Ener1 CEO Discusses Q4 2010 Results - Earnings Call Transcript

Mar.10.11 | About: Ener1 Inc (HEV)

Ener1, Inc. (NASDAQ:HEV)

Q4 2010 Earnings Call

March 10, 2011 5:00 am ET

Executives

Aimee Gordon – Investor Relations

Charles Gassenheimer – Chairman and Chief Executive Officer

Thomas C. Goesch – President, Transportation

Bruce Curtis – President, Grid Energy Storage

Jeffrey Seidel – Chief Financial Officer

Analysts

Dan Galves – Deutsche Bank

Vishal Shah – Barclays Capital

Matthew Crews – Noble Financial

Bryce Dille – JMP Securities

Dilip Warrier – Stifel Nicolaus

Carlos Berastain Gonzalez – Deutsche Bank

Operator

Good afternoon, and welcome to Ener1’s 2010 Fourth Quarter and Year End 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 segment of today’s conference call.

I would now turn the call over to Aimee Gordon, Investor Relations for Ener1. Please proceed.

Aimee Gordon

Thank you. Welcome to Ener1’s fiscal 2010 fourth quarter and year end earnings call. Today on the call will be Charles Gassenheimer, Chairman and CEO, Tom Goesch, President, Transportation; Bruce Curtis, President, Grid Energy Storage and Jeff Seidel, CFO.

Please note that our SEC filings and news releases are available on the investor portion of our website www.ener1.com. In addition, we have posted earnings slides to accompany our prepared remarks.

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. We refer you to our most recent Form 10-K for a discussion of risks that could cause actual results to differ materially from those discussed today.

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

Charles Gassenheimer

Thank you, Aimee. 2010 was a transition year for Ener1 as we aligned our businesses, as we aligned our business development efforts to target three business units; this has allowed us to precisely target customers in end market opportunities. And we feel that we have demonstrated our progress by announcing new customer relationships, launching success successful pilot projects and executing on intended ventures. We believe Ener1 has established its position as a leading provider of safe, high-quality lithium-ion solutions within the advanced battery market.

Strategically, it’s our belief that our single biggest advantage remains our choice of cell chemistry and geometry. Our prismatic energy-dense 17.5 A306 EV cell has become the modular building block for our market entry in the both the transportation and grid energy storage markets.

Most significantly, we believe that Ener1 cell is easier to package the net of our competition. And that disadvantage puts us ahead of the curve with regard to our expertise in cell assembly and pack manufacturing.

We believe the efforts that we put towards our technology have generated additional customer contract, such as a new contract for the supply of prototype battery pack with a heavy duty OEM about which Tom will provide further details.

Yesterday Ener1’s grid energy storage team signed a new MOU with Russia’s Federal Grid Company and their MGTES division, which contemplate the joint development of uninterruptible power supply system the transmission substations throughout Russia this memorandum is evidence of our continuing efforts in the grid energy storage factors.

Additionally Ener1 GES working with Duke Energy and (inaudible) Corporation was jointly gathering and analyzing data for the Ener1 battery that has been deployed in the vehicles fleet. Ener1 in Duke intend to codevelop second wide applications for EV batteries once there no longer suitable for automotive use. We believe that Ener1 is at the forefront of researching and developing the model for secondary use application having initiated projects with ITOCHU last year. We believe this paradigm will be the catalyst for battery leasing, which we expect to be the fundamental way to lower the overall cost of purchasing electrical vehicle.

Ener1, with the support of our strategic partners, intends to continue as a technological leader in developing this evolutionary model. Ener1 continues to diversify its product portfolio by end product and segment. By extending into areas such as industrial products and grid storage, we believe we are taking advantage of a growing market, which we expect will yield what we believe to be healthy profit margin as reflected by our annual gross margin increase to 17.9% as compared to last year.

We are balancing these new opportunities in the industrial products and grid storage segments with that of our transportation business. With these developments, I will now turn the call over to our divisional presidents, Tom Goesch and Bruce Curtis to provide further details on the transportation and grid energy storage end markets. Tom?

Thomas C. Goesch

Thanks, Charles. Ener1 is working under a contract with the new customer to supply prototype battery packs for a medium-duty hybrid truck. We expect revenue from pack development and prototype shipments will be recognized in 2011 and continue into 2013. We view this program as a great achievement for Ener1 as we intend to diversify our business and focus on the heavy duty market segments.

While Ener1 will continue to dedicate resources to heavy-duty and medium-duty markets, we are also witnessing OEM’s expressed interest in implementing lithium-ion solutions for hybrid light vehicles.

