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Executives

Ethan Guttenplan - The Equity Group, Inc.

Robert Lifton - Chairman and Chief Executive Officer

Howard Weingrow - Deputy Chairman and Chief Operating Officer

Jacob Weiss - President

Frank Romero - Senior Vice President of Sales and Market Development

Michelle Rush - Vice President of Marketing

Israel Fisher - Senior Vice President and Chief Financial Officer

Michael Resnick - Senior Vice President and Chief Accounting Officer

Gennadi Finkelshtain - Chief Technology Officer

Analysts

[Kent Holden - Camfund]

Stephen Bartholow - Carret Asset Management

[John Lesgy] - Private Investor

Harold Weber - Smith Barney

Foster Greene - Coburn & Meredith

Bart Blout - Sawtooth Capital

[Jerry Messano - Dolphin James]

[Adam Hoff - Vault Partners]

Tom Leach - Preakness Hills Capital

Rudy Luo - Westrock Advisors

Samuel Williams - Carrett Asset Management

[Steven Goldman] - Private Investor

[Henry Melman] - John Hancock Funds

Medis Technologies, Ltd. (OTC:MDTL) Q2 2008 Earnings Call August 11, 2008 10:00 AM ET

Operator

Welcome to the Medis Technologies second quarter 2008 earnings call. (Operator Instructions) I will now turn the conference over to Ethan Guttenplan.

Ethan Guttenplan

Before we begin, I would like to remind everyone that this conference call may contain forward-looking statements which are made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. In some cases you can identify those forward-looking statements by words such as may, will, should, expect, plan, target, anticipate, believe, estimate, predict, potential or continue or the negative of those words and other comparable words.

These forward-looking statements are subject to risks and uncertainties, product tests, commercialization risks, availability of financing and results of financing efforts that could cause actual results to differ materially from historical results or those anticipated. Further information regarding these and other risks are detailed from time to time in the company's filings with the SEC. Medis assumes no obligation to update or alter its forward-looking statements made in this conference call or any in periodic reports filed by Medis under the Securities and Exchange Act of 1934 whether as a result of new information, future events or otherwise, except as otherwise required by applicable federal securities laws.

I'd now like to turn the call over to Robert Lifton, Chairman and CEO of Medis. Go ahead, Bob.

Robert Lifton

With us on this call today are Howard Weingrow, Deputy Chairman and COO, Jacob Weiss, President, Frank Romero, Senior Vice President of Sales and Market Development, Michelle Rush, Vice President of Marketing, Israel Fisher, Senior Vice President and Chief Financial Officer, and Michael Resnick, Senior Vice President and Chief Accounting Officer. And also standing by is Gennadi Finkelshtain, our Chief Technology Officer.

As we announced, our 24/7 Power Pack with the Basic Power Management will be offered in select Best Buy and Best Buy mobile stores starting this month. Actually having our Power Pack product on the market for sales to consumers is an important moment in the history of our company. I'd like to start our call today, therefore, by putting this development into some perspective.

Eight and a half years ago, under the aegis of Gennadi Finkelshtain, Medis Technologies began developing an alkaline fuel cell based on a totally different technology than what was being employed by almost every major institution, laboratory and company, many of which were some of the larger companies in the world. During that time we created a new proprietary fuel cell technology, developed a product line that now consists of the 24/4 Power Pack with a Basic Power Management System and an Advanced Power Management System that our scientists also invented, as well as the recently developed Emergency Power Kit.

We also developed a technology platform, including a solid [inaudible] high drive fuel that we intend to use in future products. Based on this platform, we have developed the Power Knight product for the future soldier, which is the basis for developing a future power source for laptops. And we developed a 500-watt laboratory prototype for UAVs, which is the basis for future development of standby power sources for homes, offices, servers and cell towers.

We built a highly sophisticated, fully automated production line, established at Celestica's facilities in Ireland, capable in full operation of producing up to 1.5 million Power Packs per month. And we identified and entered into supply chain relationships for our Power Pack product, which included helping suppliers, both technically and financially, in establishing the capabilities we required.

We successfully listed our 24/7 Power Pack product with Underwriters Laboratories and received the CE mark in Europe and received a special permit from the U.S. Department of Transportation to bring up to three Power Packs per person on airplanes and in their cabins.

To be sure, the cost of that development was very difficult and did not always go smoothly. Key elements of our program took much longer than we had hoped and thought and turned out to be more expensive than we had planned. I certainly wish that hadn't happened, but unfortunately, this is the nature of new technologies, especially one with so much of what was developed was totally proprietary so that there was no one else to copy from.

Of course, the benefit of being unique was that it allowed us to own the intellectual property, to have patents and hold trade secrets on all the important elements of our technology. Significantly, during this same period none of the laboratories, institutions or companies which, despite having spent hundreds of millions of dollars, have been able to succeed in making and putting on the market a commercial fuel cell product for powering hand-held devices. We stand alone.

