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Ener1 Inc. (NASDAQ:HEV)

Q1 2011 Earnings Call

May 10, 2011 5:00 pm ET

Executives

Aimee Gordon – IR

Charles Gassenheimer – Chairman and CEO

Chris Cowger – President

Bruce Curtis – President, Grid Energy Storage

Jeffrey Seidel – CFO

Analysts

Steve Milunovich – Bank of America/Merrill Lynch

Dan Galves – Deutsche Bank

Michael Lew – Needham and Company

Theodore O’Neill Wunderlich Securities

Matthew Crews – Noble Financial

Mark Wienkes - Goldman Sachs

Neil Tanna [ph] – Neil’s Capital [ph]

Presentation

Operator

Good afternoon, and welcome to Ener1’s 2011 First Quarter Earnings Conference Call. Today’s call is being recorded. If you have any objections, you may disconnect at this time. Your lines are being placed on listen-only mode until the question-and-answer segment of today’s conference call.

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

Aimee Gordon

Thank you Jennifer. Welcome to Ener1’s fiscal 2011 first quarter earnings call. Today on the call will be Charles Gassenheimer, Chairman and CEO; Chris Cowger, President; Bruce Curtis, President, Grid 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 a presentation to accompany our prepared remarks, and after the call we will post an audio replay of the call, as well as a transcript.

This presentation and our comments include forward-looking statements regarding future events and the future financial performance of the company. Actual events and results may differ materially from our expectations. We refer you to our most recent Form 10-Q and our annual report in the Form 10-K for further information on forward-looking statements, and for a discussion of risks that could cause actual results to differ materially from those discussed today. Ener1 makes these statements as of May 10, 2011 and disclaims any obligation to update them.

Throughout this call, we may discuss both GAAP and non-GAAP financial measures. These non-GAAP measures are not intended to be considered in isolation from as a substitute for or superior to our GAAP results. We encourage investors to consider all measures before making an investment decision. All comparisons made in the course of this call are against the same period in the prior year unless otherwise stated.

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

Charles Gassenheimer

Thanks Aimee. As an industry, we find ourselves at an interesting crossroad. The business opportunity has never looked more robust and clear, and yet the market sentiment has never been more effective. Let me start the call by trying to address this, and present Ener1’s viewpoint for why this may be.

The lithium-ion battery industry now completing its 20th year still remains an industry of the new frontiers and discovery. As an example, the cell capacity and energy density of 18650 cell has increased threefold over the 20 year period, but cycle life remains the biggest challenge. In order to drive industry advancement, volumes and innovations in mechanical designs are crucial. The need for these innovations has allowed Ener1 to penetrate the industry, and compete in the space dominated by large Asian players focused on traditional manufacturing approaches.

There are unique differences in chemistries, geometries, production designs and packaging solutions that differentiate products in this industry. We believe Ener1 recognized those differences early on, and developed the technological and manufacturing expertise to produce products that will offer long-term solution. When Ener1 signed the largest automotive grade lithium ion battery contract with Think Global in 2007, we were forced to get our products and facilities to manufacturing ready status within a compressed time frame.

This contract helped lead to the Enertech acquisition, and affected the advancement of our energy dense cells and modular pack design that have become our building blocks for today. We believe this foundation also led to our rapid entry into the grid energy storage in heavy and medium duty markets. Ener1’s subsequent investment in Think in 2009 followed that same logic. It was important for us to demonstrate that lithium ion battery systems were not just an R&D project. Rather our products proved effective, which has been confirmed through more than 2 million miles of on the road driving experience.

We also believe that our work with Think helped us gain rapid market entry in a way that established not only industry presence, but also industry leadership for Ener1. Over the past 12 months, Ener1 has used actual market data to adjust our revenue goals and our business objectives. This data helped us create a strong business plan, which we believe differentiated us from another battery makers, and our pro forma financial performance now reflects the revolution of that vision.

We have achieved consistent and positive gross margins over the past three years, while continuing to grow our product delivery and manufacturing footprint without exceeding customer demand. The business development results over the first quarter were again very strong resulting from the objectives we set from the start of our operation.

To recap the highlights of this quarter, we achieved Production Part Approval Process or PPAP in Indiana on our first cell production line. We completed the final step of our DOE ATVM loan application, we began testing on the world’s first grid energy storage unit for delivery to the Russian Federal Grid Company against our GES supply agreement. We continue negotiations of a framework agreement against a second and potentially substantially large order from the Federal Grid Company.

Our small-pack operations recognized 12% year-over-year growth in revenue, and 22% gross margin improvement from the first quarter of 2010 due to an increased focus on products for the military and medical markets. And we advanced engineered developments for our first medium duty pack against a purchase order for a Fortune 500 company.

We are excited about the potential for profitable growth that we expect to realize in 2011 by achieving EBITDA positive on a run rate basis within this year. To lead that effort Ener1 recruited a new president.

At this time, I would like to introduce Chris Cowger, who joined us from Advanced Micro Devices in April. To better align the Ener1 team around the speed to market objectives we have laid out for the company, we endeavor to find a new president who can take responsibility for the daily operation and guide the company forward as a high-tech industry leader. In particular, Chris has set an objective of achieving industry-leading gross and EBITDA margin, something that he and I immediately agree is the definition of winning in this space.

We’re pleased to have Chris on board, and he will now introduce himself and provide some insight into his plans for Ener1, as well as provide updates on both the small pack and transportation business segments. Chris.

Chris Cowger

Thanks Charles, and good evening to everyone. First of all, let me just start by saying how excited I am to have joined Ener1 at a time when there are promising opportunities for the company. Before AMD, I spent a good deal of my career at Dell, where I held a wide variety of executive positions mostly focused on operations and global planning. I have had various other career opportunities throughout the years with a few other very innovative companies that I ultimately ended up foregoing. But taking on this roll at Ener1 was an opportunity that I simply couldn’t pass up on.

