Ener1: Wall Street Analyst Forum Presentation Transcript

| About: ENER1 Inc. (ENON)
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Ener1, Inc. (ENEI)

Wall Street Analyst Forum

February 13, 2007 2:00 pm ET

Executives

Gerry Scott - President of Wall Street Analyst Forum

Charles Gassenheimer - Chief Executive Officer

Ajit Habbu - Chief Financial Officer

Alexei Krylov - Head of Corporate Development

Presentation

Gerry Scott

Good afternoon, ladies and gentlemen. In our ongoing attempt to adhere the published schedule, I'd like to introduce the next company in today's program.

And beyond welcoming those of you that are physically here, we have about, on average, 1,500 to 3,000 investors who attend the webcast or the conference. We know, because they have -- there's a registration process, and they put who they are and what meetings they attend. So we actually know scientifically how many are attending each webcast. And so, in general, for every investor that attends in person, we average anywhere it's from five to eight investors attending via the webcast.

As I mentioned to you a little earlier in the day, and we've tried to explain how this works for the companies, this is the first analyst conference, not just for us, but in history, that has actually made the presentations in transcript form, including the Q&A session, web searchable on Google Finance, AOL Finance, Yahoo Finance, and SeekingAlpha.com. SeekingAlpha.com has become the largest online community for institutional investors. You could get their email everyday. I do. SeekingAlpha is doing that transcription. They have a group in India that's listening to me right now. You'll have to transcribe me.

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Unidentified Audience Member

Bravo.

Gerry Scott

And so -- yes. So you know, I mean the truth of the matter is how many investors, professional investors are going to hang out for a 40-minute webcast? Not many. It's a long time. But if you can in six or seven minutes get out of a transcript and a search that you can do on SeekingAlpha, Google Finance a day or a month or two months after the conference then I think -- we think it's probably more functional. So anyhow -- so we're pretty excited about that.

Unidentified Audience Member

The archive is forever though.

Gerry Scott

Yes, archive is like forever. Companies like oh-oh. Yes, but it's there forever, including the Q&A component. The exciting thing for us, frankly, is my competition to the big investment banks, and they're not going to do it. And they're not going to do it because they don't want to give their conference away. And so I'm going to do it because that's an opportunity for David to be polite. So we're all over it.

In any case, I'd like to introduce the next company in this afternoon's program, Ener1. They're an alternative energy technology company that is developing lithium-ion batteries for hybrid electric vehicles. And EnerDel -- at EnerDel through corporate ventures and strategic partnership with Delphi -- here is a tough name for me. Is it Japanese? Yes, okay. So it's Japanese. ITOCHU, I tried, and Enerstruct. And two, it's developing fuel cell products through its EnerFuel operations.

EnerDel is a major developer of lithium-ion batteries for the US-based ATV manufacturing industry. Li-ion can also be used in many other potential markets including asset tracking, [generable] power uses and medical applications. EnerDel has a pilot production facility in Indianapolis and EnerDel's team includes engineers from Delphi in materials and production process engineers from Japan. They're a very global company, by the way. We have met their management. It's like United Nations.

EnerFuel is developing commercial fuel cell products at its West Palm Beach production facility and research center. Well, fuel cells will someday replace the combustion engine, maybe automobile or immediate applications for fuel cells where there is a need for a long-term power -- for long-term power in areas that are not easily accessible to electric power. Possible needy commercial applications include backup generators and remote cameras.

So without any further introduction, I'd like to introduce Charles Gassenheimer, Vice Chairman of the Company. He is accompanied today by Ajit Habbu, their Chief Financial Officer, and Alexei Krylov, who is their Head of Corporate Development.

Charles Gassenheimer

Good afternoon. Thanks for taking the time out to spend some time to learn about the alternative energy market, especially as it relates to hybrid electric vehicles. As many of you may already be aware, the hybrid electric vehicle market is exploding. It's coming on to the scene very quickly. Today in America there is about 400,000, 450,000 cars on the road today that are hybrids using a nickel metal hydride technology. This technology is dominated by Toyota. Toyota has close to a 75% market share with Honda in the second slot today.

Detroit has very quickly found themselves outgunned at this stage of the game as oil did proceed above $3, which my previous presenter mentioned. The US automobile market went through a dramatic shift where Ford was overtaken by Toyota. And Toyota has quickly got GM in their sites as well.

What does this all mean and how does it affect a little $0.30 company called Ener1? The answer to that question lies in battery technology and what battery technology is going to do and what all alternate energy technology is going to do to the automotive industry.

The market that I'd like to talk to you about today are the hybrid electric vehicle market, especially as it relates to lithium-ion battery technology for hybrid electric vehicle purposes, and then the fuel cell marketplace, especially as it relates to our fuel cell division where we are working on alternate products, not just internal combustion engine replacement products, because we also believe that internal combustion engine replacement with fuel cells may happen in my lifetime, but not for a while.

