue guidance is between $20 million to $46 million. Can you give us any guidance, maybe not on a quarterly basis, but what is management anticipating on an annual revenue basis for 2011?

Ross Goolsby

That’s a great question. One of the things we’re dealing with, as we’re starting to see revenues grow again is visibility and quite frankly, we’re getting some very positive forecasts from customers and we’re obviously distilling that information and working on that information. But at this point, it’d be very difficult to try to give you a firm annual number. We’re expecting our quarterly revenues to increase each quarter, fairly healthy -- on a fairly healthy basis, but it’s kind of difficult to give you an annual number, Rob.

Robert Kanode

Rob, I think one of the positive things about these shortages are, if there is a positive, we are very experienced in our manufacturing processes and our materials and our products that we make are very stable. So we really only are dealing with a true shortage here. We aren’t dealing with other issues, so I think -- and that’s quite a positive because if you’ve got stable processes and you bring the supply back to the table, you can quickly respond and that’s where we are. So I feel pretty good about that, we all do. But we do have customers, I think another factor that is causing confusion that really intended to launch last year and delayed because of the worldwide economic conditions.

So we’re seeing some of that and we’re seeing some customers that through word-of-mouth recommendations have basically reduced their test time and that’s good news. So we’re seeing a lot of positive factors and we’re seeing a lot of customers that are more than just ready. They have really done their homework and covered all of the bases and we don’t have to worry about them for the most part starting and stopping because they didn’t do their homework and we feel good about that. These are very high-quality customers that have been at this for a while and they know exactly what they’re going to do and where they’re going with it, what markets et cetera.

Robert McCourt – Private Investor

Do we have the liquidity and I know Ross you mentioned that we’re working on it, it just feels like we managed inventory tight and now orders are coming in and have we cut it too tight on our inventory management and therefore we can’t fulfill these orders in the near term?

Ross Goolsby

Yeah. We really don’t believe we have. I think the issue is more technical in nature and not necessarily financial in terms of being able to meet customer demand. And we do have access to the capital markets, we’re looking at terms and opportunities to raise capital. And we also have a very patient and committed Chairman who at times when needed will step up and provide financial support. So from a liquidity perspective, we should be fine. And we think from a supply perspective, it’s a very short-term issue that should be behind us for the most part, but obviously still work to do for the rest of the summer.

Robert McCourt – Private Investor

I know it’s difficult for management to talk about the valuation of the company but I’ll pose a couple of questions here. We regained our $1 a share price and then we’re now 20 days into sub $1 share price. What is management’s plan to address the listing issue that will probably be forthcoming again?

Ross Goolsby

Well, you’re right. It’s awfully hard for us to comment on valuation. In general, we won’t do that. I will say that our outlook is positive. It’s driven by our customer’s positive outlook. We feel good that if we can demonstrate revenue growth and substantial revenue growth, that you should see the value of the company increase. And we are focused on operating the company in that light.

Robert McCourt – Private Investor

Has management considered selling the company, given the just vast intellectual property but the capitalization issues that we face? Has that been a consideration or would management consider doing that?

Robert Kanode

It has not been a consideration. And I will not speak for the future, except to say that it is not at this moment a future consideration either. We are totally focused on responding to what we believe is significant demand. 2010 is our time and we’re -- we have a very solid beginning and that’s the focus of this company.

Robert McCourt – Private Investor

Could you give me a little insight on the difference between A123’s technology and our technology? We’ve had a lot of success on supply agreements and customers, that’s been quite impressive. However, we did, I believe, lose the Modec business and the [Altera] business. And I was surprised that Enova with their freightliner product or with their product with freightliner there’s the E all electric step-in van that they did not use Valence with our longstanding relationship with Enova. So could you just talk to those issues there?

Robert Kanode

Well, I think the first thing you ought to understand is I don’t have to really talk to the quality of what we have. We have numerous customers that will be more than pleased to do that. Basically, the feedback you will receive is if you want a comprehensive complete energy storage system that has very advanced interactive logic that is immediately available, we’re it.

As far as specific customers, I’ll simply mention that with someone like Enova we are expanding with them. We are just building additional school buses in a couple of states and we expect that relationship to continue to grow. I will also tell you that I believe the lithium phosphate sector as an entity will continue to dramatically expand because of phosphate’s very long life and safety. And I think you will see others join the manufacturing ranks in this sector. However, we believe we have all of the tools to lead this sector and we plan to do so.