We believe that by 2013, hybrid vehicles would have transitioned entirely to lithium-ion from nickel metal hydrate and we are working on advancing our LTO chemistry to commercialization in order to contribute to that market segment. As the EB market matures, we believe Ener1’s energy dense manganese based chemistry may be a solution for new and existing programs. Automotive OEMs continue to test our products and we believe that secondary sourcing Ener1 batteries may be an option for us going forward.

Ener1 remains pleased to have been the first lithium-ion battery maker in the world to commercially launch its mass produced prismatic battery packs into volume production for the Think City electric vehicle program. We view this as a real milestone achieved in 2010 and believe that this has contributed to numerous new business development opportunities.

On the business front, however, sales of the Think City vehicle have met with starts as Think continues to refine its distribution of vehicles in Europe and the United States. This has resulted in an unfavorable inventory balance of battery packs at Think that will cause us to ideal our production for the short-term. The Volvo C30 battery packs, currently being manufactured in Mount Comfort, Indiana are in the pre-production phase and we expect that production for the official fleet vehicles will commence this July.

Ener1 is delighted to be co-hosting with Volvo, two separate C30 ride and drive events for financial analysts and consumer and trade media in New York and Mount Comfort, Indiana respectively in the coming weeks. Regarding the industrial markets, [Toro] has officially launched the industry’s first ever lithium-ion powered electric walk behind greens mowers, featuring Ener1 battery packs.

The product was recently on display at the 2011 golf industry show in Orlando, Florida, and is available for sales directly from Toro. Ener1 believes that there is market potential for lithium-ion solutions for non-traditional applications, and we will be working with existing customers and attempts to develop other opportunities in this segment.

The small-pack industrial electronics business continues to grow with sales from barcode scanner packages and unmanned aerial vehicle. Customers in this segment appear very interested in replacing lead asset batteries and products such as floor maintenance machinery and cleaning equipment. We believe that lithium-ion batteries solve size, way, and light issues in this market.

Ener1 battery packs are operating in products functioning daily such as those managed by Hyundai heavy industries AC Transit (inaudible) electric power company. Company such as Toro and Volvo have qualified our product to their specifications and we will endeavor to expand our customer base to include other distinguished OEMs. We believe that our solutions have demonstrated the optimum characteristic of quality safety and life expectancy with our modules showing approximately 93% capacity retention after 2000 cycles.

Ener1’s battery packs have the ability to Transcend from transportation to grid applications with only slight modifications. And we believe that we are able to capitalize on the technological advantages that our products exhibit.

With the Bruce will now discuss the progress being made in the field of Grid Energy Storage.

Bruce Curtis

Thanks Tom, first I’ll provide an update on the $40 million Federal Grid project in Russia in which we are supplying two separate utility scale energy storage system in the city of St Petersburg and Sochi. We expect to ship systems from our Mount Comfort, Indiana plant in April, but there will be fuel commission at the respective of sites in June of this year. In addition to providing the energy storage systems, Ener1 is also performing a pay for economic viability analysis study of energy storage applications for the Federal Grid transmission system, the third largest in the world. This study should be delivered to the customer in the second quarter of this year.

I am pleased to announce to you today, the signing of an MOU with Federal Grid and MGTES the partner on a contemplated long-term program that would deploy uninterruptible power supply or UPS systems for transmission substations throughout Russia. In Phase I of this program, Ener1 would furnish 40 UPS energy storage systems with an aggregate capacity of 25.3 megawatt hours.

Shipments would be delivered initially in 2011, and continue throughout the second half of 2012. These containerized units would be state-of-the-art utilizing Ener1’s lithium-ion cell technology, and would be assisted by Solar PV and/or wind renewable energy systems.

Each UPS system would provide one hour of emergency power for substations in the event of a complete power outage. Upon completion of Phase I of the program, the memorandum contemplates further program develop with the rollout of UPS systems to cover additional substations. Federal Grid owns and operates approximately 800 high voltage substations.

The need for modernization, increasing reliability, and improving energy efficiency of Russia’s unified electric system are the key drivers for the government’s grid storage initiatives. As a result of our continued focus on the Russian grid market, we will be assigning certain employees to be permanently based in Moscow.

Working within Russia has allowed us to better understand grid energy storage applications targeted to address system-grid reliability and power quality issues. Due to the relatively high cost of capital in the emerging markets we believe the implementation of lithium-ion energy storage solutions is even more valuable when delaying capitally intensive transmission and distribution upgrades. These reliability issues are common to many other emerging economies such as India. And Ener1 has begun pursuing specific business opportunities in these markets for utility as well as telecom and IT applications.