In terms of the management, Ajit's here with me today, the CFO. Our Divisional Presidents are the guys who really drive the engine of this company. We have one of the most experienced lithium-ion battery teams out there. The 5% equity holder of our company ITOCHU is one of the largest Japanese trading houses.

And through them we have been able to source the -- some of the original lithium-ion many mass scale manufacturers for Sony, who ramps up lithium-ion for Sony's portable electronics divisions in the 90s. As many of you maybe aware Sony was the one originally started to use lithium-ion.

As well as Ulrik Grape, who comes from Danionics sell the first lithium-ion batteries into Compaq to their PDA, their iPAQ PDA. So -- and the Naoki Ota, who is a founder of Quallion. So we've got a very, very strong and deep bend strength in lithium-ion. And have focuses these guys, clearly, on the automotive marketplace.

This division, so called EnerDel was formed in September of 2004 as a joint venture with Delphi Corporation. Delphi contributed their plan to be Indianapolis as well as their lithium-ion battery patterns and their BMS, their Battery Management Systems team. And their IP portfolio, I may have mention that and Ener1 Inc. owned 80.5% of the joint venture and Delphi owns the minority 19.5% stake.

Our EnerFuel division run by Rex Hodge, we own a 100% of the equity of that division. Rex came to us from Sacramental California, where he ran and started up and founded a new view, a small competitor to Ballard in the fuel cell space. Rex has been at it for about 12-13 years and brings a lot of bend strength to our team on fuel cell side. We acquired our fuel cell facility in West Palm Beach from Teledyne in December of '05.

I've already given you break down but the two principal component of the value of Ener1 or lithium-ion battery business and our fuel cell business. I'd like to walk you through first our lithium-ion battery business and what we believe we're trying to achieve in this space.

In the introduction I mentioned the battery specialist that we have on hand from Japan, I think a small person once told me it's impossible to be in the battery business without the Japanese and I tend to agree. Having them on hand, as well as both from a strategic level and an engineering and manufacturing level sets us on a new playing field.

Obviously, having the relationship with Delphi is crucial, especially with the relationship to Detroit. And clearly, in terms of, where our focus is we understand and acknowledge that we are a very small company up against at very major competition. And I hope to be able to convince you that we've got at least the small chance to doing that today.

In terms of where we're focused, you know, what I'd cover today is the innovative material that we're using for our battery technology. The fact that we are US-based supplier of batteries is crucial. Many of our competitors are based in either Japan or China.

And we think being based here in the United Stated with 17 million to 18 million cars, now, sold annually here in the US. 15 million of those cars are now produced here in the United States. Toyota just announced that they are going to be manufacturing the Camry in the State of Indiana. So being a US based supplier we think it's going to be critical.

I would say the most significant achievement for the company in 2006 was a contract from USABC or US Advance Battery Consortium, this is a consortium made up of GM, Ford and DaimlerChrysler, which is funding from Department of Energy.

The contract that we were awarded was against their 2005 request for proposal for a battery against their freedom. What they call their FreedomCAR initiative. This was a proposal they put out to basically allow you truly to go out and search for battery technology that would allow them to compete with Toyota.

And we won a Phase I grant against that and we're going to talk to you a little bit more today about some of the milestones we’ve hit against our Phase I grant. In terms of the market opportunities and drivers, a lot of this is going to sound familiar to our last presentation.

Clearly, our dependence on foreign oil is at levels that are unsustainable long-term. We certainly agree with many of the teams of -- on both sides aisle in Congress about what needs to be done. Clearly, the dependence on the foreign oil is as we calculate about 68% of it is related to automotive applications, which is just a number that needs to be come down dramatically.

And from our perspective the only way to do -- to deal with that is directly at the pump with consumption. Clearly, there are other alternatives but when you look at making a real impact, we think that designing battery into the vehicle is going to be one of the key ways to deal with this. And we think that once the battery is designed into the vehicle it will be there to stay.

Battery is an energy storage device, allows for many of the applications within the car that we run off a bit, versus the internal combustion engine or the fuel cell, which is a proportion device. So we think having an energy storage device, a very efficient energy storage device and we’re proposing Lithium-ion the technology of choice designed in the vehicle, it’s going to critical.

I’ll talk to you little bit more about why we believe that Lithium-ion will replace nickel metal hydride. We do believe there will be a market for nickel metal hydride. But we believe that Toyota was already announced that they will be shifting from nickel to Lithium-ion by 2008.

As already announced that every single car line in both the Toyota and Lexus brand will have a hydride option by 2010. You know it’s hard to argue with the success that they’ve had and we believe that the other 49 car manufacturers globally, are now playing in catch-up and certainly stood up took a notice.

One of the principle reasons why we think Lithium-ion will replace nickel metal is because of cost. You’re paying $3000 to $4000 more at retail for a hydride option. The average consumer will probably save about $600 at the pump. Consuming $60 oil per year, and when you look at really it’s on a $600 of your savings, you are upside right now, on a return on investment, with regards to nickel metal hydride.