In fact, it is a bit of a personal homecoming for me and it is a return to the industry Midwest where I grew up, and can now hopefully contribute to the regrowth of the region with what I have learned in the high-tech industry over the past 15 years. Now with regard to managing the operational activity at EnerDel going forward, my primary objectives are A, further refine our target markets and customers, B, reduce operating expenses business wise, and C, better integrate and optimize our overall end-to-end value chain.

I’m proud to be on this call as a new member of the Ener1 management team, and will now quickly switch gears to discuss our small pack and transportation businesses. The small pack business remains a steady growth area for us. On the product side, we are seeing additional interest in lithium-ion batteries for undermanned aerial vehicles, and packs for other military applications.

We have also identified opportunities within the medical equipment market and are supplying products for use in medical devices. The growth in these two markets will help drive margin expansion for this business going forward. While light-duty transportation market in general has been slower to develop than we originally anticipated, our participation with Volvo on the C30 vehicle continues to proceed, and there will be several ride and drive opportunities in North America coming up soon.

We also believe that we have made substantial progress in the heavy duty transportation segment, which continues to yield significant opportunities in the near term. The industrial, heavy and medium duty submarkets allow us to profitably grow, scale and learn while the light duty market continues to evolve.

Last year we announced a purchase agreement for Ken [ph] Battery Systems to power an all electric transit bus for the city of Seoul. The buses are manufactured by Hanuk Fiber Co. who contracted Hyundai Heavy Industries to manage the battery integration. Today I’m pleased to announce that over the past six months we have shipped an additional nine battery systems and we just recently received an additional purchase order for another 10 systems to be delivered during the third quarter of this year. To remind our listeners here today, each of these battery systems is 90 kwh, and this project is just the first phase of a vast replacement program the city of Seoul has planned.

Our project to produce battery systems for hybrid Humvees in collaboration with U.S. Army’s TARDEC division continues to progress as well, and we have already delivered the first of four systems with the remaining three systems to be shipped by December, or by September.

The PPAP process for our Toro battery packs is under way as well, and the production is slated to begin in the fourth quarter. By supplying systems for the Toro walk behind greens mower, we become well recognized by other companies in the industrial product manufacturing market, who have become interested in lithium ion products for other turf maintenance vehicles.

Finally, our partnership with Think has allowed us to work closely with them to assess the B2B and B2C markets affecting EV manufacturing, sales and distribution. We have learnt that the product acceptance is very good and that the customer driving experience is positive. One of the critical aspects to market acceptance of the product overall, however, is reducing the total cost of ownership for the consumer.

As we have studied the market and considered our strategy, it has become clear that battery leasing could be the single most important facilitator of increased EV adoption rates. Battery leasing will require a healthy secondary market for batteries once they have come out of the car, and grid storage is the perfect application for this model. Our near term grid storage business strategy is laying the groundwork for battery leasing and secondary usage, and thereby better enabling the plug-in transportation market going forward.

Now for more on that grid storage business, I will turn it over to Bruce Curtis, who will speak to recent developments in that segment.

Bruce Curtis

Thanks Chris. Grid storage continues to be a main driver of revenue growth for the company. The prospects we have encountered are very attractive. The customers approaching us are companies’ renowned world wide and the prospective projects are revolutionary. We believe Ener1 can be a significant contributor to this market, and we remain committed to advancing our products to serve as solutions for utility and commercial grade applications.

First, I would like to update you on our progress with our key customer, Russia’s, Federal Grid Company, or FSK. We are currently conducting factory acceptance testing on the first of two energy grid storage, or GES units at our Mt. Comfort, Indiana plant. The testing is being witnessed by FSK representatives and overseen by an independent third party, KEMA [ph], a leading authority in testing and certification.

We expect this testing to be completed within the next two weeks, followed by shipments to Russia for field commissioning in June in St. Petersburg. We expect the second unit will be shipped from the US in June for Sochi, Russia, site of the 2014 winter Olympics. The delivery dates for the units have been extended from our originally planned April time frame, due to the addition of new capabilities to the units at the request of the customer.

In particular, a UPS or uninterruptible power supply capability. We view the development of this capability to be very positive for Ener1, and this has ultimately led to the MOU of our second planned project with FSK. This MOU announced on our previous earnings call contemplates GES emergency backup power at over 40 key substations on FSK’s transmission system. We anticipate the size of Phase I of this potential project will be approximately 27 mwh of energy storage.

I’m also pleased to announce the signing of an MOU with (inaudible), a vertically integrated utility and the largest supplier of electric power and heat in far Eastern Russia. The MOU provides for the formation of a joint working group with Ener1 to explore grid energy storage applications throughout (inaudible) electric grid, as well as over 100 stand-alone microgrids.

Our US grid energy storage projects with Portland General Electric and Duke Energy remain on track. We are proceeding on our accelerated development of a high power GES system for frequency revelation and similar applications. Jeff will now provide updates on the China joint-venture, the ATVM loan application, and the financials. Jeff.

Jeffrey Seidel

Thanks Bruce. Many of you are excited about the Wanxiang Ener1 joint venture, which is progressing as anticipated. I can report that both Wanxiang and Ener1 have submitted all documents to the Chinese government for final approval, and once we receive authorization the joint-venture board of directors will meet to begin executing on the 2011 JV budget and business plan. At that time, we hope to be in a position to discuss specific customer opportunities.

The ATVM loan process continues to move forward. We have completed the information certificate, meaning we have delivered all information and analysis requested from us by the Department of Energy. We are preparing to move forward into the approval process.

Moving on to the financials, net sales were $23.1 million in the first quarter of 2011, an increase of $12.1 million or 110% over net sales of $11 million in the first quarter of 2010.

Transportation sales for the three months ended March 31, 2011 totaled $2.2 million. sales for grid energy storage for the same period contributed $9.5 million, and small pack revenue totaled $11.4 million.

Gross profit improved from 1.2 million in the first quarter of 2010, to 5.5 million in the first quarter of 2011. Gross margin increased from 10.5% to 23.7%. operating expenses for the quarter were 77.4 million compared to 16.4 million in the prior year period, due to the impairment loss of 59.4 million related to our investment in the unconsolidated entity Think Holdings.