Now, I would like to update you on our U.S. projects and developments. In January of this year we executed our contract with Portland General Electric for their DOE Smart Grid Demonstration Project which is progressing on schedule. To remind listeners the project is a 5 megawatt, 1 megawatt hour energy storage system using our higher powered PHEV cells. In December of last year, Ener1 was selected by Duke Energy to develop and furnish secondary used powered applications or THINK EV battery packs including community energy storage, electric vehicle charging, and home energy storage. We expect completion of this project by the end of 2011.

Earlier this year Ener1 GES has internally launched an accelerated development program for a high-tower frequency regulation product for the U.S. utility market. And we’re perusing a pilot project opportunity to test and validate this product within the next 12-months.

In Japan, the three ongoing grid energy source projects are progressing very well. The green cross over project in Tsukuba continues to advance as we gain valuable field data to further refine the development of our products. Recently, Ener1 has furnished battery systems for two residential apartment energy storage projects in Tokyo, Japan. These projects have attracted much interest from local media and building tenants who can receive credits for reduced carbon emissions from Suzuka Gas, Japan’s fourth largest gas company and (inaudible) project partner.

I will now turn the call over to Jeff to discuss the quarter and year-end financial highlights.

Jeffrey Seidel

Thanks Bruce. Net sales were $33.1 million in the fourth quarter of 2010, an increase of $22.2 million or 202% over the net sales of $11 million in the fourth quarter of 2009. This corresponds to the sixth sequential quarter of revenue growth for the company as a result of the battery pack shipments to global and increased prototype sales.

The grid energy storage division contributed $11.3 million to fourth-quarter sales as we recognize revenue using the percentage of completion methods for our grid storage projects. For fiscal year 2010, net sales were $77.4 million, an increase of $42.6 million or 132% over the 2009 fiscal year. The net loss was $10.9 million in the fourth quarter of 2010 compared to $15 million in 2009.

Net loss of the year was $68.8 million compared to $51 million in 2009. The diluted net loss per share was $0.08 in the fourth quarter of 2010 compared to $0.13 in the fourth quarter of 2009. Weighted basic shares outstanding were 141,897,000 for fiscal year 2010 compared to 116,665,000 in the fiscal year 2009. Shares outstanding at February 28, 2011 were 164,866,227.

Gross profit margin improved to 25.8% in the fourth quarter of 2010 from 9.8% in the fourth quarter of 2009. Gross profit margin for the year increased from 11.7% in 2009 to 17.9% in 2010. Cash balance for the year ended December 31, 2010 was $60.3 million.

DOE grant proceeds for reimbursement of capital expenditures were $31.9 million for the year, including $3.2 million in the fourth quarter. As a result of the grant, net equity investment for capital expenditures was $40 million for fiscal 2010. Grant proceeds allocated to research and development totaled $14.8 million for the year.

The HEV on long-term, low-interest loan of $290 million continues under negotiation. We anticipate using the proceeds of the loan, if received, to further expand our battery production capacity in the 2013 and 2014 timeframe. The loan program requires an equity match of $0.20 for every $0.80 of loan proceeds. However, we expect to receive credit for invested capital on the project to-date, which we estimate at $27.8 million.

Ener1 continues to favor the ATVM loan over matching grant programs such as the advanced battery manufacturing initiative due to the favorable cost share structure under the ATVM program. Despite repayment of loan proceeds, we believe that the net present value of our capital projects is more favorable under the loan relative to the grant, primarily due to our cost of capital. This explains our strategic decision to seek higher proceeds under the ATVM loan compared to the advanced battery manufacturing grant.

I’ll now turn the call over to Tom.

Charles Gassenheimer

Thanks, Jeff. I’d like to address the Zhejiang Wanxiang Ener1 Power Systems Limited JV agreement that we entered into this January. We believe that the combination of this partnership provides validation of Ener1’s technology and manufacturing expertise from a Tier-1 supplier to the Chinese automotive industry.

We believe that the JV offers Ener1 that means the penetrating the Chinese transportation and grid market. It is also our view that through the JV, Ener1 will have access to several provincial grid companies, with which Wanxiang is already collaborating. We’ve estimated the bulk energy storage grid opportunities in China to already be in the hundreds of megawatt hours.

Additionally, we are seeing U.S. based customers express an interest in cooperating with the JV on potential complementary business strategies. With the JV expected to officially launch May 1, Ener1 and Wanxiang are in the process of building the management team that will be headquartered in Hangzhou

[Mike Alma] Regional Vice President, Ener1 Korea and Jeff Seidel, CFO, will sit on the Board of Directors on behalf of Ener1. We expect the JV to generate revenue in 2011. Let me take a moment in my concluding remarks. Running a company in today’s global environment is a massive challenge, and requires flexibility as our end markets continue to rapidly develop.