Robert McCourt – Private Investor

Okay. I will jump back into the queue. I have got a couple more questions but let me just sort through them. Thanks.

Robert Kanode

Thank you.

Ross Goolsby

Thank you.

Operator

And the next question comes from the line of Mr. Bob Engbinder with Garden State Securities. Please proceed.

Robert Kanode

Hi, Bob.

Bob Engbinder – Garden State Securities

Hi, Bob. How are you?

Robert Kanode

Good.

Bob Engbinder – Garden State Securities

Good. Please forgive me if my reception is a little bad, I’m on the road.

Robert Kanode

But you’re fine.

Bob Engbinder – Garden State Securities

Great. My question is regarding the vanadium-based chemistry, which I know we’ve been working on for quite sometime. My understanding is that vanadium truly is the holy grail of phosphate chemistries. Could you comment on where we are at this point with vanadium?

Robert Kanode

Well yeah, I’ll make a comment on the holy grail first and where we are second, if that’s okay just for those that do not know of vanadium. Vanadium is a family of materials that this company has been developing for quite a while. It is truly significant because of two things. Number one, the cells with -- our vanadium material in them can be driven at five to six volts versus around three volts for everything on the market today.

The second is from a C-rate, which means the capacity of the cell, our -- we are driving our vanadium cells that we’ve had in test now for almost a year, up to 50 C. That’s 50 times the rated capacity of the cell for momentary burst of energy used to start a car, for example, without damaging the cell. Now, typically if you have to drive something at a 50 C-rate you have to use a super capacitor but with our vanadium family, you do not.

And the other very deliberate advantage that we have is we have a patent estate just on our vanadium family of about 250 patents worldwide. So we have a very strong IP base, and we feel very positive about vanadium.

As far as when is it coming to market? We’ve been testing commercial-grade material for about a year now and we probably will continue to work with this until 2011. And you will see it become one of the family members that we will have in 2011. For example, it could be used in prismatic or round cells. And it could be packaged in numerous ways. That’s -- those are other advantages or tools, if you will, that we feel pretty good about are all coming together and coming to the table.

Bob Engbinder – Garden State Securities

Great. Well it certainly sounds like this is the year where we’re going to finally start to see the inflection point as revenues really start to pick up the second half of this year. Could you comment on how manufacturing and is there a potential for any type of licenses or anything like that?

Robert Kanode

We are looking at license opportunities as you have heard us say before. We have been doing this or looking at these opportunities for somewhat less than a year now. You also must recognize that we are actively looking at opportunities, but these opportunities, basically, take a period of time to sort out once you engage lawyers. I’m sure everyone on the phone will appreciate that.

But we do have high-performance materials that are gaining the interest of more and more people and the fact that our IP estate will give them freedom to practice globally is also very interesting as the serious people coming to the table are doing their homework before they launch products, multi-national products. So the answer is yeah and we still got homework to do.

Bob Engbinder – Garden State Securities

Great. Okay. One last quick question, you had mentioned that you are engaged with two major car manufacturers, is that what I heard you say?

Robert Kanode

Yeah.

Ross Goolsby

Yeah. You did.

Bob Engbinder – Garden State Securities

Great. Could you add a little more color to that?

Robert Kanode

We cannot. We are under non-disclosure agreements with both. I’m sorry to say.

Bob Engbinder – Garden State Securities

Okay. Could you comment if there are any other battery manufacturers currently working with them?

Robert Kanode

I can only tell you that at least one of them has looked at others and are very happy with what they see in us.

Bob Engbinder – Garden State Securities

Very good. Thank you very much, Bob.

Robert Kanode

You’re welcome.

Operator

And the next question comes from the line of Mr. [Brian Caramadre], a private investor. Please proceed.

Robert Kanode

Hi, Brian.

Brian Caramadre – Private Investor

Hi, Bob. How are you doing?

Robert Kanode

Good.

Brian Caramadre – Private Investor

Good. Good. Long-time share holder for almost 16 years.

Robert Kanode

Thank you.