The pro forma operating expenses were 18.9 million. The net loss for the first quarter of 2011 was $84.7 million compared to $15.3 million in 2010, primarily due to the $59.4 million impairment loss just mentioned, and a $13.9 million loss on financial instruments primarily as a result of the impairment charge. These two items totaled $73.3 million.

The $0.51 diluted net loss per share in first quarter of 2011 includes $0.44 related to the impairment charge and loss on financial instruments already mentioned. This compares to the diluted net loss per share of $0.13 in the first quarter of 2010. Weighted diluted shares outstanding were 165,203,000 in the first quarter of 2011 compared to diluted shares outstanding of 124,968,000 in the first quarter of 2010. Shares outstanding at April 29, 2011 were 169,920,179.

I will now pass the call back to Charles for closing remarks.

Charles Gassenheimer

Thanks Jeff. As in any new and rapidly developing industry, there are many challenges we must overcome to achieve our business goals. While the light duty business market comes into its own, and we believe that is starting to happen, we are executing on a near term strategy by seeking opportunities in other segments such as grid, industrial small pack and medium and heavy duty vehicle.

Having discussed the benefits of our association with Think earlier in the call, we thought it would be useful to provide clarity on the impairment loss we are recognizing in the quarter. As part of our increased involvement in the company last year, we came to recognize that Think needed a new management team to perform a thorough analysis of the structural challenges, costs, usage patterns, consumer behavior and distribution for the Think and the EV industry more broadly.

Our conclusion from the strategic assessment was that electric vehicles and lithium ion battery technology are the winning combination. But after much buildup around the industry, the reality was that EV adoption would be slower than some have predicted. In our view, this was primarily due to vehicle cost and slower than expected build out of charging infrastructure.

This conclusion was consistent with the views adopted by Ener1 management since the second quarter of 2010, as we sharpened our emphasis on portfolio mix of products. All of this having been said, Think faces the need to recapitalize its go forward business plan. While Think faces this challenge, Ener1 will be guided by two principles, no additional funds will be provided to Think by Ener1, and Ener1 will try to avoid consolidating or increasing its equity exposure to Think.

Based on Think’s inability to raise additional capital, and due to its longer than anticipated delay in recommencing operations, Ener1 management has decided to fully impair its equity position in Think. Now that we have written down our shares, we have taken the additional step of returning our shares to Think in an effort to avoid any possible consolidation issues.

Ener1 anticipates supporting Think in its recapitalization with a debt for equity swap and Ener1 will maintain a minority equity position in the newly capitalized entity. While the total impact was $73.3 million, I would like to point out that only $30 million of the write-down represents actual cash investments. The balance represents equity that was exchanged for securities of Think at prices in excess of $0.04 per Ener1 share. We believe that government policies will continue to be the near-term catalysts for getting plug in vehicles on the road. As America experiences the rise of gas prices, it is time we put the possibility of electric drive in perspective.

Here is a numerical example. The Bush tax cuts from 2001 to 2008 saved the American average household $1900 per year. With the rise in the price of oil fuel over $100 per barrel, it is now costing an average family an additional $2200 per year at the pump. It is time for America to start driving towards a clean, safe energy future, and electric vehicles can help power the way. There is no doubt that infrastructure challenges are complex.

However, Congress brought a new bill to the floor last week that would authorize the secretary of energy to competitively award up to $300 million to 10 distinct communities across the nation. These communities will serve as test beds for plug-in vehicle deployment. Moments like these serve to dramatize what we already know, which is transportation electrification is a process spurred by necessity.

Additionally, last week the US General Services Administration or GSA following a tender that was issued in September selected the Think City for inclusion in the list of electric vehicles eligible for purchase by federal agencies and the US military. This is the first step in President Obama’s goal of converting the entire Federal agency fleet of 650,000 vehicles to alternative fuel, including plug-in by 2015.

In our view, Ener1’s endeavors in grid energy storage will help to further the progress towards plug-in vehicle adoption. We believe the secondary better sourcing model is crucial for mass EV adoption, and we see the convergence of the two market segments as valuable to the industry. We will continue to contribute our expertise to making secondary battery sourcing and battery leasing viable.

Ener1 expects to have a residual value pricing team for our batteries in place by 2011. Ener1 management believes that our business is moving in a very, very positive direction. We expect we will have a ramp in revenues in the second half of ’11 that will help us meet our goal of achieving EBITDA positive. Simply stated, we believe that Ener1 is in a solid position, where we can add capacity on the margins and price deals at a point where we can return value to our shareholders.

It is in our opinion that the point of differentiation for Ener1 remains our high-energy density product suite, actual on the road product experiences. We also think that we have the right management team, to continue to build on our double-digit gross margins. We’re relishing the opportunity to continue to punctuate that point of differentiation in the market in 2011.

At this time, operator I would like to open the call for questions and answers.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Steve Milunovich from Bank of America/Merrill Lynch. Please proceed.

Steve Milunovich - Bank of America/Merrill Lynch

Hi. Thank you. Good afternoon. Hi, Charles, obviously the goal here was not to consolidate Think, and it sounds like you were not (inaudible). Somebody else put money into the company to dilute you, and so the answer is, you are writing that off and you are giving your stock back, is that correct? But then you said something about maintaining a minority equity stake, how does that fit in?

Charles Gassenheimer

Sure, Steve. I think there is a couple of steps here that we have taken in the quarter. The first step was that after an exhaustive effort known would be let us say new capital would come into the company given the Accounts Payable balance on the balance sheet that is owed to suppliers. So essentially the message point I think for new investors is that you had to clean up the historical accounts payable situation prior to new capital coming in. But with that as a backdrop, and with the analysis we have a potential substantial new investor at the table. We chose to, or I guess we impaired our position fully, returned our stock back to Think to avoid consolidation, and then are working with the new investor and his investment bankers on a debt for equity proposal for our trade receivables and our debt, our unsecured and secured debt.