All of our accomplishments took place despite the naysayers who, before every one of our developments, said it couldn't be done. And they took place in a setting of attacks on our share price by improper short selling activities that have made us number one under Regulation SHO list of failures to deliver for 758 days and despite the pattern of false statements and rumors intended to undermine our achievements.

Fortunately, during this development period the market need for increasing power and longer battery life for hand-held devices evolved very much in our favor. True, we had some vision of the future needs when we started our product development, but mostly we were lucky with what happened.

Google has created a successful model for offering in-depth content in return for offering advertising to the user. Content and advertising create the need for more power and extended battery use. More applications like broadband, music, video, GPS, banking and the like have been added to the devices. Look at the very broad applications offered by the iPhone and similar devices. Apple, Nokia with Symbian, and Microsoft with Windows Mobile, are all encouraging the development of new software applications for their products by outside developers.

Today we read Steve Jobs' report that in the last month iPhone users have already downloaded more than 60 million programs. Indeed, Steve Jobs has declared his intention to make the iPhone into what is essentially a hand-held computer.

All of these developments increase the device use, requiring ever more power and ever longer battery life. Meantime, the number of device uses has multiplied to where it now exceeds 3.3 billion devices worldwide, including many millions of smartphones. We are now marketing to our customers products that we think are exciting and meet the needs of the consumer - the 24/7 Power Pack with the Basic Power Management System for most devices and with the Advanced Power Management System for the smartphones like the iPhone and Blackberry and other devices that require greater power, and the Emergency Power Kit that provides power both for cell phone use and to provide light, which we believe will have considerable appeal in these times of climate change and loss of power from storms, floods, fires and just plain power outages.

Now before we open the floor for questions, let me add one more point. Before we issue a public statement regarding relationships with major companies as customers or as joining in product development, we seek and get approval of the exact language of the statement from those companies. Under our agreements with those companies, we are constrained from any other discussion of our relationship or the details of their plans or activities. I know that we shareholders are deeply interested to learn all the plans and programs we have with those customers or joint developers, but unfortunately, we must stay within the confines of approved public statements. Anything else would damage our relationships.

So please bear with us if we are not able to satisfy the understandable desire to know each program or step that is planned. They will become apparent very soon as they move forward. Thank you.

Now let me open the floor for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from [Kent Holden - Camfund].

Kent Holden - Camfund

In the 10-Q, the Results of Operations section, where you talk about the pricing structure for the product being reevaluated, require an increase in prices and an increase in the cost, I was wondering if you could clarify that a little bit.

Robert Lifton

Yes. When we started this process, the dollar relationship to the Euro was substantially different and there were other factors that led us to price the product at a price that is lower than what we feel we now should get and are entitled to get for the product to provide the kind of spread that we want for profits. So we are raising the prices on our product to our customer base. We have had no pushback on those prices because they still allow the price to the ultimate consumer to be sold at a price that we feel and the customer feel makes sense. In some cases we've been dealing directly with customers or dealing through representatives, which reduces the markup of a distributor in the middle, so that helps the pricing structure to the ultimate consumer as well.

And so the pricing structure has been increased with respect to the Power Pack, with respect to the Power Management, with respect to the Advanced Power Management.

Operator

Your next question comes from Stephen Bartholow - Carret Asset Management.

Stephen Bartholow - Carret Asset Management

Could you give us a bit of a review of the relationship you have with General Dynamics? It's my understanding, and I may be wrong, that you've got a complete, exclusive relationship with them in terms of current products and all future products as that relates to the DOD opportunity.

Robert Lifton

Let me ask Jacob Weiss to discuss that because he's been working on all of our military programs.

Jacob Weiss

The relationship with GD, as you know, goes back number of years and has been very dynamic as we looked for opportunities together with them. The focus right now is the DOD product, and that's where all the effort is going. We're also working with them on the [inaudible] product to try to introduce it to the military directly. But the primary focus is the DOD competition product. And off of that platform we would hope to develop additional products together with them.

The agreements with them specifically are for the products that exist that we're working with them on, but by the nature of the relationship, with or without - and this is the nature of our relationship with a lot of people, it's a relationship of trust - I would anticipate going forward with GD as the opportunities arise and expanding the relationship both contractually and practically.

But right now, again, I would say that the primary focus is that DOD competition.

Operator

Your next question comes from [John Lesgy] - Private Investor.

John Lesgy - Private Investor

If I'm not mistaken, the Wearable Power Prize begins at the end of next month. I assume the Medis product is still entered in the competition and I was wondering is the - and I think you're calling it the Power Knight now - can you tell us that it's demonstrated the minimum criteria to win the competition?

Jacob Weiss

Okay, well, we called it the Power Knight, by the way - and maybe we'll get into it later - but we called it the Power Knight when we participated in the Eurosatory show for military land products.