Brian Caramadre – Private Investor

Yeah. And a believer that you folks are going to pull this off but just a quick question on the vanadium, how secure do you feel about Valence’s patent portfolio within vanadium? And I’ve been reading a lot about it and the mining capabilities around the world and I’m just wondering how secure Valence feels with their current portfolio and their patent portfolio with vanadium versus the standard lithium phosphate that you currently…

Robert Kanode

Well, I will tell you we feel very good. We’ve had one major corporation that really with a fine-tooth comb looked through our patent portfolio and determined that it was very strong. And we think our vanadium portfolio is one of our stronger portfolios, not that our others are weaker, but it is not only strong but it reaches across both lithium vanadium phosphate and lithium vanadium fluorophosphate. Two distinctively different family members, if you will, that will have slightly different operating conditions and taken together, they will be a great application base for many different types of devices. So the length and breath, if you will, of our lithium state is pretty significant.

Brian Caramadre – Private Investor

Great. And one final add-on, do you see vanadium in the next couple of years supplanting most of the current technology or are there still going to be applications for current technology well…?

Robert Kanode

No, our current lithium iron magnesium phosphate will continue to be a work horse over time. And vanadium when it first appears will be positioned as any normal evolution of technology. It will be probably slightly higher priced when it’s first launched and -- but from a performance and a lifetime cost, it really is going to be efficient. And I think you’ll see it go into very advanced applications in the beginning and move to others very quickly.

Brian Caramadre – Private Investor

Are there -- is there potential, are you folks looking at the potential for licensing vanadium technology soon or keep it proprietary for a while?

Robert Kanode

We are not at this moment looking to license vanadium. We have considered opportunities in the past and we probably will in the future. We do recognize that given our patent portfolio, we have the opportunity to really open the sector. And as I said before, we intend to do so.

Brian Caramadre – Private Investor

Great. Thanks. And keep up the good work.

Robert Kanode

Thank you.

Operator

And the next question comes from the line of Mr. [Paul Riney], a private investor. Please proceed.

Robert Kanode

Hi, Paul.

Paul Riney – Private Investor

Hi, there Bob. I just have a couple of questions. The first one, CODA Automotive and Lishen were going to build a car and I was curious if Lishen is going to be using any of your intellectual property?

Robert Kanode

Well, at this point, we have no indication that they will. But they certainly recognize the quality of what it is we make and that’s about all I can say at the moment. Ross, you want to add anything?

Ross Goolsby

I think that’s right.

Paul Riney – Private Investor

Okay. One other question is you got a lot of big companies like Johnson Controls and Delco company and these huge companies that are all getting into this field and do you feel like that, Valence is small and starting out, do you feel like you’re going to be able to effectively compete with these outfits, getting in the front doors and that kind of thing? Can you comment on that kind of…?

Robert Kanode

Well, yeah. I feel very good we can compete because we’re now getting to the point that we’re competing on the performance of our products and that’s exactly where we wanted to go to. It’s beyond the smoke and beyond the mirrors, does it work and can we get our hands on it and put in a product and the answer to all of that is absolutely yeah.

Paul Riney – Private Investor

Well, what comes to my mind is that Smith announced that Delco company is going to be their battery, but they keep buying batteries from Valence. And I’m just curious is that because Delco company is not really making the battery and they don’t have any other choice except to buy from Valence or is -- maybe they’re going to use -- nobody’s going to use a single supplier, I wouldn’t think, and maybe they’ll use it as a second solution or what do you think about that?

Robert Kanode

Well at the moment, to my knowledge, we’re the only battery that Smith Electric Vehicles is using. And to my knowledge we are receiving reports that we perform flawlessly. And not only from a battery perspective but they utilize our interactive logic that comes straight out of our batteries to basically run most of their control systems on their fleet of trucks.

Paul Riney – Private Investor

Yeah. That’s really important getting in the door first and doing this kind of stuff and doing it right first. It gives people the feeling of -- it gives them a good feeling maybe they can stick with you, I don’t know.

Robert Kanode

Well over time, we believe that performance counts and we’re going to stand behind that. And I would just encourage you to stay tuned on, I’m very pleased with what we’re seeing so far. We are beyond talking the talk. We’re walking the walk, if I could make that statement. I feel very good…

Paul Riney – Private Investor

I know that. I’ve been around a long time. I remember when you had no revenue. So keep up the good work and we’ll be watching.

Robert Kanode

Thank you very much.

Paul Riney – Private Investor

Bye.

Operator

And the next question comes from the line of Mr. John Schroepfer with UBS Financial. Please proceed.

Robert Kanode

Hi, John.