Certainly, there are close to $500,000 vehicles on the road, and we would suggest that that’s a great number given the upside down notion of the economics and we applause those who are doing it, because they’re clearly doing it for non-economic reasons. And we believe the shift to Lithium-ion will promote a tremendous amount influx as it relates to perhaps even a 20%, 25% market share of hydride technologies by 2010.

These are pictures from the Toyota Motors -- so the Tokyo Motor Show, it was obviously dominated by the battery technologies here presented. The one slide I would like to highlight is the Lexus GS450h. This car is not about fuel efficiency this car is an eight cylinder vehicle that with the nickel metal hydride technology that they’ve designed in perform to receive the performance of the V12.

The reason why I point this out is because they cut the particular cost versus Mercedes and BMW by $45000. This is significant and this bolsters the theory that we have, which is once the battery gets designed in, we’re not just talking about fuel efficiency anymore. We are talking about dynamically changing the entire drive train of an automobile. And we think that the folks in Germany have stood up and take a notice to what’s going on with Toyota and Lexus.

So what’s our strategy, our focus is clearly to make three here in the US. We have a very good relationship with GM Ford and DaimlerChrysler through the USABC that was a crucial win for us. And as well as leveraging our strategic alliances, already in place. ITOCHU is one of the largest companies in Japan or substantial equity holder of our company.

More importantly they have strategic alliances with both ITOCHU and Nissan that we are working with them on USABC, Delphi talked about Argonne National Laboratories is one of the top research laboratories here in the United States.

Dr. Khalil Amin is one of the top automotive battery research experts. And it is in conjunction with Argonne that we developed the Lithium-Titanate material we use for our anode, and I will be talking more about that in the presentation.

This is a, I guess, just a graphical representation of our partnership scheme and how we feel like, I guess, we're only a $150 million market cap, but how we feel like we do have some substantial players who are helping us to attack the marketplace where we're going up against some very, very substantial competition including Johnson Controls the largest Tier 1 OEM supplier.

In terms of our lithium ion technology versus nickel metal hydride, I have talked a little bit about this, but I think in terms of how you quantify it on categorically. The most important point here that I've not mentioned is cost. This is clearly a cost game, Toyota and picking up the ball and running with it has turn this into a marketing game.

And I think that being able to drive down the cost of the battery is going to be a significant component of the shift to lithium ion. The other things that I would speak to here in particular our power the shift to lithium ion it gives you a tremendous ability to deliver more power and cycle-wise, the ability to not only to discharge the battery, but except recharge at a very, very, rapid rate.

That's something that lithium ion gives you is an advantage over nickel metal hydride. The best example I can give you in terms of I have to try and put into layman's terms is if you look at your cell phone, you look at your laptop, the PDA, you remember the brick cell phone you use to carry in the 80s.

The ability to cut the cost of that cell phone from a couple of grand down to about, 200 to $100 today has been driven mainly by the battery technology. The chip size hasn't size hasn't change that dramatically. It's really been the battery and we see a very, very similar shift happening in automotive applications and then finally most importantly the ability to shrink down the size of the battery will allow engineers to design this into the vehicle.

In places they don't take it away from the lot of the creature comforts in the vehicle, under the floor boards, behind the backseat, thing of that nature, where you can start to have enjoy a smaller car or significantly room in the vehicle for creature comforts. Okay. Well, how about our EnerDel versus our US competition in lithium ion?

The three most important components and the one that I would say is most significant is the shape and size of our battery, we are pursuing a flat stack design a prismatic battery versus our competition, which is pursuing in traditional round design of the battery or cylindrical design.

We believe that that combined with the lithium titanate material that we're using on our anode, and then manganese spinel, material we using on our cathode, are really quite revolutionary. Now, once again trying to say that technically and then translate that into English, what does that really mean, the issues here are if you look at your cell phone, okay, your cell phone lasts probably 3, 3.5 hours of talk time when you first buy it.

We'll that cylindrical cell decades overtime, the edges, it won't accept recharge to the full amount, so after about two you year your cell phone probably only lasts about an hour and a half, plus or minus. You have been educated as consumer at this point by the cell phone company to literally throw away your cell phone after two years and buy a new one.

Unfortunately in the automotive space, you're not going to be able to do that. So what needs to happen is a dynamic shit where you need to be able to promote longer life of the battery, and our prismatic design and I graphically represented here the round design versus flat stack design promotes longer life, higher power, and then finally most importantly better safety.

For those of you who are going to ask me about the Dell laptop that caught on fire. I'll answer the question now, to avoid the question in the future. The materials we’re using combine with our flat-stack design promote better safety. And the best image that I can give you of that is our thermal performance of our batteries.

Our competitors’ batteries on the left, EnerDel battery on the right. With regard to our thermal performance, what does thermal performance mean? What is this once again in English?

