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Ener1, Inc. (NASDAQ:HEV)

 

Q2 2008 Earnings Call Transcript

August 14, 2008 10:00 am ET

 

Executives

Rachel Carroll – VP Corporate Communications

Charles Gassenheimer – Chairman

Gerry Herlihy – CFO

Naoki Ota – COO

Ulrik Grape – EVP of Global Sales, Marketing and Business Development

Analysts

Rob Stone – Cowen and Company

Michael Lew – ThinkPanmure

Gill Sharp [ph] – Guy Dale Adviser LLC [ph]

Maxwell Mariven [ph] – UBS

Harlan Cherniak [ph] – Venor Capital

Operator

 

Good day, ladies and gentlemen, and welcome to second quarter Ener1 earnings conference call. My name is Carmen. I'll be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of the conference. (Operator instructions). As a reminder ladies and gentlemen, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Miss Rachel Carroll, VP Corporate Communications. Please proceed.

Rachel Carroll

Good morning. Thank you for joining us today to discuss Ener1's second quarter financial results for 2008. Charles Gassenheimer, Chairman of Ener1 and Gerry Herlihy, CFO will chair the call. Participants in the Q&A will also include Peter Novak, CEO of Ener1; Naoki Ota, COO of Ener1; and Ulrik Grape, CEO of EnerDel, our lithium ion battery subsidiary. Prior to diving into the call, I would briefly like to remind listeners that certain statements made on this call constitute forward-looking statements that are based on management's expectations, estimates, projections and assumptions. These statements are not guarantees of future performance and involve certain risks and uncertainties which are difficult to predict. Therefore, actual future development trends may differ materially from what is forecast in forward-looking statements due to variety of factors. I will now turn the call over to Charles Gassenheimer, Chairman of Ener1, for opening comments.

Charles Gassenheimer

Many thanks, and good morning. Ener1 is in the process of establishing itself as a key player in the lithium ion battery field, an industry that is steadily gaining traction in the investment community and in the world at large as the automotive industry reinvents itself. The purpose of this call will be to provide a summary update from the quarter, but also to summarize Ener1's business objectives and give more color on industry developments going forward.

To summarize some of our second quarter highlight, we completed the headquarters transition to New York City and have consolidated our Florida operation into 1751 West Cypress Creek Rd, a building we own free and clear. Additionally, we have now completed the sublease of the former corporate headquarter space which would accumulate in actual cash savings of $330,000 for the balance of the leased term.

The recently announced restructuring of Ener1's joint venture with Delphi means that Ener1 now has sole and complete ownership of Enerdel, it's lithium battery business, which is a key strategic importance going forward. It gives Enerdel the freedom and greater opportunity to bring innovations to market faster and at lower cost. The transition also paves the way for new strategic partnerships. We had previously hit roadblocks in this area. One of the key stumbling block issues was confusion about the relationship with Delphi especially amongst the Tier 1 OEM supply community. In the past months, we've seen a dramatic increase in activity in this area and we attribute it to the announcements we made earlier in July regrading the structuring agreement we filed with the Federal Bankruptcy Court on July 11th relating to this transaction.

Our commercial contract with Think Global of Oslo, Norway to realize volume production by the end of this year is tracking to plan. In addition to the contract with Think, we have publicly stated we anticipate signing an additional two development contracts this year. We have begun an aggressive Capex program in Indianapolis which includes the delivery of a large-format coating machine by the end of September of this year. When fully built out, we would have the capacity to produce 300,000 hybrid electric vehicle packs a year which would equate to approximately $450 million in annual revenue. I would like to take a moment to congratulate the Enerdel team and the Argonne national lab team on their jointly being awarded in the Research and Development magazine's R&D 100 award for Excellent in Technology and Innovative design. This is truly an outstanding achievement. I will now turn the call over to Gerry Herlihy, Chief Financial Officer of Ener1 for more details on the quarter. Gerry?

Gerry Herlihy

 

Thank you, Charles. We filed our form 10-Q this morning, which includes our unaudited financial statements for the second quarter and six months ended June 30th, 2008 and 2007. To highlight, Ener1 accelerated its engineering research and development expenses in the second quarter of 2008 as we prepare to begin production on the Think contract in the fourth quarter, as well as working on programs with potential customers. We have sufficient liquidity for the next year barring any positive events such as an acquisition or a new product award that might have additional cash requirements. We remain debt free and have positive shareholders equity. A summary of the significant results include cash in the balance sheet of $34 million at June 30th, and $7 million of cash in deposits for equipment that we intend to be placed with equipment lease financing this next quarter.