John Schroepfer – UBS Financial

Hi, guys. A couple of different -- just kind a variety of questions. I read somewhere it was announced that Mercedes Benz was testing Valence batteries in taxicabs in London. How is that -- any idea on how that’s working out?

Robert Kanode

Well, it’s working out very well from a perspective that they have ridden and tested the cab that is equipped with our batteries and we’re very pleased. And so they’re looking at alternatives to basically do what the British Government wants to do and that is put a taxi fleet on the road before the 2012 Olympics. We can do that and our partners like Zytek that makes the electric drive train for that taxi can also do that. So Zytek by the way is a partially owned by Continental Corporation in Europe. So there’s a great deal of interest to do something to fulfill the wishes of the British Government and those discussions and actions are proceeding. We’re ready to go, so…

John Schroepfer – UBS Financial

Okay. And then I -- it appears to me that Navistar who makes buses and trucks uses Valence batteries for buses, but did not choose to use Valence for the trucks. Is that a correct perception or are they just using multiple sources or is there an advantage to a competitor in the truck?

Robert Kanode

Well, all I can tell you is we’ve been in the buses for quite a while. There’s been, I don’t know the exact count now, 25 or 30 of these in service for quite a while. They’re performing flawlessly. We’re very happy with that. They’re very happy with that. Whether they’re trying to set up a future second source, I do not know. Whether they’re trying to set up a manufacturing alliance in the United States, I do not know. The only thing I do know is our battery systems work and we have a great relationship with those guys.

John Schroepfer – UBS Financial

Okay. Then kind of leading into that, are we still pursuing some type of Federal funding or Government loans? It seems like they hand them out every now and then and we seem to be noticeably absent for whatever the reason and is that a constraint on our ability to supply?

Robert Kanode

Well, I’ll take the last comment or question first. As far as our constraint to supply, it has absolutely no impact whatsoever. We have on the ground at the moment in China enough capacity to basically output $150 million in revenue per year. Okay? It’s there. We also feel very comfortable that we can break even under $100 million annually, very comfortable and we think that’s much more competitive than many of the people that are competing against us.

So we have the capacity online to break even. And we believe we now are dealing with the right customers and market segments. And we’re bringing all of these tools together. So that is where we -- where we are at and I simply am comfortable with that.

John Schroepfer – UBS Financial

Okay.

Robert Kanode

There’s really no way I an add.

John Schroepfer – UBS Financial

All right. That’s great. Yeah, no, that’s great. And you gave some pretty good color to that and I appreciate that. Thanks a lot.

Robert Kanode

You’re welcome. Thank you.

Operator

And the next question comes from the line of Mr. [Patrick Metcalf] with [Newbridge]. Please proceed.

Patrick Metcalf – Newbridge

Hey, Bob. How are you doing?

Robert Kanode

Good, Patrick.

Patrick Metcalf – Newbridge

Good. I wanted to touch base with Segway, if you can comment on Segway at all? I know that revenues had fallen off last year and I just wanted to see -- I know they had some management changes there or something like that. And I wanted to see how that relationship is going and if you can comment what you see going forward on that? That’s the first question.

Robert Kanode

I will make two comments and then I’ll ask Ross if he wants to add to this. Number one, their new management team is absolutely fantastic. I really like what I see. They’re very deliberate in what they do. Their engineering guys are very open to just normal upgrades and modernizing different components, and -- et cetera.

Second, they are back and we’re very pleased with that. So this is very refreshing. They have come back and their management team is excellent. You cannot ask for more. Ross?

Ross Goolsby

I would just reiterate that they are placing orders again and we are seeing revenue from Segway again at healthy levels. And we’re excited about the relationship and excited about their business.

Patrick Metcalf – Newbridge

Okay. And real quick, that is a very complex battery, right? That’s just not a very simple battery that gets plugged in. There’s a lot of design behind that, is that correct?

Robert Kanode

Yeah. Yeah. It is a -- I wouldn’t call it extreme rocket science but it is a custom pack that was very carefully designed to basically fit into a rugged application that’s abused in these safari tours. These things are just beat up.

Patrick Metcalf – Newbridge

Okay. Great. I love to hear that. And then secondly, I’d like to see if you can give me more detail or specifics on the backlog. Are we talking $10 million, are we talking $15 million, $25 million? Can you give us a range so we can have a little bit more confident stepping in and buying the shares here?

Ross Goolsby

We’d love to, but unfortunately we just are unable to quantify it down to that level of detail.