Thermal performance speaks to when you want to test the battery, you want to push it, right? You want to do something really extreme to it to see what will happen. The most extreme thing you can do to a battery is discharge it at a very rapid rate. So this charge test, which was performed by an independent national lab shows the performance of our battery versus our competitors’ battery.

And this more than anything else is probably one of the most important slide. Our battery at a continuous pace of discharge, stayed cool. It remains at 33 degrees C. Our competitors’ battery heats up to 70 degrees C. So once again what does this really mean?

What this means is when the car companies are looking at this data and they are evaluating our battery versus our competitors’ battery, they now have to think about liquid cooling system to keep our competitors’ battery cool versus our battery, which can be air-cooled, because under the most extreme circumstances, it doesn’t heat up.

This is something that, you know, more than anything else was exceeded the endpoints of the data request on USABC. As far as we know, we’re the only company pursuing lithium-ion for automotive applications that have either met or exceeded every endpoint on USABC.

And our thermal performance is something that we’re extremely proud of. And as we progress towards our second milestone, which is USABC Phase II, we believe that this data will be very representative of our ability to wins Phase II or achieve success going forward.

I mentioned a little bit about being US-based supplier, you know, I’m showing you some pictures of our plant in Indianapolis. It’s very expensive built-out. Delphi bore the cost of that prior to the JV. We do have an ability to produce upto 100,000 battery packs.

A battery pack simply stated is the cells that I showed you on the previous slide, 50 to 100 of them stacked in array with battery management system, which is the electronics and safety components and a hard case. That’s what a hybrid is.

The hybrid today is nickel metal hydride. What we’re talking about is lithium-ion cells, BMS and casing. We can product 100,000 battery packs in our facility today. So it’s more than just a test facility. It’s actually a pilot plant that we can ramp up.

And we do have off-room in this facility to scale up to about 300,000 packs per year with some CapEx. So it’s a very nice facility for us, because it allows us to take this from, you know, [be grow] all the way through the commercialization.

In terms of our location, our location in Indianapolis, obviously, proximity to Detroit. Additionally, GM their Allison Electric Division is right next door to us. You know, they are working on the hybrid bus project there, so it’s a very interesting and strategic relationship for us.

So what are the upcoming milestones for EnerDel? Clearly, the most important thing for us is to get our samples out to our customers. We do have a short list of about 50 people who are very thirsty for our product right now. We have delivered samples to USABC and we are going to start to sample our customers in March and April. And we expect some very good feedback based on the data that I have shown you here today.

Securing Phase II for USABC, being able to talk more publicly about some other applications of our battery, including DoD contract for Unmanned Aerial Vehicle project that we start to work on. Obviously as the more get starts to scale, and I don’t know if I talked about this before, but if you look at the hybrid marketplace and you look at 17 to 18 million cars sold in the US annually, I think both McKenzie and Bruce, they pointed to about a 20%, 25% market share of hybrid by 2010.

Well, now you are talking about 3 million units a year with a battery unit. Clearly with where we are today, we think we are in a good position to capture our fair share of that market, which would mean another plant to be built because I mentioned this plant can only handle capacity of 300,0000 batteries. That plant we believe will be eligible for both federal and state public financing.

Senator Lugar from Indiana drives our previous hybrid, previous in Washington DC. This project is taken on a special sort of note for him and he believes very publicly that for Indiana to move forward and to recreate jobs that were lost in the last downturn in the auto industry and needs to become the silicon valley of the automobile industry. And we would like to think that this project is right in the sweet spot of that.

So we are very excited about the ability to publicly finance that plant when the time is right. Clearly, the next step is a little bit longer off, those are kind of more near-term milestones, longer off or a volume order from a major car manufacturer or tier-1 OEM supplier. You know one of the questions, maybe, who is our competition and I mentioned it briefly, but I will talk about them directly. A123 in Massachusetts is a direct competitor. They have chosen to marry up with Cobasys which is a energy conversion device. Chevron-Texaco JV, the Tokyo nickel metal-hydride and when combined with A123 with the [Marilyn] that’s a group that’s attacking the market as well as a French company called Saft, that’s patterned up Johnson Control.

So the three people out there those two and ourselves, EnerDel is the last of the unmarried if you will. Yes, we have Delphi as a strategic partner. We are not relying not relying solely on Delphi and we have started to -- we have actually received recently from a number of major players in the space. And we do believe we need a full scale marketing partner to help us attack this marketplace. So those are some of our goals at least in the coming 12 to 18 months.

I would like to shift to our fuel cell division, while our battery we think is a little bit, I hate to say, but it’s a little bit of our sexy appeal business. Our fuel cell is little bit more mundane. But our fuel cell business is the business that we think can generate cash in the near term.

I have mentioned a little bit about how far out we think fuel cells are as in terms of replacement technology for the internal combustion engine. The one thing we love about Rex Hodge when he came in the door is, he is pragmatic engineer who thinks about things very logically and he has put together really nice business plan for us.