Our stockholders equity increased to $35 million primarily from the exercise of $30 million of warrants in the first six-month of 2008. All of our convertible debt and redeemable convertible preferred stock were converted to common stock by March 31st. The only remaining financial instrument at June 30th is the redeemable EnerDel Series A preferred held by Delphi which was retired this week when we completed the restructuring at the Delphi investment. In the next quarter, we will report a balance sheet with no preferred stock and a 100% ownership of our battery subsidiary.

With regard to the overall financial results for the second quarter of 2008, Ener1 reported a net loss of $7.8 million for the quarter ended June 30, 2008 compared to a net loss of $8.5 million in the prior year quarter. Our net loss per share was $0.08 for the quarter ended June 30th, 2008, compared to a loss per share of $0.14 in 2007. Weighted average shares outstanding were $101.9 million in 2008, compared to $64.3 million in the prior year quarter. Our shares outstanding were $104,711,000 at June 30th, 2008, compared $92,598,000 at December 31st, 2007. The loss from operations in the second quarter of 2008 was $7.3 million, compared to a loss of $5.1 million in fiscal 2007. R&D expenses for the 2008 quarter increased to $5.4 million compared to the prior year quarter spending of $2.2 million. The increase in R&D expenses primarily related to increased spending on battery development. G&A decreased slightly to $2.2 million.

We reported revenues of $437,000 which are primarily development fees and things for delivering working battery packs under the Think city supply agreement. The Q2 2008 R&D expenses are net of government and art and USABC grant of $1 million in 2008. Most of our government grants and USABC contracts are cost reimbursement contracts, and we report amounts that we bill on to those contracts as reductions and expenses rather than revenues.

We have previously announced, approximately $10 million of contracts for the USABC and government R&D contracts, and a substantial amount of that will be reported as expense reductions in 2008 and 2009. R&D expenses for the second quarter of fiscal 2008 include $4 million of expenses incurred in connection with our battery business, $1.1 million of expenses incurred in connection with our fuel cell business, and $300,000 of expenses incurred in connection with our nanotechnology business.

For the sixth months, we used $12.6 million cash for operating activities and $7.9 million for investing activities for CapEx. We currently have a leased facility of $7 million which we intend to grow down when equipment deliveries accelerate in the third quarter. Charles will now go into more detail on Ener1's projected financial model as we scale up the production process.

Charles Gassenheimer

Thanks, Gerry. 2008 remains a critical year for Ener1 as we continue to build out our Indianapolis base manufacturing facility and ready the company for commercial production at the end of this year. As I mentioned in my opening remarks, yesterday, Ener1 announced it has completed the transaction to acquire full ownership of EnerDel, its lithium battery subsidiary from former JV partner Delphi. While we look forward to working with Delphi on future ventures, this long anticipated transaction paved the way for further serious partnership discussions which will lead to greater strategic advantage for the company in building long-term business model. Our proximity to market and advanced stage into the pre-production process has produced many opportunities. We have received many investor questions on why the size of the discount was so big with regards to the economics on the Delphi transaction. I would like to make the following three points. One, Ener1 had a right approach refusal in the original transaction documents from 2004 on purchasing the residual balance of EnerDel. This allowed us to enter into an exclusive negotiation with Delphi. Two, Ener1 has been contributing capital to EnerDel since Q1, 2006, and Delphi had not been able to make any capital contributions. This would have allowed Ener1 the ability to begin the dilution process that would have dramatically reduced Delphi's equity stake in EnerDel. While this process may have been equally beneficial to Ener1 shareholders, it would have taken a great deal of time which may have prevented further access to markets through customer contracts and partnerships. Ener1 believes that the discounted value reflects the ability to dilute Delphi's stake overtime. And three, due to the larger financial concerns that Delphi is now facing, the discount was priced into the transaction would seem acceptable given the immateriality of EnerDel to the overall chapter 11 estate of Delphi.

I'd now like to make a – give you an update on the Think Global contract. We are making good progress and the relationship with Think continues to be very strong. Testing of our packs is progressing very positively. We are currently testing the packs in vehicles and are on-schedule with delivery of the one PP, the one Pre-Production packs starting from August. We believe strongly that the bulk of the $70 million supply agreement could be realized in 2009 as Think scales up their own vehicle production in Norway. To be clear, this is an aggressive program. Being the first to commercial pack and vehicle to market has its challenges, but our engineers recently flew over to Norway with the packs and installed our battery into a working Think city vehicle. I am pleased to confirm that our packs is plug-and-play, which is really great news. We expect to have further updates on the Think's supply agreement soon. I'd now like to give you a review of our business plan and key objectives.