Steve Milunovich - Bank of America/Merrill Lynch

So, that was my next question, because you had a I think a $14 million receivable and $17 million in loans, there was also another $14 million write-off, is that a receivable, or was that to something separate?

Charles Gassenheimer

No, yes, let me help you there a little bit. The write-offs were solely due to the equity. However, we took the write-offs in two pieces. There was a $59 million write-down of the equity position, and an approximately $14 million write-down related to the puts [ph]. Due to the accounting rules, and I will be more than happy to turn it over to Jeff here shortly, but due to accounting rules the short version of the story is given the puts that are outstanding where investors in the company could exchange their Series B preferred stock in exchange for Ener1 shares that are priced not less than $4 a share, that is a derivative. So we had to split the $73 million charge into the two pieces, the asset liability portions of it, so that we could reflect those, one as a financial loss, and on as an impairment to the equity.

For the purposes of being, let us say, a summary version, the total amount was $73.3 million. It represents the entire write down of equity. As you will note as you read our

10 Q we expect to receive full value from the conversion of our debt and trade payables, or I guess trade receivables on our balance sheet through the conversion process when the new investor puts together this new deal.

Steve Milunovich - Bank of America/Merrill Lynch

So, you expect to get full value for $14 million receivable and the $17 million in loans, but that is going to be in the form of equity?

Charles Gassenheimer

Well, again we have to be a bit careful here because the new JV, the new deal has not been formed yet. But as it stands today, and there are other parties at the table, as it stands today, we expect to get full value in new securities. Those new securities can either be debt or equity securities in the new company. We don’t yet have any clarity, or let us say we are in negotiation around negotiating those new securities. So we can’t yet give you full clarity because the deal is not yet done, but once the deal is done, of course, which we expect to happen in the second quarter, we will share with you what those new securities are. But essentially they will be some combination of debt, equity and cash that we expect to receive as part of the restructured process.

Steve Milunovich - Bank of America/Merrill Lynch

Okay. That helps quite a bit. So where are we now in terms of our planned Capex for the balance of the year on your funding needs?

Charles Gassenheimer

So, why don’t I split those questions into two pieces, for the capital, I’m going to turn the financing question over to Jeff. For the Capex question, why don’t I give the opportunity for Chris to answer that. He has been doing his evaluation here on this first month on the job.

Chris Cowger

Hi, Jeff, you want to take yours first?

Jeffrey Seidel

Why don’t you do the Capex first, and then we will do the financing question?

Chris Cowger

Okay. Good question on the Capex side, the long and short of it right now is I think we take a bit of a different capacity planning stance or strategy relative to others in this space. The long and short of that is the majority of the capacity that we think we need scaled over the next 12 to 18 months we largely have in place are flexibility around that capacity. It is more scalable around adding shifts and incremental headcount to better utilize it in the short to medium term. But we really think that the next true increment of capacity we need over and above what we have now to hit growth targets in 2030 and beyond. If something, we will have a lot better view too in early 2012, when we still have some of the financial instruments available to procure them. Jeff.

Jeffrey Seidel

Steve on the capital raising side, we have commitments with DOE to raise a certain amount of capital prior to closing the DOE loan. It does jive [ph] very, very well what our financial model projects for 2011, and into 2012 in terms of moving towards cash flow positive. The number I still maintain is at 50 million in Q3 that more than encompasses planned Capex for the remainder of 2012, Opex expenditures in line with our expectations and DOE’s.

Steve Milunovich - Bank of America/Merrill Lynch

So, DOE is trying to give you some money even though you haven’t finalized the loan?

Jeffrey Seidel

Well, that is a little bit presumptuous, but that is part of the negotiation.

Steve Milunovich - Bank of America/Merrill Lynch

So, I think it is along the JVs [ph]?

Jeffrey Seidel

That is true.

Charles Gassenheimer

Well, I mean obviously we would like to point out that there had been no new loans since November of last year, November of not last year, but the year before last. So certainly there has been a bunch of high priority loans that they have tagged, and they have given Ener1 all assurances that we are on the top of that list. The other thing I would add Steve, just let us say articulate and buttress what Jeff is saying is one of the things that we do believe is that on the capital market side, and clearly given where our stock is, we are relatively confident we would do that in the private markets rather than the public market, and again the $50 million, we are relatively confident it is not a problem given some of the backers we have had historically, and certainly over the last 12 months in particular.

So, we feel pretty confident that we are in good shape on the loan, and we are in good shape on the liquidity and financial resources to fund our company through the EBITDA positive, and again we are on the march to get there this year, which we feel is going to be well in advance of our competitors.

Steve Milunovich - Bank of America/Merrill Lynch

And finally, if I could ask, I think in one of the footnotes it says there is $20 million of purchase orders committed that is not on the balance sheet, is that figured into your funding needs?

Charles Gassenheimer

There are some Capex carryovers of about $12.1 million from 2010. We also had prior to the movement away from Think, you order material three months ahead of time. So we had some purchase order commitments associated with that. Those were all part of what is our minimum Capex schedule for 2011. So that has been incorporated in our funding requirements.

Steve Milunovich - Bank of America/Merrill Lynch

Thank you.

Operator

Your next question comes from the line of Dan Galves from Deutsche Bank. Please proceed.

Dan Galves – Deutsche Bank

Hi, good afternoon. I just want to clarify, you are saying that you need to raise capital before the deal – we did the deal, we will agree to give you a loan. Is that correct, it is not that the DOE is going to give you that capital?

Charles Gassenheimer

Hi, Dan, how are you?

Dan Galves – Deutsche Bank

Good.

Charles Gassenheimer

Let me answer that question in a different way just so we are all clear. I think what we are essentially trying to say, and obviously while loan negotiations are typically a private matter, and the fact that we are – we feel we’re pretty close to goal line, we certainly don’t want to let us say release information at the wrong time. So we feel like we’re making really, really good progress, but we have to be a bit careful.