Ener1 has been ahead of the curve in understanding the changing needs of our customer base from the very beginning, standardization at the core of our business. Sales in module has allowed us to focus on the worst end markets. We feel that this allowed us to prioritize opportunities based on what we foresee to be the most profitable sectors and programs based on the opportunities we think were available to us.

Moreover, our global manufacturing footprint has enabled us to pursue opportunities not only in the U.S., but in Europe, Asia and the emerging markets. Interestingly, the emerging markets in particular Russia, China and India appear to have demand for Grid Energy Storage products of substance and scale.

One reason for this could be the higher cost of funds available to native electric utilities in the emerging markets. They must evaluate the capital investments associated with new infrastructure and capital upgrades or electric power generation and transmission versus electrical investment in a GES offering. Ener1 was honored to participate in Governor’s annual states sponsored economic towards India. The results were compelling and appears that this market is ready for development.

We remain committed to keeping our company nimble by adding capacity on the margin when we can quantify the customer demands. We believe this remains a competitive advantage for Ener1 and we plan to capitalize on this plan. Maximizing shareholder value means allocating or scarce resources to the best projects available. We believe we have the right assets currently deployed in the right markets. We remain on a path of growth marking our sixth consecutive quarter of revenue growth and achieving a CAGR of 378% over the past five years. We absolutely intend to stay ahead of the curve, moving forward and are ready to address the upcoming challenges in 2011.

Thank you very much for participating. And I’ll now open up the call for questions and answers. Operator, if you could please the crowd.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from the line of Dan Galves of Deutsche Bank.

Dan Galves – Deutsche Bank

Hi, good afternoon guys.

Charles Gassenheimer

Hi, Dan.

Dan Galves – Deutsche Bank

Hi. I think you said that you would be idling on your production of THINK batteries for the short term. Can you give us a little color on what the situation is over there, have they gone through the backlog of orders that they had before production started? I guess I’m getting out of this is it’s a production, slowness of production of THINK and you got too many batteries already shift or is it a lack of sales going forward. So any color on that as well as kind of an outlook for first quarter revenue if possible?

Charles Gassenheimer

Sure. So I’ll take it. It’s Charles and Jeff can step in. First of all, let me say obviously that in terms of the revenue picture for 2011 and in particular the first quarter, we are very confident that the first quarter revenue numbers are going to be unaffected by any slowdown in THINK. That’s principally because our revenue associated with the $40 million grid energy storage contract with the Federal Grid Company of Russia. A large portion of that will flow through the first quarter.

The second point I would make is, while there has been a – while we are assuming a lower revenue number overall, for THINK for 2011. One thing I would point out is, with the 40 units of uninterruptible power that are going to be coming hopefully from Russia, of which we’ve signed an MOU, and hope to have a supply agreement shortly. The total revenue range that we’re expecting now for 2011 is in the 130 million to 150 million, but the important part, Dan, about that relative to mix, and we’ve talked about this for the last nine months is, that with the higher margin of grids, we’re actually more confident of getting the EBITDA positive for 2011 now than we were previously because of the substantially higher growth in EBITDA margins that come from Grid Energy Storage.

Coming back to THINK, they are working through the excess inventory problems, and you’re absolutely right, they asked us to slow down production until they were able to work through their inventory. At this point in time, we will continue to be patient, and look through THINK to be upside to the revenue range that we’ve now provided for 2011.

Dan Galves – Deutsche Bank

Okay. And on the funding situation at THINK, I mean, you know it looks like you pushed out the majority on the – or the expiration of the line of credit to them. What are the – what’s their situation in terms of their own cash levels and funding situation? I mean, I’m just got to – trying to get a sense of – what should – what we should be expecting in terms of overall production for THINK this year?

Charles Gassenheimer

Yeah, I mean, it’s hard to THINK, the private company, Dan. So it’s hard for me to speculate. Obviously, Ener1 is the shareholder, and Board member. Like other shareholders and Board members THINK is pulling together their business plans for 2011. And at this point in time, it’s difficult for us to give you more color than that, because it’s not something that we’re permitted to discuss. What I would say is though that we are very supported of THINK and the go forward plan, we are helping them. And Tom I don’t know, well maybe you could mention some of the work we’re doing to help THINK in the state of Indiana and U.S. in terms of vehicle sales.