From the business plan's perspective, EnerDel has received the request for proposal and request for quote from over two dozen car companies in Tier 1 OEM suppliers. Many have ordered sample cells and packs which they have been evaluating over the past six months. Our stated goal is to sign two additional development contracts by the end of this year, which we believe we're on track to hit.

From a business model perspective, we've always said that we believe that this market is supply constrained, the demand is not the issue but this is a supply problem which leads us to also make comments about the fact that capacity is crucial. So as you see us invest further in capacity based on our pro-development contract, you will see us work toward commercial development. In terms of long-term value proposition, the residual bid for the battery from the power and utility sector might suggest that the lifetime value of the battery could be greater than its initial purchase price. Something that also tells us that we believe the value propositions of battery is extremely beneficial to Ener1 for the future.

Finally, we strongly believe that the business opportunities beyond automotive, in military, and stationary storage for power and utilities and renewable could potentially be a larger market than the automotive opportunity. We believe that automotive needs to be the first to ramp up to production and scale. This scale is what will enable the reduction and the cost curve of the energy storage solution, thus making the battery attractive to the power and utility space on a dollar per kilowatt hour basis.

I'd like to make some brief comments about progress at EnerFuel and NanoEner. As you know our EnerFuel team are a very talented group of engineers that we have acquired from Teledyne in December of 2005. We are working on some exciting programs including a high-temperature membrane which is very important for the future of hydrogen-based power trains for automotive. We are seeing good progress in terms of development from the team. It is crucial to understand that the energy density of batteries can be increased through range extension where the fuel cell recharges the battery within the automotive environment. We think this is an ideal application for our hydrogen-based fuel cell.

We started our NanoEner business long ago. It was the original basis for Itochu's initial investment in to Ener1 back in 2003. We have a small efficient team that has focused on advanced coating applications. Our stated goal is to develop the safest, most reliable, and cheapest form of energy storage devices. NanoEner will play a large role in that process going forward.

Finally, I'd like to give you an update on our conference participation and further visibility of Ener1 over the next quarter. On September 10th, Ener1 will be presenting at the Cowen and Company second Annual Clean Energy Conference in New York City. On September 11th, we will be presenting at America's Growth Capital Clean Tech conference in Boston. September 15th through 17th, is the first international conference on Lithium-ION battery for automotive application at Argonne National Lab in Chicago. Toyota and Enerdel are key sponsors of this conference. On September 16th, Alliance Burst [ph] team Alternative Energy Conference will be here in New York and Ener1 will be a participant on the panel. On October 16th, the Annual Research and Development 100 Award Dinner and Ceremony will take place in Chicago; and on October 22nd, Ener1 has been invited to participate in Jefferies and Companies European Global Clean Tech Conference.

We would like to thank our shareholders for their continued support and interest in the Ener1 story. We remain extremely excited about the potential opportunities for this market and I would now like to open the call for questions and answers. Carmen?

Question-and-Answer Session

Operator

 

(Operator instructions) And the first question comes from the line of Rob Stone from Cowen and Company. Please proceed.

Rob Stone – Cowen and Company

Good morning, Charles. I wonder if you could comment, with respect to shipping, the first pre-production unit to Think if you've already installed the working prototype, what else has to be done between now and shipping the pre-production volume? Is it essentially just replicating the prototype or do you still need to make changes?

Charles Gassenheimer

Thanks for your question, Rob. I think, it would be appropriate for Ulrik Grape to answer this question. Ulrik, you want to take a first crack at that?

Ulrik Grape

Yes. Thank you, Charles. And hi, Rob. Yes, I mean, the next steps are basically the design has been frozen, so the one PP units are essentially not much different from the one that was shipped to Norway. What's going to happen, of course, with the one PP units is that they are going to be going through further testing, principally all – most of those, if not all the batteries, will be in vehicle testing throughout the autumn as we lead into being in production by end of the year.

Rob Stone – Cowen and Company

But essentially allowing them to replicate testing over a greater number of units, they have higher confidence in the results?

Ulrik Grape

Yes, in the vehicles, exactly. Getting a lot of kilometers and various forms of testing that are part of the normal process of leading up to that production deliveries.