I think what we’re seeing is that the DOE may be ready to go to conditional commitment with Ener1. with just a commitment of capital, but not having raised the actual capital itself. With the subsequent funding of that coming prior to say, let us say date certain is part of the conditional commitment.

Dan Galves – Deutsche Bank

Okay, got it, thanks.

Charles Gassenheimer

You understand that. So, we would not need to go out eminently and raise capital, you know, anytime in the near term but once we had the additional commitment and we go further along on our business plan, you know, we would need to fill that commitment based on our conditional commitment letter with the DOE.

Dan Galves – Deutsche Bank

Okay, okay. Thanks, thanks for that. And I just wanted to, wondering if there is any additional shares that could be – any additional Think shares that could be put to you in exchange for Ener1 shares, and what is the exposure there?

Charles Gassenheimer

Sure. So the impairment charge reflects the full risk of the put. So that's fully reflected so there would be no additional icky there, if I can use that term, and remember the hard floor on the puts are at $4 a share. The final answer to your question is the puts have expired as of May 5. There are a couple of staggering puts that we're still negotiating with some folks, who have indicated interest to put as we’ve – you've probably seen from our 8-K filings. We've gotten most of the put holders to agree to a standstill until the September timeframe and our hope is that we can just clean up some of these staggering put holders. I don't have the specific number of shares with me on the call as to what that represents, but it's a fairly small number.

Dan Galves – Deutsche Bank

Okay, okay. Maybe I could ask something on operations here, hoping that you can provide some type of a bridge of where the incremental revenue in the back half is coming from. I mean, if it look at the operating expenses in the quarter,

about $18 million, D&A was about 3, so maybe $15 million net, if you are able to generate 25% gross margin that means you need to do about $60 million of revenue in a quarter, to get to EBITDA break even, maybe it is a rough math. Where are the additional contracts that are going to support the doubling of revenue from here is my question?

Charles Gassenheimer

Sure Dan. So your math is directionally correct. I think what we're giving you some breadcrumb there is it's going to come from the green energy storage business unit, as well as the small pack business unit in terms of the revenue growth for the year. The transportation business as we have stated earlier we expect to start to ramp in 2012. So as you look at that one of the things that Bruce mentioned earlier is we have confidence around the MOU that we signed with FSK for a second much larger deal for UPS or uninterruptible power supply that we expect to start producing again.

And then what Bruce also announced today is we signed an MOU with (inaudible), and I so I am going to turn it over to Bruce to give you color on both of those deals. I know MOUs that they don't have as much significance in US but outside of the US MOUs are pretty important documents. So these are significant steps that we have taken in the green energy storage side. Bruce, you want to get Dan some color on the GES deals in Russia?

Bruce Curtis

Sure. The first project the GPS units we’re currently finalizing negotiations on our framework agreement, and phase 1. So we are very confident we're few deal points away from closing on that. We also have commenced as I mentioned with engineering of the units. We’ll be looking at three separate size units. We will announce that on the next earnings call and a press release, and we are working closely on the design of the project right now.

So that we are very confident with that and we're also very confident in addition of phase besides this first phase too. The customer is very excited about the value that these units can bring to their operations, and the other new project with (inaudible) is very exciting to us because it incorporates some of the work that we've been, some of the engineering and technical work we have been doing on micro-bids where there is over a hundred micro-bids and areas that have high-value assets. So we feel there is a lot of upside on those projects also, and both what you're doing with both of these projects can spread to other markets, similar emerging markets such as China, India, and Brazil. So again we are very happy with the progress we discussed, and the volume we feel we can get from them.

Dan Galves – Deutsche Bank

Okay, thanks a lot.

Charles Gassenheimer

Thanks Dan.

Jennifer, next question.

Operator

Your next question comes from the line of Michael Lew from Needham and Company. Please proceed.

Michael Lew - Needham and Company

Thanks and good afternoon.

Charles Gassenheimer

Hi Michael, how are you?

Michael Lew - Needham and Company

Good Charles, and yourself?

Charles Gassenheimer

Good.

Michael Lew - Needham and Company

You had mentioned EBITDA positive by year-end, are you still holding to the previous revenue outlook of $130 million to $150 million in revenues for 2011? I believe that excluded Think?

Charles Gassenheimer

Dan it did, I mean, look, you know, just to sort of complete the story, you know, certainly on Think, while disappointing to – I have to take the write-down, management certainly believes this shouldn’t come as a surprise based on our 10-Q filing and our fourth-quarter numbers. You know, we certainly believe that this was a prudent action, and as you think about the revenue guidance we had stripped Think out of our revenues for on a go forward basis as you’ve correctly indicated.

So we feel that this quarter we performed in line with expectations. We feel we nailed the plan especially in terms of gross margins, and we are very confident about our ability to get to EBIDTA positive on a run rate basis here in 2011. You know, one of the things that you will see when you open our 10-Q is the positive gross margins associated with our two business units, small pack and grid, and the heavy negative gross margins associated with automotive, really transportation. So, you know, in essence while as I said before, certainly disappointing by having a lighter transportation revenue build here in 2011. It actually helps to get EBIDTA positive faster, right. So it is good news, bad news if you will.

Michael Lew - Needham and Company

And to just switch gears a little bit, your competitor yesterday had highlighted the potential for an electrode material shortage related to the ongoing events in Japan, is that also an issue that could arise for Ener1 in upcoming quarters, and if not, how much inventory do you currently have?

Charles Gassenheimer

Okay, so thanks Michael and you know, again this is a good news coming on a bad news story. The good news coming out of the bad news from Think is we will stop with some excess inventory right from orders that we felt we were going to off take in terms of battery supply for 2011. So you know, we had almost $13 million of raw materials and supplies at the end of the quarter as of March 31, 2011.

So while the tragic events in Japan when they hit, we feel we had a pretty good cushion there of raw materials and supplies to where things didn’t start to get better for some couple of months, we felt we were okay. If things don't start to get better for some couple of years then, you know, we’ll have to resource quite a bit of our supply network, but as it stands today we are pretty comfortable that there wouldn't be a lot of interruption in our supply chain given that things are incrementally getting better now by the day, and so we're starting to see some loosening up of the supply chain. So we feel we are in reasonably good shape because of the excess inventory or excess raw material we had coming into the end of the quarter there.