Patrick Metcalf – Newbridge

Can’t give me a conservative number, maybe 50% of what you think or whatever the number is you keep to yourself, so I can have a …

Ross Goolsby

We’ve commented on as much as we can with regards to our backlog?

Patrick Metcalf – Newbridge

Okay. Is it the highest it’s been in -- since the history of the company?

Ross Goolsby

I’ve been here two years or approaching two years. And it’s certainly the highest since I’ve been here.

Patrick Metcalf – Newbridge

Bob?

Robert Kanode

Yeah.

Patrick Metcalf – Newbridge

Yeah.

Robert Kanode

Yeah. We really feel good about not only the backlog but the customers that are coming forth.

Patrick Metcalf – Newbridge

Okay. And you said you picked up the two OEMs on the automotive side…

Robert Kanode

No. No I’m sorry, I said two OEMs are testing us.

Patrick Metcalf – Newbridge

Testing, yeah. And one is further along than the other.

Robert Kanode

Yeah.

Patrick Metcalf – Newbridge

So the second you said only has been going through for a couple of weeks, correct?

Robert Kanode

Well yeah, it’s probably a month or so, yeah.

Patrick Metcalf – Newbridge

Month or so. How did that relationship develop? Did you guys go to them, did they come to you?

Robert Kanode

Again, we have quite a bit of word of mouth that is spreading around. And I must say we have some competitors that have disappointed a few people and have forced them to turn to us.

Patrick Metcalf – Newbridge

Okay. All right. And lastly, I know we hired a new head of sales.

Robert Kanode

Yeah.

Patrick Metcalf – Newbridge

Hopefully, you are happy with that assignment?

Robert Kanode

I’m very happy. As we speak he’s in Europe, and he has a full dance card of work he’s involved with.

Patrick Metcalf – Newbridge

I want you to go out and let us know, do you think we’ll see a lot more deals, supply agreements, new customers that will be able to be announced in the next couple of quarters here?

Robert Kanode

I really cannot give you any feel for that except to tell you if you look at what we’ve already announced, I think you should begin to be getting -- or developing a profile, if you will, of where we’re reaching too and where you can expect us to move further. Obviously, the Beneteau multi-year supply agreement was an excellent first step into a very large sector. And Beneteau is a respected pioneer and leader in that sector.

So you can expect us to reach into applications where we belong, and where we can bring economic advantages within that sector. That’s one example. What we do in each sector we’re now involved with is very structured and deliberate. And RJ, by the way, understands this and does this very, very well.

Patrick Metcalf – Newbridge

Okay. Thank you very much. Good luck, guys.

Robert Kanode

Thank you.

Operator

And the next question comes from the line of Mr. Michael Lew with Needham & Company. Please proceed.

Robert Kanode

Hi, Michael.

Michael Lew – Needham & Company

Hey, Bob. Hey, Ross.

Ross Goolsby

Hi, Michael.

Michael Lew – Needham & Company

Hi. I joined a little late, so please excuse me if I missed on these topics that may have already been discussed but with regards to Beneteau, are you generating revenues from them yet?

Robert Kanode

We have shipped them product for their first yacht and that’s about all we can say.

Michael Lew – Needham & Company

Okay. And I take it, do you -- I know that’s all you can say, but how long does the process take to test? Can you give us a timeframe or general idea?

Robert Kanode

Their testing is finished.

Michael Lew – Needham & Company

It’s finished. Okay.

Robert Kanode

And by the why they tested us for two years. I mean this testing we’re seeing many of our customers that are coming forth now has been very, very thorough. And we’ve done very well, obviously.

Michael Lew – Needham & Company

Okay. Now, you just mentioned breakeven under $100 million annually, could you elaborate on that a bit more? In other words, how are you forecasting end market and geographic demand to reach that kind of a revenue run rate?

Ross Goolsby

Sure. Obviously, we’ve got customers across many markets, all of which are multi-billion dollar markets as you look out in time. And we’ve got customers in each of those markets that can grow their businesses. In some cases, individually over our breakeven point. So we’re looking at large markets and big customer opportunities and we feel like that breakeven is probably the lowest in the industry. So we feel we’re very competitive and have a great opportunity for success there.

Michael Lew – Needham & Company

To elaborate, just to dig in a little, drill in a little deeper though, do you expect that to mean more, Ross, on a heavy-duty driven versus let’s say stationary or more on the personal transporter side being Segway?