Rob Stone – Cowen and Company

Over what timeline are production deliveries expected to start, assuming that the testing goes as planned?

Ulrik Grape

Our plan – the plan today and as we've talked with Think about is that we are on track in production by the end of the year. There is no change in that timeline.

Rob Stone – Cowen and Company

Okay. Charles, a strategic question. Since you note that the industry is scarcity situation and you have so many inquiries. Can you talk a little bit about how you would narrow that down, to two more relationships by the end of the year, and what else needs to happen in terms of completing that process. I know you can't mention specific companies at this stage, but to get a sense of how you think about sorting out the prospects?

Charles Gassenheimer

Sure. Thanks, Rob. You know, I would say it is fair as a first step to answering your question that the human capital issue continues to be our crucial constraint. Our guys, as you would imagine, are putting long hours and really have done a great, great job in delivering the first packs for Think. So my first answer to the question is, I think it's fairly crucial that we note that we always want to be in a position where we under promise and over deliver. So taking on too much, too soon, we think would be a negative. So we are very careful and we carefully evaluate each time we look to take on a new customer, the strategic implications. So that's the first part.

 

The second part of your question is, “So then great, now how do you evaluate it?” Well obviously, when you do have the luxury of choice, the point there is, who is the best strategic fit for EnerDel, and that would include both chemistry wise strategic fit, that would include who's willing to work with us to help us scale on the production and capacity side, because obviously, there needs to be further CapEx and investment as we scale the business, and that would be clearly someone with a large balance sheet who's willing to, first of all, see well into the future and see that the future of automotive power train, whether it would be hybrid electric, plug-in hybrid electric, or electric vehicles, includes the battery. And I think, it would be fair to say, that we obviously have had meaningful conversations with car companies and Tier 1s who have told us, not us telling them, that they believe that there will be very, very high penetration of batteries over the next 10 to 20 years. So, clearly, we see it to the future.

So, in making those decisions, the strategic determinations are –who can we scale with; who has the balance sheet to help us grow our CapEx; and most importantly, who is the strategic fit, who sees the world the way we do? Who sees the prismatic, is the right shape and size of the battery? Who sees that our chemistry that we're pursuing is the right answer versus some of our friendly competitors? And those are some of the ways we're evaluating who to partner up with going forward. And these next two development contracts, just like we did with Think, are very important in terms of picking companies that we think will be long-term successful. I don't believe that anybody at Ener1, on the management or the shareholder's side, wants to be short-term greedy. We believe in being long-term greedy which means making good strategic decisions in making sure bet on companies that we think are in this game for the long-term. So hopefully that answers some of your questions.

Rob Stone – Cowen and Company

Yes. I'm intrigued by your comment about the picking someone with the strong balance sheet. Are these discussions involving non-potential strategic investments? And is that part of the significance of now having 100% ownership of EnerDel that you could then entertain strategic investments by future development partners.

Charles Gassenheimer

Rob, clearly the answer to that question is when we talk about strategic partnership, every thing's on the table. There's no question about it that if you look at the most successful business model in the market today, it's the Toyota-Panasonic joint venture called Panasonic Electric Vehicle. And so the car companies are clearly, clearly looking at this as wanting to have some equity ownership of their Lithium-ion battery supplier and that is one potential option. Another option or another model that that is out there that most of the people on this call are well aware of is Johnson Controls partnership with SAT to form the JCS partnership. So, those are the two models that we look at and clearly we've done our own internal analysis as to which makes the most sense but we are going to take our time and we're going to make sure we get this next step right because obviously having just come through a friendly divorce, but a divorce nonetheless with Delphi, we want to make sure that the next step, with or without equity, is the right step for the company.

Rob Stone – Cowen and Company

 

Great. Finally a follow-up question for Gerry if I may. With respect to the USABC's funding next year, did I understand you correctly that, net of ongoing funding, that your R&D expense would actually be lower next year or is it—how's it going to trend relative to the present level?

Gerard Herlihy

 

We don't give financial guidance on our numbers on Ford but we did say earlier on the call that our R&D expenses have increased in the quarter as we're gearing up for the Think contract. As you know the numbers went from $2.2 million last year to $5.4 million this year and that $5.4 million is net of a million dollars on reimbursements. So, actually our R&D expenses went up to $6.4 million before the reimbursement. So, we're tracking at a higher number. What I would like to say though is as we get into production, our cost is going to shift more into cost of sales as well an increase in R&D expenses. So, we're looking for the revenue number to start the beginning of next year and some cost of sales associated with that number.