Thomas C. Goesch

Sure, I would be glad to, Charles. So we have set up additional support for THINK on a number of fronts, one of them is on the sales front. We’ve helped them to find some additional sales people to choose on the ground so to speak and help get through the group of cars that are waiting to be sold. There is pretty good commitment from the state of Indiana to help us with a project in Indianapolis that will help us relive that up to 200 vehicles. That’s going very well.

And we’ve just about completed the sale of the first 100. That will be done by hopefully next Friday. The other things we’re doing is helping them from a technical aspect, providing technical resources that we have to help them get through any production issues that they have run into. And all of this is, it’s going very smoothly.

Dan Galves – Deutsche Bank

Okay, good, fair enough. Just one more if I could, in terms of the gross margin, it did look like it went up quite a bit in the fourth quarter. Could you give us a spilt of the revenue by kind of business unit and how should we be thinking about on gross margin on the $130 million to $150 million of revenue in 2011. I mean it sounds like it’s going to be mostly grid storage, is that the reason that the December gross margin went up and I guess is more grid storage revenue comes on is that dilutive or accretive to the current gross margins?

Jeffrey Seidel

Dan, I will answer that. Gross margin is typically runs around 12% to 15% out of our Korean operation that’s historically where you’re seeing gross margins for the company as the bulk of the revenue has been out of the small-pack and Korea businesses. Obviously, as we ramp grid into the mix, it’s certainly higher margin, particularly this first FS Car project that we did for the Russia Grid side, which is fortuitous because obviously, we are able to do a lot of product development on the long side.

I think a strong gross margin project. We think that we will report even higher gross margins in Q1 and Q2, but I would caution that we’re not going to replicate the pricing on the first FS Car project across volume projects that we anticipate with the Federal Grid Company. So I believe that our gross margins will remain positive, will remain strong, we will probably ramp a little bit in Q1 and Q2; and then level off as we balance out the mix.

Dan Galves – Deutsche Bank

Okay great, and then can you give us a split of the business in the fourth quarter?

Jeffrey Seidel

We have that by the year.

Jeffrey Seidel

We are going to find it, I got it. I will find it.

Dan Galves – Deutsche Bank

Okay. I will jump back in queue. Thanks a lot guys.

Jeffrey Seidel

Thanks and we will share that. We will take the next question. We will share it out here in a minute.

Operator

Your next question comes from the line of Vishal Shah of Barclays Capital.

Vishal Shah – Barclays Capital

Yeah, hi, thanks for taking my question. Charles, can you maybe talk about the split of business for 2011 between grid and transportation and then small pack, the $130 million to $150 million range. And then can you also give us the sense of what kind of gross margins you’re getting in grids? I mean, I know you are saying better than the transportation segment, but give us the range of what margins look like there? Thank you.

Charles Gassenheimer

Sure Vishal, so in terms of 2011, let me just take a step back a little bit, because I think one of the things that that’s fascinating to me is that if you think about the business and you think about what you want to achieve in 2010. How do you commonize cell and module, right and I’ve talked about this so many times before. But having a commonized cell and module allows you take that, and plug it in to where we think you can get the most amount of money for and do it quickly.

And in launching Grid Energy Storage six months ago, we were able to take that common cell or module and plug it into a $40 million grid energy storage opportunity. $11 million of that of course flush through in the fourth quarter at attractive gross margin that that brought our overall margin up to 25%.

In 2011, while we don’t give gross margin estimates. We do expect the gross margin to continue to expand in 2011 beyond the 17.9% we booked in 2010. We’ve obviously talked before about the fact that for our business to be a business, we have to be able to generate cash. And that means, we view the plants at same way you do a retail store and the fact that if you’re going to run that plant, that plant should generate cash.

I think it was fortunate, because about three quarters ago I started talking about the fact that light-duty automotive while important to our business in the long-term, and something we really think will help drive our revenues that we started looking in all opportunities outside of light-duty automotive, because we thought we could make improvements in margins and improvements in cash flow.

I think the fourth quarter was a result of that. So coming back to your question, in 2011, the range we gave you only attunes about 10% from transportation. We do expect upside to that number as we get more clarity and sales information from thing as we write their business plan. And so there is some tremendous upside I think to that number.

The other thing I would point out is remember transportation has much longer lead times. So while 2011 has a lower transportation component, 2012 is when the new heavy duty contract that Tom referred to comes online. So we booked some substantial revenue in 2012 in transportation.

The other thing I would point out is that we do expect to record a substantial amount of non-recurring engineering as well as product development work for that heavy duty contract here in 2011. And it is with an exceptionally rated credit quality customer which we obviously like as well. So I think there is a lot of good news here about our portfolio, our product mix and our confidence in the business. And to be fair, and this is both the Dan’s question and yours Mitchell, I have never been more confident in Ener1 business because I've never seen a backlog as strong as diversified and is highly rated from a credit quality perspective is that the best ever received in Ener1 – my five and a quarter year history here at Ener1.