The unique things about our fuel cell business is we work both on the fuel cells and cells as well as the membrane, the stacks and the membranes which makes us a little bit unique. And we actually have fuel cell products that we’re bringing to market today. So this is in the 2015 story, this is a today story. And I’d like to talk to you a little bit about some of the summer products.

When I sat down I thought about the fuel cell business and I thought about problem of addressing the marketplace that probably is still 10 year away. The important thing for me was not to put together our business plan that was an economic black hole. But to put together business plan that actually carried itself throughout.

Lot of alternative energy companies have been overly relined in my opinion on the capital markets. And the capital markets can have been inflow that we think that Ener1 fuel is the business that can actually produce a cash flow in the next 12 months.

The first step in our rainbow chart if you will was to secure government contracts. We received data contract from the Florida Hydrogen Initiative. Our purpose was to build a 10 kilowatt fuel cell system for a rest stop among the Florida Turnpike. It’s actually in Orlando. So it’s a very high profile rest stop close to Disney among others.

This is a project that we started and expect to inflate within the next 12 months. And the gimmicky part of it if you will is that we're going to be extracting the hydrogen from the methane of orange peels. So we’re literally powering a floor of rest top with oranges.

So you can image that’s kind of an excited project for the dam in Florida. As well as we've announced a sub-contract with AST for also on Unmanned Aerial Vehicle project that we’re working on for the government. We successfully launched our Dehumidifier product in summer of '06, summer of last year.

This is a thing that goes wrong and the things the breaks the most for the fuel cell is keeping the membrane moist and its something that most of the major fuel cell companies have not historically focused on? We believe that we could bring in a non-complex but fairly simplistic solutions to the business that were put our name on product get it out there and start to establish credibility in the marketplace.

We were pleased that the receptionist product was excellent and many of the major fuel cell companies have now outsource their entire humidification process to us. This is a example of a design we did for major fuel cell company called IdaTech and we are starting to ship in decent quantity.

We are under no illusion but this going to be an eight figure product for us all. But as said it does achieve what we needed to achieve which is to get our name on the product, get it out there and start creating commercial revenues. So that we can start to head towards bigger and better feel.

Near term bigger and better feel that I've been talking about or referring to is a remote sensor product. We believe this can be a home-own product for us. The remoter sensor market is a $4 to $6 billion market today, precisely what is the remote sensor market. This is a video camera product that you think about any type of vision requirement where you cut the wire where you don't have the ability to plug a camera in.

Today the closet competing product is the solar product that weighs about 1700 pounds. It's not exactly portable. It requires at least a helicopter or a truck to get it into the field. What we're working on is a camera product that can fit in a back-pack and is incredibly portable. That solar product I mentioned costs about $9000 or $10,000. Our camera we're targeting at $3,000 price point.

So we think we can come into a market, put an actual fuel cell into a camera product and run this thing for up to a year in the field without going near it, without touching it, without maintenance. And we think the applications here are numerous. We expect to launch this camera by the way in the second quarter. So this is coming up.

We worked on our 5th Generation low temperature fuel cell and we're going to be using this for camera. It's two times lighter and smaller then the previous generations. And it really is a very, very, very light and small fuel cells. If you're going to imagine a portable camera and we're very excited about it. The camera itself has been through a couple of prototypes already.

And it's gotten some very, very good feedback from its even potential customers. So we are very excited about the launch of this product. In terms of powering the camera this is quite possibly one of the most important breakthroughs for the Company on the fuel cell side, anyway we've developed our own chemistry our chemical hydride compound that we think has a higher hydrogen weight than any of our competitors out there.

I know it's a little bit difficult to see, but if you look at the picture it's literally a string of what I call vitamin pellets. And this string of vitamin pellets, you pierce the pellet and when mixed with water delivers a higher hydrogen weight percentage than anything else on the market.

And we think that there will be a premium use for this chemical hydride compound that we've developed not just for our own cameras, but selling the actual fuel component itself. So we are very, very excited about it. And we've actually patented this and we're looking forward to the launch of the camera.

If you look at the wholly grill in the fuel cell market which nobody has today even Ballard doesn't have this yet. There has been a lot of capital dissipated to get there but no body has it yet. It's the high temperature fuel cell this is what -- this is the enabling technology to put the fuel cell in the automobile.

We are also working on our version of high temperature fuel cells. We believe it's at least two years of R&D from start to finish. We started about six months ago and we've got our ways to go. I put on here that the internal combustion engine replacement market is a $100 to $200 billion. But I am under no illusions that this is going to happen tomorrow. We have mentioned kind of middle of next decade as a potential target. But we think it's a way off.

And once again if you look at kind of where we're going and what kind of cash flow we think we can do. We are not relying on this as a means of a near term cash flow. We are looking at this as a long term value driver for the Company.

We currently have a prototype of both the fuel cell -- high temperature fuel cell and the high temperature membrane. And our next steps are to continue to manufacture and test this product and to start to evaluate it and start to test the performance and then start to sample with our potential customers.