Rob Stone – Cowen and Company

 

Okay. Are you able to say how much the USABC funding you anticipate next year?

Gerard Herlihy

 

Well, we have several contracts. We have a $6.5 million Phase II for the hydro-electric vehicle, lithium-titanate battery. We have a $2.5 million PHAV contract, and we have $1 million grant from the DOE for bus development. It hasn't been turned into a contract yet, but that's all USABC and those are all 50% cost share.

There's also another $4.3 million net of government grants related to the Department of Defense and the Office in Naval Research, which is part of that $10 million number that I stated earlier. The $10 million number being a net number.

Rob Stone – Cowen and Company

 

So, over what period of time did those contracts– $10 million extends over what period of time?

Gerard Herlihy

 

Well, as you do the work. So, you actually have to keep track of where you spend your hours and the materials, but it's going to be – substantially, all will be done over 2008 and 2009, but it's really a timing of how – when we do the work on the projects.

Rob Stone – Cowen and Company

 

Okay. Thanks very much.

Charles Gassenheimer

 

Rob, just for point of clarification. The USABC contracts mainly were signed in September of '07 and they are 18 months contracts. So that gives you at least the start and finish points and then you can sort of term out as we work against those. But you can see that a good portion of that will be in 2008.

Rob Stone – Cowen and Company

 

Thanks, Charles. That was sort of my question in getting a sense of over what time period, if any, the different R&D funding sources were scheduled. Thanks.

Ulrik Grape

 

Thank you. Operator, next question please?

Operator

 

The next question comes from the line of Michael Lew from ThinkPanmure. Please proceed.

Michael Lew – ThinkPanmure

 

Thank you and good morning.

Charles Gassenheimer

 

Good morning.

Michael Lew – ThinkPanmure

 

Morning. You stated in the release to delivery expected over 20 additional pre-production packs from the end of August. So as it stands today, Charles, with existing coaters in place are in the house, how many whole-electric vehicle battery packs can you produce on a daily basis?

Charles Gassenheimer

 

Sure. Thanks Michael for the question. I think it might be an opportune question to introduce Naoki Ota, our COO. Naoki, would you like to answer that?

Naoki Ota

 

Yes. Hi, Michael. Thank you very much for your question. As you know the battery pack, we are making monthly we can make up hundreds of packs a month level by the end of this year. But when we ramp up the production for the next year, we are looking at starting from 200 to 400 and we'd like to achieve 800 packs a month level by the end of next year.

Michael Lew – ThinkPanmure

 

Okay. So in other words, based on the prior coms pyramid [ph], the design is frozen right now, so on September 1st, this 20 packs could be I think global the doorstep right? Or are you going to be waiting to produce some with the large coasters that are coming in house in September?

Ulrik Grape

 

This is Ulrik here, Michael. How are you?

Michael Lew – ThinkPanmure

 

Hi.

Ulrik Grape

 

Yes. These batteries will be – the start of delivery of those will take place in – from the end of August and into September. So they will be on a track to be delivered as quickly as we get them out the door.

Michael Lew – ThinkPanmure

 

And then how long do you anticipate the evaluation process will take? Or this battery is going to be tested also side by side against the Zebra and A123 unit simultaneously?

Ulrik Grape

 

I think that's a question for Think what they, what I would say, whatever the pace is with the Zebra batteries and the A123 batteries but these will go through extensive testing throughout the autumn. And we feel very confident that these batteries are going to perform very well in the vehicles. We've already seen that, of course, demonstrated in the unit that we've already delivered to Norway and also, of course, the unit that we have here in Indianapolis.

Michael Lew – ThinkPanmure

 

Okay. And also, with regards to the development contracts, Charles, that you've alluded to that you can announce by the end of the year. Just to clarify, they're going to be for HEV batteries, the power batteries, or you think there could be a possibility for some more electric vehicle development contracts or even possibilities for heavy duty applications?