Vishal Shah – Barclays Capital

Great. Thank you. And can you talk about margins little bit.

Charles Gassenheimer

Sure. Well, so look, I mean this is a very competitive market, okay. And we understand there are other publicly traded companies in the space. And there is no doubt that as with automotive where pricing got stupid very quickly. We are not going to provide that level of granular detail and provide scenarios where all of a sudden pricing gets stupid. We do have a sustainable competitive advantage in grid, we have default bulk energy storage grid units going into the field in the second quarter. That differs greatly from the other grid energy storage units that are going in the field today from our competitors.

It’s a totally different segment and it’s one that Ener1 is defining and therefore we are not prepared at this time for competitive reasons to give you any information on margins and I hope you can appreciate and understand and appreciate that.

Vishal Shah – Barclays Capital

That's great. Thank you.

Charles Gassenheimer

Thanks Vishal.

Operator

Your next question comes from the line of Matthew Crews with Noble Financial.

Matthew Crews – Noble Financial

Good afternoon gentlemen. Just kind of want to understand how – not to stick too much on the grid and gross margin pricing, but in terms of how you price it, for instance the 40 back up units that you are discussing, is that being priced more on power, is the revenue – how much other balance to plan type equipment is involved outside of the actual battery content just in terms of hitting a gauge there?

Bruce Curtis

Okay Matt, this is Bruce Curtis answering the question. The units contain obviously batteries and batteries [systems] to support the battery and in addition to that which makes up a good chunk of the cost, also there is bidirectional inverters, there is containers and electrical systems, controller systems that support the overall UPS. I can’t get into details on the design, but it is rather unique what we’re doing for the customer and very customized and the environment that these units are going in are very difficult in terms of minimum and maximum temperatures, altitude, and they’re highly, highly reliable units, meant to be in very remote areas. So they are not your typical UPS that you may think of for a data center.

Matthew Crews – Noble Financial

So if you thought about cells versus battery packs on a sink versus what you were doing cell content and one of these things. Would you say that the pack was actually your higher percent of the total sales?

Bruce Curtis

Yeah. That would be true. That would be a correct statement.

Matthew Crews – Noble Financial

Okay. Thank you on that. And then a question on heavy duty. Could – can you discuss at all, did you have any shipments of heavy duty disc? I mean are you shipping anything currently versus sort of production, the pre-production that you're working on now, is that pretty much what’s going on the heavy duty transit – medium transit duty side?

Charles Gassenheimer

Yeah. Hey, Matt, it’s Charles. So look I mean, one of the interesting thing is that it’s heavy duty because it mainly BtoB segment versus the BtoC segment. The pricing seems lot more rationale to us. So one of the interesting things about the contract that we’ve been awarded and we’ll hopefully be able to announce the vendor name shortly is that we were able to negotiate non-recurring engineering. So the pack development is paid for by the customer and not by Ener1. And we have received a purchase order in the millions for the pack development work that we’re doing. So it’s that that all of that NRE and pack development work will be recognized here in 2011.

Matthew Crews – Noble Financial

Is that pretty much the one (inaudible) you are currently actively engaged in?

Charles Gassenheimer

Sure. Tom, do you want to give a different color?

Thomas C. Goesch

Yeah. I think I would. Let me give you a little background. We have buses that we provided tax for that I would consider a production program. There are 20 buses for example running around in Korea that our EV buses that we provided tax for last year that were used as G-20 summit are now on daily use at a park called (inaudible). And those are behind us. We have buses that have been built by Yangzhou that are running around Connecticut and Alameda County out in California that again what I would consider production units.

And follow-on orders are coming in for those through Yangzhou. And then of course as Charles talked about, we are in the development period that lasts through 2012 with this new customer. And you will see revenues from the prototypes for those as well as early production during that period. But the big production starts in ‘13 on most of the programs we’re working on.

We have some other pending agreements that hopefully we will be able to talk to you about here very shortly in the medium and heavy-duty areas as well. So all of those will be in development with production launching in 2013.

Matthew Crews – Noble Financial

And just a final question on there. I mean obviously China is a huge opportunity for hybrid transit buses. And that's going to be a (inaudible) JV, but is there any visibility there on the opportunities?

Thomas C. Goesch

Yes. We have already engaged certain opportunities that would launch in China and we would intend to put that through the JV on a bus contract. Again as soon as some of these things become completely signed off and we have our supply agreements in place will announce them. But we are experiencing more requests than we ever have in our history for new business from customers, a lot of them and I would say mainly in this medium and heavy-duty space. That market is really heating up.