Michael Lew - Needham and Company

And also as you look forward at the various initiatives in place, and the different end market requirements, would it be power and energy density. In the long term for Ener1 to become more of a one stop shop, and be able to provide like flavor to that is required for lithium ion, whether it be phosphate, (inaudible) or LTO, or any other derivatives?

Charles Gassenheimer

Sure. So thanks for the question. I mean, you know, obviously I think you know, the idea of being chemistry gnostic is a good one. You know, iron phosphate happens to be chemistry we have expertise out of our JV in China with Wanxiang. So we have access to that technology. As you know, we favored the manganese-based chemistries on the cathode side for energy density in the US and then we favored the tight [ph] materials for power density on the anode side here in the US.

So we feel like we've got a fairly compelling suite of products. In terms of the go forward and the vision for the company, I think it's fair to say that what's important to us is not just the sell chemistry but the module design and the packaging. The battery management system and one of the things I think we've always stressed is that we believe we've got one of the best building blocks in terms of our module, and we feel that we can use our module for you know, that's the common building block for transportation, green energy storage and for you know, various different markets in between, and we feel pretty strongly that they've got some of the best and most advanced module building blocks in the world.

And so I think you know, what we want to do is as we start to think about facing off and as we start to think about competing, we want to make sure that the message gets out that our standard building blocks are the most road tested, the safest given the 20 million to 25 million that Volvo has spent testing our products now, when you saw some of the crash testing results that they have released, and the most experienced, I mean, again on the green energy storage side while we certainly acknowledge that on the frequency regulation side we haven't been as active as our peers, with the bulk energy storage units we’re shipping to Russia, we believe we can be the leader in bulk energy storage and high energy storage. So I think the points of differentiation are clear.

Michael Lew - Needham and Company

Got them. Right, thank you.

Charles Gassenheimer

Thanks for your question.

Operator

Your next question comes from the line of Theodore O’Neill from Wunderlich Securities. Please proceed.

Theodore O’Neill - Wunderlich Securities

Thank you. Charles, I’m just a little bit confused about the auto market, your competitors are losing plenty of money on everything they sell into that market, Think is not working out, isn’t this a market, can you define the situation under which this market will be profitable for any one of the battery companies, you or anybody else, or is this just a complete – there is no way to make money in the automotive segment. And I appreciate what you are saying on the diversification side, but this part, the auto part looks terrible?

Charles Gassenheimer

Theo, thanks for your question. It's hard for me to argue in a quarter way. I think it's $73 million write down, but – and I think you've heard from Ener1 management since the second quarter of 2010 that we thought that market looked bleak in the near-term, but let me at least try to paint the bull case because I don't, you know, while I agree with you that the picture is bleak today, I do see an incremental improvement into the market, and let me show sort of lay out how we think we get there.

And certainly let's say this is Ener1’s viewpoint, I mean, I guess you suggest it’s unlike my competitors I don't believe generating negative 80% or 100% gross margins, and trying to make it up in volume is the right answer. So let's say we agree with you on that particular thesis. Coming around to what do we believe, I think there's a couple of points that we believe in.

I think the first thing is that without some demand creation from governments whether it be the DOE, whether it be China with $18,000 of credit whether it be mainland Europe with VAT and other tax incentives, without some government intervention this business doesn't work in the near term. I think the second point that we've been fairly consistent about it is that you can’t charge an automotive consumer 100% for battery products they only use 20% on, right.

So once again, you know, sort of again let's call this lessons learned from Think, right. What we know for sure is the driver experience for the Think City vehicle is incredibly positive, and in fact the cumulative market data we have is that people really enjoyed driving the car and that is unanimous across the board, not just in Europe. In the US even, which you know, I know the thought of a two door plastic car for some is the four letter word, but I'm telling you that the driving experience for that car is very positive even here in the US, but the idea of prices is where we start to have a real challenge.

So you know, from our perspective if you could charge you know, $15,000 for that car plus $100 a month at least for the battery, I think we feel pretty strong that that car could fly off the shelf. So I think it comes back to secondary use. Now Ener1 has done some fairly advanced work on this, and again if you come back to our basic building block of why we think our module is so compelling, it's that same module that we use to build our Think Tank [ph] that we're using for our green energy storage units over in Russia.

There is no difference in the module design. So pulling that pack out of the Think after five years, breaking that pack down to the module level, which is where most of the value resides and refocusing that module for grid energy storage is not going to be a challenging endeavor. So hopefully that gives you some sense of the path to creating, you know, profitability in light duty automotive. It starts with residual value, the second step is being able to repurpose that product after five years and the first step is then having some sort of lifecycle management company for the battery that exists, that buys the battery, leases the battery to the automotive consumer and then you know, repurposes it for secondary and even tertiary, you know, third users like data center backup storage, which is a market where the battery doesn't cycle very often, and the third use lithium ion battery would be a hell of a lot better than a lead acid battery.

So, you know, all of these steps are possible. Who do I think the lifecycle management company will be. It's most likely to involve the utility and I refer back to the MOU that was signed between Duke and (inaudible) in November of last year, in Indiana, where they've agreed to partner up and start exploring the secondary use market. I don't think we're two or three years away from this. I think we're really are going to see at least trial programs or pilot programs in this area here in 2011. So I know that was a – let's say a long way of answering your question. The question was certainly phrased in a way where I couldn't give you a one-word answer, but hopefully that gives you some let's say thinking – broad-based thinking and strategic thinking on how do we make the automotive electric car model work, and how we make it work today, and not, you know, five years from now.

Theodore O’Neill - Wunderlich Securities

Well, it sounds like if you take the place of the battery out of the equation, then the car will sell?

Charles Gassenheimer

Well, yes.