With that, that's the presentation. I'm certainly happy to take any questions whatsoever. We are, you know, generally speaking, we are a listed company with about $150 million market cap.

Question-and-Answer-Session

Unidentified Audience Speaker

[Question Inaudible]

Charles Gassenheimer

No. The USABC is obviously not in the business of single sourcing. They are in the business of finding someone who can deliver the product. But to answer your question directly, we were the only ones to win it for lithium-on.

Both A123 and Saft had previously gotten awards. They are using lithium phosphate and lithium nickel each respectively. That being said, both of them are currently in Phase II for USABC. And you could see where we are or we're close to having Phase II, but we're not there yet.

Unidentified Audience Speaker

[Question Inaudible]

Charles Gassenheimer

Sure. There is a 50-50 joint venture called Enerstruct. It's 50% owned by Ener1, Inc. and 50% owned by ITOCHU. That is based in downtown Tokyo. A lot of the cell chemistry and cell design came from Enerstruct and some of the IP exist there. But all of the manufacturing and marketing sales are done here in the US. So --

Unidentified Audience Speaker

[Question Inaudible]

Charles Gassenheimer

Yes.

Unidentified Audience Speaker

[Question Inaudible]

Charles Gassenheimer

Sure.

Unidentified Audience Speaker

The corporate description mentions that you're a nanotechnology business as well.

Charles Gassenheimer

Yes.

Unidentified Audience Speaker

Can you tell us something about that?

Charles Gassenheimer

I'd be happy to. We have a 100% owned subsidiary called NanoEner. Our NanoEner subsidiary is working on ultra-thin film vapor deposition technology. We would anticipate that Nano would be able to deliver to us ultra-thin anodes and cathodes for our next generation of lithium-ion hybrid electric vehicle batteries.

Because we don't have commercial scale in Nano, we don't talk about a lot in terms of Wall Street presentations. But we do own a 100% of the equity of the venture. We have about five research scientists working on this in Fort Lauderdale, and it's something that we think is, you know, quiet possibly one of the most important breakthroughs at the Company. But it's not something that we think is ready for primetime. I guess it's the right way to say it.

Unidentified Audience Speaker

Why are these fuel cells something of a future? What has happened between now and the middle of the next decade?

Charles Gassenheimer

And the question is -- why are fuel cells a long way off? I think the answer to that question is -- there is a political answer, and then there is a scientific answer, and then there is economic answer. And you know my point of view would be, I'd rather just take the question on the economic side and let the politics speak for itself.

But you know, as it relates specifically to high temperature approaching exchange membranes, they don't exist today. Nobody has them. And if you can’t develop a high protein -- high-temperature fuel cell, they can’t go into the vehicle. So that’s easy. And so nobody has that today. Even Ballard who has obviously spent than anybody else in this industry still is only at the low-temperature PEM.

The answer is once that high temperature fuel cell is developed, there is no reason why that can’t be accelerated into a vehicle. And then there is a question of, okay, well, you know, now we are talking about putting hydrogen in a vehicle and what is the political motivation and what are the safety issues?

And from my perspective, it’s going to happen, right? When you look at all of these different alternate energy sources, they’re all going to happen. Okay? It’s -- there is not going to be a winner. It’s not ethanol. It’s not hydrogen. This is a marketplace where there is enough -- I mean it’s first of all the largest economic marketplace globally, right, talking about the automotive industry?

But from my perspective, there is going to be hydrogen fueling stations. And Arnold Schwarzenegger is going to make that happen in California. There is going to be ethanol-based fuel systems. There is going to be batteries in vehicles. There is going to be pure electric vehicles.

And the answer more so than anything else that I have for you is that we’re talking about putting a lot of dollars at this problem now. And we haven’t thrown a lot of dollars at this historically. And I think that there is a combination of factors I see.

Even if you’re Republican, only as a joke, because Al Gore obviously is out with his recent movie on the democratic side. But even George Bush -- and historically, Republicans haven’t been -- even George Bush is talking about the fact that our carbon emission problem is off the [charts].

And so now, we’re starting to realize that this is an issue politically that doesn’t just speak to one side of the isle, but it speaks to both sides of the isle. And it needs to be dealt with, right? So it’s not just dependent on foreign oil. It now needs to be dealt with.

Unidentified Audience Member

So the lithium-ion battery results in zero emission, right? You just have to take a hold and plug it in a car?

Charles Gassenheimer

Sure. That’s -- it’s a more -- the question is the lithium-ion battery doesn’t have any emissions. The answer to that question is twofold. There is two -- this is a two-step process. And let me address that.

The first step to that is that the hybrid electric vehicle is a power-assist. So this is an internal combustion engine with a battery power assist. This is the near-term technology that is here today. This boosts performance in the vehicle.

The average vehicle at 25 mpg with a nickel metal hydride battery can boost to 35 mpg. With lithium-ion, we’ll get more performance and part of that will have to do with the power and efficiency of the battery.