Charles Gassenheimer

To Michael, the –obviously, the simple answer to that is, yes. We are – obviously the broad spectrum of opportunities are being looked at and when I gave you those, sort of, north of two dozen companies, remember that we could be talking about multiple vehicle lineups within that. So, one car company, for example, could very we'll be talking about both an HEV and an EV solutions. So, we – obviously, it's a – there are every single car company in the world today, all 50 major car companies, have some sort of electrification program underway. So this is a very, very crucial year in '08 as these car companies start to better understand and it would be, I think, it'd be fair to say that the same sort of education process that investors are going through right now, the car companies are going through. Remember, this is a brand new field for car companies and replacing the internal combustion engine with batteries, there are clearly some car companies who've been at this for a while, very few, who've been doing a lot of research. But for the most part, the education process is ongoing. So, we are, EnerDel, is part of that education process. And so, we've had some car companies that sort of getting up to speed. We're helping them get up

to speed and sort of we are their trusted advisors. But to answer your question specifically, it's all trade. It's HEV – well, it's actually all Ford. HEV is PHEV, it's EV, and it's heavy duty, and all are being worked on and all of these solutions that we're looking at are very, very interesting right now. There is a lot of very interesting things going on in the market which is – it's a very exciting time to be part of.

Michael Lew – ThinkPanmure

 

Okay. And also you got $34 million cash on the balance sheet as the quarter close. What's the current burn rate?

Charles Gassenheimer

 

It's approximately $1.8 million per month. When you look at it burn, obviously, that doesn't include– that operating burn doesn't include Capex which is controllable. As we said earlier in the call, we control our Capex and we spend it relative to actual customer contract. So, we spend a fair amount of money getting ready to produce in volume for Think. As we look at additional customer contracts and bring them online, you would expect that we might increase our Capex relative to customer contract. So, it's an interesting time. We think we're sufficiently funded and, as I answer the question of Rob earlier, whether we decide to raise additional capital from the capital market or from a strategic partner or things like that, when it comes to building new plant, those are questions that we still are looking at and evaluating carefully as we manage our growth against customer demands. As I said earlier, there is no doubt in my mind this is not a demand problem, it's a supply problem. But it's also about time phasing our Capex against specific customer contracts. So, there's, obviously a lot balls in the air and it's a challenge to manage the growth which is very exciting.

Michael Lew – ThinkPanmure

 

Okay. Thank you.

Charles Gassenheimer

 

Thanks for your questions, Michael.

Operator

 

Our next question comes from the line of Gill Sharp [ph], from Guy Dale Advisers LLC [ph]. Please proceed.

Gill Sharp – Guy Dale Adviser LLC

 

Charles, Gill Sharp here. How are you?

Charles Gassenheimer

 

Yup. Good morning.

Gill Sharp – Guy Dale Adviser LLC

 

Good morning. When we were out in Indianapolis, we talked about that new coating machine coming in, in mid-August. There seems to be a month delay. Once that machine arrives, how long does it take to install and you know, to proof?

Charles Gassenheimer

 

Sure. I guess, I let Leo to take the first crack at that, then I'll follow-up later.

Gill Sharp – Guy Dale Adviser LLC

 

And also, why the month delay?

Charles Gassenheimer

 

Sure. Naoki, do you want to answer the first– the second part of that and I'll answer the first part of that?

Naoki Ota

 

Yeah. Hi, did you– I'm not sure when we said the order delivery. I think we keep on saying September delivery. The delivery – the real problem to ship from Asia, actually from Japan, up to the end of August and it's arriving in September. The quota delivery schedule to sell [ph] has not been changed in my memory. So, if we mistake in communicate with you, we apologize but in our schedule, it doesn't change. Our engineer, already, they went to Japan and we test it to the quota over there and we confirmed it’s working and the quality is good and they are parking the quota in Japan for shipping right. So, it's has been already in the schedule.

Gill Sharp – Guy Dale Adviser LLC

 

I see.

Naoki Ota

 

Charles, after that?

Gill Sharp – Guy Dale Adviser LLC

 

And when does that actually begin production? Once you receive it, when do you gear up to full production? How long does that take?

Naoki Ota

Yes. September, the end of September, we receive it, we start to test it and since we test it over there, we confirmed it. And the quality, the time is not such a long but still we think of 2 to 3 months is necessary.

Gill Sharp – Guy Dale Adviser LLC

Okay. Thank you.

Charles Gassenheimer

Thanks for your questions, Gill. Operator, next question please.

Operator

The next question comes from the line of Maxwell Mariven [ph] from UBS. Please proceed.

Maxwell Mariven – UBS

Good morning. Charles and John. The question is, have you publicly disclosed yet or would you publicly disclose the thought on what the cost of – what you will realize for revenues of the battery pack if and when you start shipping production quantity to think?