Ross Goolsby

It’s hard to say at this point. They’re all huge markets. I think stationary is going to be moving slower than our other market opportunities. So I guess by nature you’ll see revenue growth from the other segments first from us, so motive, industrial et cetera will lead the way. And within motive, I think it is fair to say given our revenue profile today, commercial automotive and commercial motive will lead consumer auto.

Michael Lew – Needham & Company

Also, could you comment on pricing? Where do you stand today on a price per kilowatt hour or general idea of where we are today? And also could you elaborate, like what actions you’re taking to drive the costs lower beyond scale?

Robert Kanode

Well, from a system perspective, we are under $1, which I think is very competitive in the industry. And from a cost takedown our efficiencies, future efficiencies standpoint, I think we’re well positioned simply because with the first critical element of any battery, the cathode material, we understand it well. We have for quite a while, and we have a very active plan in place to drive costs down going forward with one of the most talented people in my opinion, in this business, Dr. K.C. Lim, our Chief Technology Officer.

So from that point forward, there’s a lot of when you step to electrolytes and when you look at separators and anode materials, there is a lot of benefits from efficiency of scale, and we now are getting into that arena also. And I might also add that as we continue to load our plant, moving up towards capacity, we more efficiently absorbed fixed overhead. So we know we have efficiencies to gain in that whole arena. So taken together, the maturity of our products and road maps moving forward for cost reduction and the fact that we can more efficiently use a plant that is already in existence and is qualified, we feel pretty good about this.

Michael Lew – Needham & Company

What’s your current utilization rates?

Ross Goolsby

Well, we’ve talked about having capacity of $150 million in revenue. So you see where our revenue levels are. So we’re well below maximum capacity, so we’ve got a lot of room to grow.

Robert Kanode

And by the way, when we say $150 million, that’s just system output.

Michael Lew – Needham & Company

Okay. Great. Thank you.

Ross Goolsby

Thank you.

Operator

And the next question comes from the line of Mr. [Ron Stewart], a private investor. Please proceed.

Robert Kanode

Hi, Ron.

Ron Stewart – Private Investor

Good afternoon. Again, following up on the comment about the breakeven at under $100 million, could you be more specific? Is that as little as $75 million or $99 million -- $999,000 or what can you tell us about that?

Ross Goolsby

In the past, what we’ve said is breakeven is between $70 million and $80 million in revenue.

Ron Stewart – Private Investor

Is that still your best guess?

Ross Goolsby

It sure is. Yeah.

Ron Stewart – Private Investor

Good. Thank you. Second question, Bob, what is your contractual attachment to the company at this point? I’m not bothered to go in and look at your employment agreement, but would you -- how long are you contractually obligated to be with this company?

Robert Kanode

I joined the company, I have been here three years. It is my intention to stay with the company and I will tell you. You’ve probably heard me say this before. This fits me like a glove. I’m glad to be here. I’m very proud of the Senior Management team and the whole corporation. So that’s as far as I can go. I like what I’m doing. I enjoy what I’m doing. I’m proud of what we’re doing.

Ron Stewart – Private Investor

Just -- I’m glad to hear that. Just from an observation point of view and it may be incorrect one, please correct me. I would assume that all of the employees that have incentives regarding stock options are underwater. So if that’s true, where are the incentives for these valuable people to continue doing their thing?

Robert Kanode

Well, have a multi-faceted approach to compensating our employees, that we will continue, number one. And number two, I’d have to tell you with the progress that we -- the progress and the opportunities that we see before us, we really believe we’ve got an excellent opportunity to start draining the pond in 2010, which will benefit both our customers, our investors, such as yourselves and our employees. And our employees certainly know this.

Ron Stewart – Private Investor

Last question, did we again get a going concern qualification in our annual report from the auditors?

Ross Goolsby

We did. I will say that for the first time in many years, there’s not a material weakness reported in the annual report, but there is a going concern opinion.

Ron Stewart – Private Investor

Got you. Thank you all very much and good luck and keep up the good work.

Robert Kanode

Thank you.

Ross Goolsby

Thank you.

Operator

And the next question comes from the line of Mr. Robert McCourt, a private investor. Please proceed.

Robert McCourt – Private Investor

Hi, guys.

Robert Kanode

Hi, Robert.