The vehicles of the future -- and Chevy just announced their Volt program that was announced at the Detroit Auto Show. This is what’s called the plug-in HEV or plug-in hybrid electric vehicle. This is a vehicle, which doesn’t exist today.

There is no battery that can support that vehicle today. But this is a vehicle that can either be battery-powered solely or pure electric vehicle or can be a battery-powered vehicle with a small internal combustion engine, what we call, limp-home capability. Okay?

That sort of vehicle is still a little bit of a dream, but that sort of vehicle, they have announced they’ll have something by 2010. My guess is that they’ll be out there by 2012. All right? And that’s something where you plug the vehicle in it at night. It’ll probably have a range of somewhere in the 200 to 250 mile radius, and you’ll to charge it up on a daily basis.

Unidentified Audience Member

Wouldn’t that make more sense to begin in a smaller vehicle like a motorcycle or something like that rather than jumping to big automobile?

Charles Gassenheimer

In terms of the development, obviously, you know, to the best of my knowledge, General Motors doesn’t do anything in the motorcycle space. They are looking at on the automotive side. We clearly have ongoing discussions on the electric vehicle side with a number of parties.

Tesla Motors, as an example, is a Google spin-out with a couple of googling -- I can’t even say, so I won’t. Google guys has spun out and have started off its -- it’s a pure electric vehicle with lithium ion. And they’re using the old heavy 18650 lithium-ion cells.

Besides the seat and the steering wheel, every single inch of that car is battery, okay? But it’s a pure electric vehicle. They have sold out through 2009. And they haven’t produced a single vehicle yet.

But we’re going to see a proliferation -- Phoenix Motor -- we’re going to see a proliferation in smaller startups. They’re going to be focused on this. And as I said, there is a going to be a number of different technologies, but what EnerDel is focused on is mass scale production, being in 1 million, 2 million units by 2010, 2011…

Unidentified Audience Member

[Question Inaudible]

Charles Gassenheimer

Well, Delphi has just one board seat and is not involved in the day to day operations. They're only on a minority equity stake. So the answer is no. In 2006, obviously, the biggest issue was they couldn't contribute capital. They were capital constrained.

Delphi -- we have a very good relationship with Delphi. They are still doing 35 billion in revenues. So they are not an insignificant player in the automotive space, and they still do 80% of revenues with General Motors. So the answer to the question is -- we view Delphi as important to us. They're an important player in the tier-1 OEM space. But from our perspective, there are other people we're talking to as well at this point.

Clearly, the two things that we do need right now is we need a marketing partner of scale and substance, who can help us take this battery to the next level and get volume manufacturing orders. And then we need some balance sheet assistance to ramp this up. No different our peers, A123 and Saft.

Unidentified Audience Member

Revenues, burn rates, and how have you financed the Company so far?

Charles Gassenheimer

All right. Okay. Revenues -- so the revenue picture here is not meaningful last year, scaling this year. We don't traditionally give revenue projections at this point. But what I will do is I will give you more of a sense of what the business model looks like.

If you look at what the overall ATV market looks like in 2010 and you look at what we think we can be doing, on 1.5 million batteries at about $1,000 price point -- because remember, I said, we're going to cut the cost by $3,000, by 50%. So we're looking at $1,500 price point to the consumer, which we think we need to be at $1,000 of cost of revenue to the OEM.

We're talking about 1.5 billion -- you know, we're talking about $500 million in topline. Our model suggests that we can be at a double-digit net income margin on that. So we think this thing turns the cash flow in 2010. We got a long road to haul, and we know it. But we know that also you don't just go from zero to have 1 billion. There is a substantial ramp, and that ramp will be the milestones I've talked about.

USABC Phase II, which is typically eight-figures in terms of the purchase order amount. USABC Phase I, which was typically seven figures in terms of the purchase order amount that we're already started to work toward. And then, some of the other milestones would be a purchase order for our prototypes and some of the other things you can look toward where you can start to see some of the ramp and some of the reflection point. And that's all I can guide you toward at this point in time in terms of the revenue.

In terms of the cash burn, let me address that. The Company has a very substantial equity investor, a single individual who has put $100 million of his own money into the Company and owns about 85% of it. That's one of the reasons why -- even though we've got a substantial market cap, that's one of the reasons why the average daily volume is so low.

Without this, the Company would not have been able to survive the last five years. So it's right to have a billionaire who is willing to write the checks, because it's the only way the Company would have made it through.

The other thing we did was refinance with 35 million of convertible notes. Those notes are on an average basis convertible at above 15. So they are substantially out of the money. So we've got some ways to run before they will start to become a factor.

Unidentified Audience Member

But someone put $100 million in.

Charles Gassenheimer

Yes.

Unidentified Audience Member

[Question Inaudible]

Charles Gassenheimer

No. Over the last five years. Yes. Over the last five years, $26 million of his money last year. This is a -- to be clear, it's expensive to be in the battery business.