Gerry Herlihy

Obviously, the direct answer to that is, no, we have not publicly disclose unit pricing mainly because we think we are aggressive on our pricing relative to our competition and we don't want to give them a target. We definitely have given some guidance, and that is that the Think City vehicle, and we understand from Think that they are planning to sell the vehicle at about a $35,000 price point, and the battery is about half to cost of the vehicle. So, at least that gives you some guidance on an average selling price that you can sort of back into a number.

Maxwell Mariven – UBS

Alright, I appreciate that and I've read a lot of stuff so I lose track of where it is. But is Think saying that they expect this vehicle to have a 100 mile or kilometer range in a 40 mile/hour capability or –?

Gerry Herlihy

No, well, I mean again it's – I think the answer to that is – this is obviously a better question for Think but from what I understand from their public guidance, I think the answer is that it is a city vehicle. I believe their product cap the speed at 65 miles per hour. I'll have Ulrik correct me if I'm wrong on that. And in terms of range, we do have a – they have publicly announced that at the Geneva autoshow that the three different solutions and the advantages and disadvantages of the three different solutions they've been testing. And I believe the data they released in Geneva was that the EnerDel pack was 27 kilowatt hour pack that gave the car a range of 112 miles, the A123 solution was a 90 kilowatt hour pack, it gave the car a range of approximately 70 miles, and the Mes-Dea numbers I don't remember off the top of my head, Ulrik, if you remember those.

Ulrik Grape

 

The Mes-Dea or Zebra battery is about comparable number to slightly below or comparable to the EnerDel number.

Maxwell Mariven- UBS

 

Okay. Thank you.

Ulrik Grape

 

And you were correct in you earlier statement Charles.

Charles Gassenheimer

 

Thank you, Ulrik.

Maxwell Mariven – UBS

 

Okay. And are you guys completely satisfied now that you've solve the heat dissipation problem of the lithium-titanate solution?

Charles Gassenheimer

 

Sure. Ulrik or Naoki, do you want to take a first crack at that?

Naoki Ota

 

For the Think– this is Naoki Ota. Actually this battery is not the lithium-titanate. This is hydrocarbon base – the battery. And actually, of course we know the full integration, the vehicle, we tested the many heat – the special from our management issue. They asked how we confirm – we integrated the vehicle. So, of course, they are lining the test with the vehicle but in a bench test or the pack test. They dictate we didn't see the problem.

Maxwell Mariven from UBS

 

Okay. And the next question is – has to do with the Lithium as self use. Lithium carbonate is a basic building block and what purity would that be going in or is that so technical to answer on this call.

Charles Gassenheimer

 

Carbonate

Naoki Ota

 

Yes. Actually, the Lithium Carbonate is not– actually, we said the positive side, the cost of material, is the mix of oxide, Lithium mix oxide. The containing manganese and the negative aside hydro carbon it's not lithium carbonate. Sort of a carbon material but not the graphite material which is used by many companies. The material set of softer carbon it's not the hydro carbon. Hydro graphite.

Maxwell Mariven from UBS

 

And I'm sure there was a typo in your previous press release where you're talking 600 pounds battery pack per vehicle. I presume that's 60 pound.

Charles Gassenheimer

 

For the Think vehicle, the battery is about just under 600 pounds. That is correct.

Maxwell Mariven from UBS

 

It is 600 pounds. Wow.

Charles Gassenheimer

 

In terms of the batteries, it has about 26-27 kilowatt hours. That is pretty attractive weight actually. We may have earlier talked you about some of the hybrid packs that are down into the 45 to 50 maybe even 60 pounds, depending on the (inaudible).

Maxwell Mariven from UBS

 

Great. Okay.

Charles Gassenheimer

Remember, I mean, remember, there's a difference between the high-power and the high-energy density packs. On the high-energy density electric vehicle batteries, remember, the battery runs the entire vehicle. It replaces the entire internal combustion engine, right, so, that weight, as Ulrik mentioned, is actually quite attractive. When you're talking about the high-power battery, such as an HEV battery pack like you're used to see in the Prius and another vehicles on the road today, we have a much, much, much more attractive solution than the current nickel metal hydride technology that exists. Our pack is in fact approximately, just less than 40 lbs relative to almost twice the weight for the nickel metal hydride pack. So, remember, we got two different solutions and those are two different markets. I just wanted to make sure that point was clear, so that's it's not confusing.

Maxwell Mariven from UBS

Well, that's why we listen to these calls so it does get straightened out for us. I appreciate that.