Robert McCourt – Private Investor

On the supply chain issues, can you talk a little bit more about that? I believe, if I recall correctly, Lishen is our cell provider and is there any conflict that they’ve got on their focus with CODA versus providing us the cells that we need to supply our customers?

Robert Kanode

No. We know of no conflict with Lishen. Simply what has happened on the cell side, is they have moved into a larger plant and they’re having some initial quality issues with their processes, and they are somewhat different because they’re using automation that they were not using before. But I would add, quickly, that the automation they’re using is the best in the world, most of it procured out of Japan. And we see all indications this is going to be short term.

We are looking at dual sourcing critical components. We’re not prepared to discuss what those are but we have been actively and aggressively pursuing this for quite awhile now and they’re starting to come online. So we don’t see this as a major show stopper beyond this summer that’s why we said that. From a component standpoint, we are experiencing some short-term shortages of things as simple as diodes. And the reason we’re seeing these problems is these components that are used in our interactive logic are also used in computers and many other sectors.

So we have a lot of people that are coming out of this recession, if you will, and are now ramping up initial volumes. But these components, component suppliers, are already quickly responding. So you simply got a restart issue here from the bottom up.

Robert McCourt – Private Investor

Got it.

Robert Kanode

And it would be -- let me just say one more thing. It would be more dramatic when you look at components if we were dealing with a top generation brand new technology. But in our componentry, we are not. We are dealing with not often standard, but mostly standard and benchmark stuff that should recover quickly without a hitch. We don’t have to worry about performance while they’re recovering of these components.

Robert McCourt – Private Investor

Good. When these issues get resolved, will you notify us in a press release?

Robert Kanode

Well, we certainly will notify you in our regular quarterly calls. I mean, we won’t probably do a press release that per se says components are recovered but we have another investor call coming up shortly.

Ross Goolsby

As you know, there is our year end, so we’re already well into the first quarter and our first quarter ends June 30th. And 40 -- we’ll have our next call 40 days from that date at the latest. So we’ll be back in communication with you all in the next six weeks.

Robert Kanode

So what we want to do is the same honesty and open communication that we can have with you. We want to bring that same communications to you that we’re taking to our suppliers as much as we can.

Robert McCourt – Private Investor

Can you give us the status on the lawsuit? And also are our legal fees continuing to be burned at a pretty elevated rate that we’ve seen in 2010?

Robert Kanode

Well, the only thing we can really say about our litigation is we remain very comfortable with our position, number one. And number two, we can not control the court system. It is beyond our control and sometimes a mystery to me, I might add. So we simply cannot force that to an early conclusion or we certainly would do so. And that’s about all I can say.

Robert McCourt – Private Investor

Okay. And then as far as capacity goes, Ross had mentioned that any one of several suppliers could take up your entire capacity. What is the -- putting my optimistic hat on, what’s the lead time to add additional capacity if that transpired near the end of fiscal year 2011?

Robert Kanode

The lead time, while not talking specifics, our ability to respond to additional demand is excellent simply because we understand all of the equipment we use, we can get our hands on it in a very reasonable time frame. We can put it online, qualify it and put it, drop it into production very quickly. All of that gives us some real comfort because that can be show stoppers for a new company that is just bringing things up for the first time.

So bottom line of what I just said is, we can very easily replicate our powder, our cell operations and our system operations. We have the processes documented, qualified and they’re easily transferable to any place in the world.

Robert McCourt – Private Investor

Great. Last question, UQM just entered a supply agreement with EVI and Oxygen, the Swiss Post office just announced that they’re taking their electric vehicles or electric scooters up from 500 to 1,000. Are those numbers in our backlog or are those yet to be -- POs yet to be received?

Ross Goolsby

I would say at this point we really can’t comment in detail on that but those are both Valence customers and that is business we would expect to have.

Robert McCourt – Private Investor

Okay. Thank you.

Ross Goolsby

Thank you.

Robert Kanode

You’re welcome.

Operator

Ladies and gentlemen, this concludes the question-and-answer session for today’s call. I would now like to turn the call over to Mr. Robert Kanode for closing remarks.

Robert Kanode

I simply would like to thank everyone for joining the call. I thought the questions were spot on, very informative and thank you for that and wish you all a great evening and thanks again. Have a good day.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect.

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Source: Valence Technology Inc. F4Q10 (Qtr End 03/31/2010) Earnings Call Transcript
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