Yeah.

Unidentified Audience Member

[Question Inaudible]

Charles Gassenheimer

Yeah.

Unidentified Audience Member

[Question Inaudible]

Charles Gassenheimer

Yeah. The answer there -- the question is, lithium polymer and then I'm going to throw in there the Bellcore lithium-ion technology that was Delphi's that we bought. So it was a part of the joint venture. I'm going to go back to a slide here to answer your question.

The technology that that Valence pursues, the lithium polymer technology, so called (inaudible) technology is not something that we deem as commercially viable mainly because it's upside down from an economic perspective. You can't produce this in enough scale at the right cost to be cost-effective. And that's the big problem that Valence has today.

You know, once again, certainly, not to -- for 10 years probably doing this, I was a portfolio manager on Wall Street. So I come at it more from a direct approach rather than from not talking about my competitors. I'll tell you where we're good and where we're not. And from Valence's perspective, that's their big problem.

So I view Valence as they will get their wins, but it's going to be niche. They're not going after the volume markets that we're going after, because I don't think they can be cost competitive, and that's the big issue. And Valence is the number one where they spend a lot of money.

[Kohlberg] has put -- again, another rich billionaire has thrown a lot of money at it. And you know, they'll find a way to win because there is enough smart people around. But that's the biggest issue there.

To answer your other question about Delphi, the Bellcore technology that we inherited from Delphi, the big problem with that lithium-ion technology again was a similar problem to Valence and that we deemed it wasn't commercially viable for mass scale production. It was too expensive on a per unit basis to scale.

And so what we did was in the summer of '05, we ripped out the Bellcore technology as our cell technology and we put Enerstruct, the ITOCHU, the Japanese technology in the core. And since then, that was the course for our, kind of, rocket ship ride here in terms of the cell performance.

And for anybody who has been in better industry, you know cell performance it’s like a balance sheet. You make a decision and then two year out -- two years later you see if you are right or not. It’s not like you can just kind of change direction on a dime. So it was a big bet that’s made and it looks like it’s paying off our way.

Yeah. Go ahead. Do you have a question there?

Unidentified Audience Member

[Question Inaudible]

Charles Gassenheimer

Yeah. The question is on the remote sense of remote sensor fuel cell products. What can we look at fundamentally to see if there is real value there? I think this sort of question and the answer is its $46 billion market. And that’s basically a fully wired market meaning at the plug-in market.

You literally, you know, I am talking about video cameras for security. I am talking about things to get plugged. If you cut the wire what does the market look like? And we think the ramp on this is, I mean we are looking at potentially over the next 12 months and we don’t --.

Unidentified Audience Member

[Question Inaudible]

Charles Gassenheimer

Once again, its kind of Greenfield. The only product without a wire is the solar product that I mentioned before so --.

Unidentified Audience Member

[Question Inaudible]

Charles Gassenheimer

I don’t have an answer for you to be honest. It’s a niche marketplace. I would say it’s substantially less than $50 million today. But I really don’t have a good answer for you because it’s a private company. We think that we can keep -- we think this could be an eight figure product for us.

Unidentified Audience Member

[Question Inaudible]

Charles Gassenheimer

The solar solution, yeah.

Unidentified Audience Member

[Question Inaudible]

Charles Gassenheimer

That’s right.

Unidentified Audience Member

[Question Inaudible]

Charles Gassenheimer

We think that that $46 million market can be expanded dramatically. If you have a reliable product that you deliver to market that really allows you to cut the wire that’s portable.

And that’s this market, this product, this remote sensor video camera product will be the first product that I am aware of that will be able to address it is, you know, it does mean no good to sit there and say can be a $100 million or $200 million today until we have better sense for what the market is.

We are trying to do something that hasn’t existed previously. So the only way I know how to look at it is to say once we launched the product we are going to sell it with our cells for the first three months and test the market as to, you know, what we think it will be probably 50% government, 50% industrial in terms of the sales channels and then start to push it once we have a good sense of where the pockets lie in terms of revenue scale for this product.

Unidentified Audience Member

[Question Inaudible]

Charles Gassenheimer

Sure.

Unidentified Audience Member

[Question Inaudible]

Charles Gassenheimer

Well, both our products were looking at 50%, 60% gross margin plus in both of our businesses. And the question is wouldn’t it be better to look at some near term markets that don’t require as much burn to get there in terms of 2010 or is the question more --.

Unidentified Audience Member

[Question Inaudible]

Charles Gassenheimer

Yeah. And we hear you I think we’re all looking at some of the specialty markets. One of the specialty markets we are looking at as we said is the unmanned area of vehicle market and we have talked a little bit about the customer contracts we’ve gotten there.

And we are looking at asset tracking and mobility as other markets for our product. But for right now, we are 100% focused on getting the automotive marketplace correct. I mean it’s just too big an opportunity for us right now. Okay. Thank you very much.

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