Ulrik Grape

No problem. It's still early days.

Charles Gassenheimer

Operator, I think we have time for just one more question.

Operator

And the final question comes from the line of Harlan Cherniak [ph] from Venor Capital. Please proceed.

Harlan Cherniak – Venor Capital

Good morning, guys. How are you?

Charles Gassenheimer

Good morning, Harlan. How are you?

Harlan Cherniak – Venor Capital

Gentlemen, congratulations on the achievement of these milestones thus far. Good job. Couple of quick clarifying questions. With respect to the Think contract, can you confirm that you and A123 are the only lithium ion battery solutions that are potentially vying for this contract? And that Mes-Dea is just a molten sodium technology. Is that correct?

Charles Gassenheimer

Everything you've just said, I can confirm it's true at – to the best of our knowledge at this stage in the game. Correct.

Harlan Cherniak – Venor Capital

And you know, on the day-to-day basis, you continue to read about, sort of, sagging SUV sales here in the US as it relates to the Tier 1 and the OEMs, what have you, and continued transformation of SUV plants to smaller compact vehicles. Do you envision pursuing additional production capacity here in the United States, or in Asia as it relates to that current trend in the market?

Michael Gassenheimer

 

So for the second part of the question, I guess the easy answer is it depends. But let me try and give you a better answer than that. So, we obviously believe this market is global, from what we're seeing today. European and Asian car makers are certainly being more aggressive than the US car makers. That being said, United States market is still the largest automotive market place in the world, even with the reduction in car sales expected for this year, this is still probably going to be a 13 to $14 million unit year. And of that, still a large majority of the cars sold in the United States are produced in the United States. I mean, based on last year's numbers, that's 16.5 million units, plus or minus, approximately 14 million units were produced in the United States. So we think having production capacity in the United States, in fact, having the only lithium-ion automotive manufacturing plant in the United States, it was an important strategic move for the company given that this is the largest automotive market.

We would not rule out setting up capacity in either Asia or Europe, as we want to build our global manufacturing footprint and, obviously, when I said earlier, it depends, it obviously depends on who our next two customers are. So, should our customers continue to be European in focus like Think, at least initially, then that may skew us there, or Asian obviously being a very, very large and attractive market. So we have a number of key important decisions to make as to the next steps on capacity, and I think it depends on market opportunity and customer base.

That being said, when I mentioned Think being European centric, obviously, we've read publicly, as of you, that Kleiner Perkins who's one of the largest investors in Think-North America has said that they believe their demand for North of 50,000 Think City Electric vehicle here in the U.S. So clearly, the U.S. market is an important strategic focus anytime you talk about automotive. So we're glad to be here, we think it's important to expand here but we also think having global footprint is crucial.

Harlan Cherniak – Venor Capital

 

That's great. Thank you very much. One last quick question perhaps. It's for Gerry, as it relates to some other previous comments on SG&A, R&D, cash burn, and your comments again about being fully funded trough the end of 2009. Can you us help with some clarifying assumptions with respect to a ramp up in corporate overhead, employees, production, manufacturing in the engineering areas? You've seen some press out there about your continued ramp up in those areas, and I was just wondering what some of the assumptions were behind that?

Charles Gassenheimer

 

Gerry, I guess you want to take a first shot at that?

Gerry Herlihy

 

Yes. Our – actually we're not ramping up G&A, we've actually slightly cut it back in our recent and actually the G&A carry – contains a large non-cash number related stock option expense because the volatility on our stock in the past is something that causes our black shoals [ph] numbers to go up. The piece that your missing that is going to become a bigger part of the budget going-forward in the next year is that a substantial part of the $10 million in government grants are going to show up over the next 12 to 18 months, and also the Think revenues with a positive gross margin are going to be contributing to the bottom line, and that's why we have cash flow – enough cash to last through at least the next year.

Harlan Cherniak – Venor Capital

 

Okay. Great. Thanks very much guys. Queue out the door.

Charles Gassenheimer

 

Thank you for your questions. Thank you to everyone that dialed-in. We have a large attendance today. We appreciate your time, and attention, and focus on Ener1, and we look forward to either be seeing you at a number of the conferences we'll be presenting at or clearly on our next quarterly conference call. Again, thank you and have a great day.

Operator

 

This concludes the presentation for today. Ladies and Gentlemen you may now disconnect.

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Source: Ener1, Inc. Q2 2008 Earnings Call Transcript
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