Chris Cowger

I guess certainly that's to one way to think about it although the battery is about 50% of the cost of the car today. I think what I'm saying is that you need to disaggregate the cost of the battery from the vehicle, and sell the two as separate components because right now today, as an automotive company you're trying to sell 100% of the products that your current automotive consumer will only use 20% or 30% of. So I guess what I'm saying is more you need to break the value chain into its pieces and sell them separately to the consumer, then try to sell them as a package.

Theodore O’Neill - Wunderlich Securities

And until we get to that day when that happens, you are comfortable with the diversification that you have got – with other uses for your batteries is going to get you to profitability?

Charles Gassenheimer

You know, no question. I mean, in Q2 of 2010 where I think I surprised I think the Ener1 surprised a fair amount of people by starting to talk about portfolio diversification, and lessening the light duty automotive part of our revenue segment. Certainly I guess I was, let's say, more unsure then, you know, having come now a full year into it and, you know, demonstrating now three years of positive gross margin and having, you know, strong double-digit gross margins for the last two quarters in a row in the 20% plus range, I think Theo the answer is we feel extremely confident that they can get there.

Theodore O’Neill - Wunderlich Securities

Okay, thank you.

Charles Gassenheimer

Thanks for your question.

Operator

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

Matthew Crews – Noble Financial

Good afternoon everyone.

Charles Gassenheimer

Hi Matt.

Matthew Crews – Noble Financial

Just a couple of follow-up questions. Number one, this is a two-part question, just the contracts and process, 19.7 million, can you just help me work through the timing of the shipment and receiving of revenue for the Federal grid trailers?

Charles Gassenheimer

Sure, do you want to answer your second question or you want to do that –

Matthew Crews – Noble Financial

That was two part, I mean, the timing because you have built up another $8 million or so in Q1, so I’m just wondering if that is all Federal grid and when that is supposed to be recognized in revenues?

Charles Gassenheimer

Yes, time is – the timing with – you know, quarter to quarter the timing – we had a fair amount of funding on that project in Q1, and we’ll start to see revenues on that later on this month actually. The product is in an evaluation phase right now and the units will begin to ship once they begin to ship, which we anticipate in the May June time frame, and we start seeing some significant cash from the customer.

Matthew Crews – Noble Financial

And then Q3 it sounds like, will the second one be commissioned in Q3?

Charles Gassenheimer

They will both be commissioning in Q2. There's just a short lag between the two units in terms of delivering set up, but we will recognize a fair amount of cash from that delivery in Q2.

Matthew Crews – Noble Financial

Well, all of that contract will be wrapped up in Q2, or are you still doing that study that might, is there anything you are going to be seeing in Q3.

Charles Gassenheimer

Yes, there’s a study. There are also some payments associated with performance. So it's not all Q2, there is elements in Q3 as well.

Chris Cowger

Well, so Matt there is a – let us just be clear. So there is the revenue recognition and the cash flow recognition. I just want to make sure we are speaking apples to apples. So your question, just clarify your question as to which part are you asking about, the recognition of cash flows or the recognition of revenues?

Matthew Crews – Noble Financial

Well, both will be helpful but I assume that you're going to receive cash first for milestone payments…

Chris Cowger

The way – we use a milestone-based approach as we informed you on our fourth-quarter earnings call. So the revenue would be recognized before the cash flow. So what Jeff is indicating is the revenue recognition for the most part will be completed in the second quarter. The milestones around cash delivery relating especially to performance will most likely be, the monies will move in the third quarter. If that matters to your modeling, and I just wanted to make sure that point was clear to you.

Matthew Crews – Noble Financial

No, I appreciate that. and this goes back, and so the second part, the next question is can we bracket, or can we go back to that potential MOU for the 40 units for the transmission substations, I mean, if this gets signed, what are the – I know we had talked in the past about potential shipments per quarter or can you give me a timeframe that 40 units, or are we still talking 40 units and the timing of shipping those 40 units?

Charles Gassenheimer

Yes, I mean certainly as I said before, I think the only let us say guidance we’d probably want to give you now is that we think we feel very confident that on a running rate basis we’re going to get to EBIDTA positive this year. So that should give you some way to model, how you get there is sort of positive EBIDTA for the company. The other point I would point out it was asked yet, but we've taken a fair amount of cost out of SG&A that you will see in the second quarter.

We've taken about $7 million of cost out of SG&A in the last 30 to 60 days, so that should help you in terms of again, you know, good news story of getting the EBIDTA positive to both of those things can help you model that in terms of the number of units you have to deliver. The last assumption you need to make is the price per kilowatt hour. We're not prepared you know, to give you that number but you will have to make an assumption there for now, but with those pieces you should be able to just sort of get to that. You know, because we don't have a long-term supply agreement in place and for competitive reasons we think it would be premature to start talking about some of the last pieces. So we will let you make some assumptions, and then try to help you with our next call in terms of getting that deal signed.

Matthew Crews – Noble Financial

Now but just generally speaking is this – will this take you through – you are thinking this will take you through 2013, you wrap this up in 2012, just rough overall timing?

Charles Gassenheimer

I think we're thinking that we would deliver those units over an 18-month period would be the rough way to think about it.

Matthew Crews – Noble Financial

Yes, I’m not trying to nail you down there, just rough ideas.

Charles Gassenheimer

Yes, I understand. I'm trying to help as well, you know, the one Matt, as you well know in our little industry here the only constants I know is change. So we also don't want to get into a place when we announced the contract is different from expectation. So, it is huge [ph] 18 months for now with the knowledge that I could be right or wrong by you know, six months you know, either way, right that could off-take it much faster, they could off-take it much slower. It's just – it truly depends on the plain threshold of what they're trying to achieve, which is to ensure that these substations have uninterrupted power and the grid stops you know, having rolling black and brownouts, which are a fairly substantial and serious problem right now.