Charles Gassenheimer

And so that just a

Matthew Crews – Noble Financial

Okay, yeah…

Charles Gassenheimer

Turned out Tom’s answer, so what Tom is referring to is a substantial and large U.S. companies that actually wants to engage our JVs in buses for the Chinese market. In addition to that and that’s a nice crossover opportunity for us. One of the nice things about the Wanxiang JV is that the bus markets is a captive audience, because Hangzhou which is ‘a small city’ in China of 8 million people is – had contracted with Wanxiang to make all the electric buses for the Hangzhou market, which is a substantial opportunity for Wanxiang. So not only it’s Wanxiang manufacturing the busses, but of course the JV will be manufacturing the batteries for those buses. So that will keep it busy here in the early going as well. So hopefully that gives you a little color.

Matthew Crews – Noble Financial

Yeah, it does. Thank you very much.

Charles Gassenheimer

Thank you.

Operator

Your next question comes from the line of Bryce Dille of JMP Securities.

Bryce Dille – JMP Securities

Hi, guys. Thanks for taking my call.

Charles Gassenheimer

Hey Bryce, how are you?

Bryce Dille – JMP Securities

Good. My first question is more on the THINK drive controller in light of some of your comments you talked about in the communality of cells and modules. Are you seeing any kind of secondary interest outside of the ITOCHU mass demonstration project and are you guys leveraging this kind of whole pack into the light and heavy-duty market at this time?

Charles Gassenheimer

Yeah. Bryce, thanks. So we are and clearly the vehicle control unit, we think it’s one of the most advanced pieces of the puzzle there, so I think coincidentally and obviously, I guess that China seems to be very, very interested in this particular technology. So there are clearly opportunities there in addition to in Europe and in the U.S. So, there are also opportunities on the THINK side or private label manufacturer of vehicles for other OEMs as well. So we are exploring all of those possibilities as part of the go forward plans I think.

Bryce Dille – JMP Securities

Okay and then, just a follow-up. You talked about expanding capacity on the margin. Can you just update us on kind of where you stand on a coding basis and on a sell level may be as of 2010 year end and then, kind of what your targets may look like for fiscal year ’11?

Charles Gassenheimer

Yeah. Can we – Bryce we can get that to you on sort of the sell/run rate, if that's all right.

Bryce Dille – JMP Securities

Sure.

Charles Gassenheimer

So last year in 2010, we invested just under $15 million in our plant in Korea, South Korea and we are now able to do a 140,000 sales per month and those are the 17.5 M per hour EV cells with minimal CapEx. We can upgrade that plant to about 250,000 cells. So again Korea is, it’s certainly the gift that kept on giving for us in terms of that acquisition and the quality and yields coming out of that plant is exceptional.

On the U.S. side, we’ve made excellent progress especially recently. We are in the process of going through full PPAP of our production line. Just to remind you, PPAP is the automotive term for validating the parts and processes around making something automotive great. And we are in the process of going through that and we should have the Indianapolis plant up and running an online and available for production here in the second quarter, the total production capacity we have in the U.S. when the four lines are ready to run at rates is approximately 205,000 cells.

Bryce Dille – JMP Securities

As a monthly number.

Charles Gassenheimer

Of course, as a monthly number. 205,000 cells for month. So it will be equivalent to what we have in Korea. As it stands today, it looks like we will be out of capacity. By the first quarter of 2012 it’s not sooner. So the key question and Jeff discussed it a little bit earlier on the call is, the key question is the DOE loan versus the grant.

As we discussed, I think it’s important to understand that we – on purpose applied for a larger loan amounts under grants amount and we continue to evaluate the cost of capital and relative capital efficiency of building an incremental plant with the loan versus the grant. And that is something we will continue to be focused on as managers, to ensure that we’re building the marginal or incremental capacity at the cheapest possible cost of equity capital.

Bryce Dille – JMP Securities

Okay, thank you very much.

Charles Gassenheimer

Thank you.

Operator

Your next question comes from the line of Dilip Warrier of Stifel Nicolaus.

Dilip Warrier – Stifel Nicolaus

Thank you. Just following up on the capital expenditure budget, is your 2011 budget kind of dependent on where you see the DOE loan application going or do you actually have a number that you could share with us?