Matthew Crews – Noble Financial

Okay, and I appreciate that. Just the last question and I will hop off, just we were talking about gross margin, and you are posting some very impressive gross margins given the industry. With the work that has been done and take the (inaudible) facility, as well as the Mt. Comfort facility to get your Indiana battery manufacturing at the base, what kind of unabsorbed charges do you see that you are experiencing there, are you not because it is not really running, or when do we see that you do fire up the coating and the battery, the cell manufacturing in Indiana, and how does that impact margins, because I have got to assume as we have talked in the past that stopping the shipments of cells from Korea that should be incrementally positive to your margin profile?

Charles Gassenheimer

Yes, I mean stopping, just to add to the last part first, I mean obviously taking the shipping cost from Korea over to assembly in the US does make a difference. You know, the lines are running on a low volume basis in Indiana. There is, I mean, you can see in the gross margins associated with transportation, you can see some of the manufacturing overhead that's getting allocated to that segment based on you know, based on what our low-volumes for transportation for us.

I mean, I think that's that sort of indicative of the margin hit that facilitated with the manufacturing side, but you know, as you ramp, you know, I think you are correct, you know, and you get into volume you know, that overhead obviously gets allocated across your production cycle and you know, margins improve, but I think you know, the real dichotomy is if you look at transportation and then versus grid the margins are almost diametrically opposed and you know, volume make the difference. So getting up the (inaudible) and Mt. Comfort facilities is obviously critical to that part of the story.

Matthew Crews – Noble Financial

Okay, thank you very much for the time gentlemen.

Charles Gassenheimer

Thanks for your question. Operator, Jennifer, any further questions.

Operator

Your next question goes from the line of Mark Wienkes from Goldman Sachs. Please proceed.

Charles Gassenheimer

Hi Mark.

Mark Wienkes - Goldman Sachs

Hi. You mentioned the Wanxiang from the regulatory perspective, just wondering on the operational side, what is the order of operations as you see that capacity coming online, when do you think it comes online, and then what do you think the impact of that is now, versus what you thought it might be when you started down this path?

Charles Gassenheimer

Well Wanxiang guys they're doing – they're actually running now right there, they are manufacturing. We have good visibility into their Q1, and also good visibility into their full year projects and manufacturing plans. It has been very, very consistent with the due diligence process that we went through, sort of culminating in the development of the business plan in the September October time frame of last year.

They are still principally involved in four product lines, namely the EV bus, HEV bus, HEV car, and EV car, and the bulk of the revenues are on the bus side that remains in place. I think once the – you know, we're anticipating the final approval in the next couple of weeks from the China government. Once that takes place, we will really begin to get involved in the day-to-day. We have our principal officers identified for the JV and I don't anticipate any significant delay between the signing of the document and greater involvement from the Ener1 side in the business. So we look forward to working closer with Wanxiang, and pushing that market forward. So it remains on track and pretty consistent with what we've stated in the past.

Mark Wienkes - Goldman Sachs

Yes, thank you.

Charles Gassenheimer

Thanks Mark. Jennifer, is there any further questions.

Operator

Yes. Your next question comes from the line of Neil Tanna [ph] from Neil’s Capital [ph]. Please proceed.

Neil Tanna - Neil’s Capital

Yes, just my question is on the JV [ph], I think you guys have an $8 million commitment there, have you funded that yet?

Jeffrey Seidel

It’s $8 million over two years. The initial $4 million commitment is in the first year of the JV. It is not funded per se, but you know, it's something that we will get in place when required.

Neil Tanna - Neil’s Capital

Okay, and then just my last question is you got $4 million to fund there and then you've got, you know, you’ve got $20 million of cash on the balance sheet, another $90 million of commitments and $40 million of AR related to Think, and then some loans that can be converted, and I was just wondering and then you sold it looks like about $7 million of equity this quarter like you know, how does the run-rate for liquidity look for the next kind of two quarters, you know, absent a DOE loan, just given the delays that we've seen there?

Jeffrey Seidel

I don't see any difference between the funding commitments based on the DOE loan or not. I still believe that we need to as Charles mentioned raise capital most likely in the private market given where our stock is at the moment. I think that makes sense. It positions us for the balance of 2011 and moving into 2012, and I would say with that response on the $50 million.

Charles Gassenheimer

Neil, as well, let me just correct some of the information that isn’t fully accurate and that you said. Again if you're trying to do the credit analysis, I think I would sort of say in a different way. So if you add up the commitments versus the sources and uses of cash, you know, which we do on a frequent basis. We look at our rolling 13-week cash flows. So of the $90 million of commitment only $13.7 million was Capex. The balance was for inventory that we purchased to build the FSK units, of which we are expecting. Remember that’s a $40 million deal which you know, we’ve only been paid $1.6 million, right. So you've got to look at the sources from the FSK deal that will be coming in over the next two months, excuse me over the next two quarters, right.

Neil Tanna - Neil’s Capital

Right.

Charles Gassenheimer

So the second quarter we should be pretty close to cash flow neutral based on then flows of capital coming in from the FSK transaction, right. And again the $4 million obviously is a capital commitment once the JV is formed, and then finally as we said before the final capital comes, we think we need to get over the office the $50 million. The DOE loan certainly as we talked about before, we wouldn’t start drawing on that this year. That would be something we would start drawing on in future years.

We do still have access to the ABMI grant, the advanced battery manufacturing grant in which any capital investment we spend here in the US is underwritten by $0.50 reimbursement by the Federal government. So there is substantial and ample sources of liquidity that we continue to tap and draw on when we need to. So again liquidity of all the challenges we face on a daily and weekly and monthly basis, liquidity is not the one that keeps us up at night, and I certainly would reiterate that. I have said that on previous calls and I certainly would reiterate that on this call.

Neil Tanna - Neil’s Capital

Okay, I think that's it from me.

Charles Gassenheimer

Okay, thanks for your question.

Neil Tanna - Neil’s Capital

Thank you.

Operator

There are no questions at this time. We will now turn the call over to Mr. Charles Gassenheimer, Chairman and CEO, for closing remarks.

Charles Gassenheimer

Okay, thank you very much Jennifer, and thanks everybody for participating. We look forward to talking to you again on our second-quarter earnings call. Have a good day.

Operator

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

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