Charles Gassenheimer

Hey, Dilip how are you? So, the answer is – just coming back to it. I mean again, I think I’ve tried to give you the color around that last question, but I’ll try it in a different way. We don’t think that the CapEx budget for 2011 will be substantial. We think we can soak up the additional capacity. Remember, and again I’ll just say this again, it soaks in and hopefully make sense to all you all because it’s really an important concept is being over capacitized in the lithium-ion battery industry is the fastest possible way to burn cash. So if you say that the other way around is you always want to be filling the plant or filling the factory.

And so it’s important to understand that you want pull signals before you build the capacity on the margin to ensure that you’re running your business at the optimal capital efficiency rate something that I think we’ve done a pretty good job of and I think that we certainly are proud of the gross margin numbers for 2010. And then certainly it’s something we want to improve on in 2011, because we think it’s absolutely critical.

So answer your question directly, CapEx for this year at this point in time is modest and that also means that our capital requirements for this year are modest as a matter of course. So we think we’ve got a pretty good story here coming together in 2011. 2012 is a different story and clearly we have some time to make that decision, we are very optimistic, we remain optimistic about the loan. It has been a long and winding road, but it looks like we are getting pretty close here.

Dilip Warrier – Stifel Nicolaus

Thank you, Charles.

Charles Gassenheimer

Thank you. Operator, next question?

Operator

The next question comes from the line of Carlos Berastain Gonzalez with Deutsche Bank.

Carlos Berastain Gonzalez – Deutsche Bank

Yeah. I think some of my questions have answered, but I heard you correctly that you expect EBITDA positive in 2011, right?

Charles Gassenheimer

That’s correct, Carlos the guidance that we’re, the guidance, it’s a goal. The goal that we are have set out to achieve and we are reaffirming that same goal is to be EBITDA positive by the end of the fourth quarter of 2011. Here the key assumption that we need to get there is to produce in one quarter, seven of these new EPS systems for the GES markets in Russia, the new MoU that we signed. If we’re running at that run rate by the fourth quarter, which we expect, we should be able to deliver a positive EBITDA quarter. And clearly there is execution risk, but I think we’ve been able to manage the execution risk of our business pretty well and it’s my hope that we can achieve that goal.

Carlos Berastain Gonzalez – Deutsche Bank

So that there obviously lot of moving thoughts including, but what do you think will be the, I mean I assume there will be some cash burn in 2011, right?

Jeffrey Seidel

Absolutely, we’re 40 year, we’re still EBITDA negative, I want to make sure that’s clear. When we’re saying EBITDA positive to the 2011 that’s means on a run rate basis at the end of the year we will be EBITDA positive, but that does not mean for the year as a whole. And clearly I want to make sure everybody understand that where we are…

Carlos Berastain Gonzalez – Deutsche Bank

Right, right. Okay.

Jeffrey Seidel

But nonetheless, it’s still a robust target.

Carlos Berastain Gonzalez – Deutsche Bank

Okay, what is the expected cash burn in 2011 that’s what I wanted to ask?

Jeffrey Seidel

Yeah, sure. So we don’t give an expected cash burn number for the year that’s typically not what we do. What I can tell you is that we ended 2010 with $60 million, our total additional capital requirements for this year. We believe we’re in the $50 million range. We do not anticipate that some or all of that will come from equity. We think we have opportunities with project finance and potentially in terms of monetizing some of the, lets say efficient working capital or project finance abilities that we can monetize some of these contracts that we’re working on in Russia to the extent that we may not, I won’t say we will not, but we may not be to raise that money as equity.

Clearly management’s job is to evaluate the most efficient way to raise that capital and we do that every day. So we’re obviously actively looking at different and efficient means of raising capital. In 2010, we’ve raised north of $180 million. In 2011, we won’t need anything close to that, so we think we’ve gotten over the hump, and it’s our job now to use the assets that we’ve built to generate cash rather than using dilution or any other means to raise that cash, and that’s certainly our goal, that here is to try to use the assets and a lot of that cash.

Carlos Berastain Gonzalez – Deutsche Bank

Oh, that’s good to hear, [Ulrik]. And less numbers and the better obvious. Thanks. Okay.

Charles Gassenheimer

We like you agreed.

Carlos Berastain Gonzalez – Deutsche Bank

All right, that’s all I wanted to know. Thanks.

Operator

(Operator instructions)

Charles Gassenheimer

Yes. Operator, I think it’s getting close to top of the hour. Thank you very much, everybody for participating in Ener1’s year end conference call. As you can tell, we are very optimistic for a – we think it will be a great 2011 campaign, and we look forward to further and continuing update. So talk to you, I guess nice thing about the year end call is, quarterly call comes up so quickly. So we’ll talk to you here in a few months. Thank you.

Operator

Ladies and gentlemen, that concludes the presentation. Thank you for your participation. You may now disconnect. Have a great day.

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