Well, that was quite an exciting opportunity there. It's a major show, like the Paris Air Show. It's a major show for systems that are air based, airborne systems. Every other year you have the Eurosatory, which is for land-based systems. We took a booth near the Israeli booth. The Israeli booth in these shows are usually one of the largest and most sought after booths. We were right next to the Israeli booth, and we basically demonstrated the platform that we were developing for the DOD and we called it for that purpose the Power Knight. We had brochures made up around it because we wanted people to understand what its function was and the name was very well received. That's where that name came from.

The end result we were there for four days with over 60 meetings, ad hoc meetings - some of them planned, but many of them ad hoc - with press in Europe as well as major companies in Europe as well as the military in Europe, but a number of companies who are the prime contractors for the equivalent land warrior programs in European countries. And since that time we've already had follow up meetings with a number of European companies.

And in September I, myself, together with a team of people, are going to be meeting a dozen or more major potential partners to cooperate for European programs in the land warrior environment. That would include specifically some form of that DOD product but not exactly because the specifications in Europe are significantly lower and simpler than the U.S. specification. The U.S. specification is very extreme and challenging for everybody. For example in a lot of the European specs as we know them, whereas the U.S. wants a product that has 96 hours in the field, many of the Europeans only want you to demonstrate 24 to 36 hours in the field, and that's obviously a significant difference of carry-on power.

So we're pursuing those relationships aggressively now and we find that there's a lot of opportunities but, as I was starting to say, it's not limited just to that product. There are a lot of potential applications that we're trying to pursue with the Europeans, including standard batteries for communication equipment. There's a lot of excitement about that. That would be a new development for us, obviously. But we think we bring some real special ability to compete there, and portable power is definitely one of the top three issues in land fighting in the next decade. So we're well placed to find opportunities in the military environment for that.

Specifically going back to the U.S. program, as you said, the fly off begins, I believe, at the end of September, the 22nd or 23rd of September or something like that. We are definitely in it. One of our senior people, the head of the project, I think this week is in Washington at one of the meetings, preliminary meetings going forward on that. I don't know how many people are still in it. I know many dropped out from other companies, but I'm sure there are plenty of competitors there because it's such an exciting potential program going forward. It basically would be the platform for the land warrior in the U.S. for portable power.

We have tested our units in Israel and in terms of the weight restriction, which is the key drop-dead restriction there, we're definitely within the weight restriction of 4 kilo. In terms of power, we're there, we're pretty much there. And in terms of longevity, we're coming close to achieving. I wouldn't say we've achieved the spec but we're working towards it. It's a very challenging spec. We don't anticipate many companies coming anywhere near that spec, but we'll see when we get there.

But we're confident that we have a very competitive platform for that, and we'll all know in the next couple of months.

Operator

Your next question comes from Harold Weber - Smith Barney.

Harold Weber - Smith Barney

Is it possible you could give an idea of how many different customers you're supplying goods to, to what different channels and how many places they're showing up in or going to be showing up in shortly?

Michelle Rush

We are currently shipping to our current distributors as well as the program that we just announced. We have a variety of channels. You've got distributors that service the enterprise channel as well as the industrial channel and then the retail channel. We've just now shipped product to one of our representatives for the South America region, and that product will show on the shelves there in wireless stores. We're working with a representative in India, and then the recently announced relationship with Xentris has opened up additional customer channels for us as well.

We also started focusing, especially with this new product line, the Emergency Kit, on specialty retail stores, so companies that are servicing the outdoor market, working with utilities, various city and state agencies, and we'll continue to pursue the retail customers that we've been working with.

Operator

Your next question comes from Foster Greene - Coburn & Meredith.

Foster Greene - Coburn & Meredith

Can we talk about the Best Buy relationship a little bit? Are you shipping to them and have they given you an order at all?

Michelle Rush

Yes.

Robert Lifton

Foster, let me repeat what I said before so it's clear that whatever we've said about any relationship with any customer has been vetted with that customer and our agreement with those customers is not to say anything more than what we've said publicly, and anything else might damage our relationship.

Michelle, in the confines of that, if you want to discuss generally how we're working with customers, that might be valuable to Foster and everybody else.

Michelle Rush

I can give an overview to the overall programs. Companies are working very differently now than they were just a year ago. JIT, just in time, is really the name of the game today, and flexibility is absolutely key.

We were introduced to Xentris and the various programs we have with them unfolded from there. Everything is done through EDI, the Electronic Data Interchange, and all companies have visibility to the requirements coming down the pike. So customers place their orders through Xentris, in this specific instance, and in turn the orders are then delivered by Medis to Xentris for final packaging and shipment to either in-store or to their distribution centers.

The advantage to working with Xentris is really the ability to have the flexibility to configure the required packaging and products here in the states based on the JIT. It takes about three to four weeks for a container of Power Packs to get from Ireland to the landed destination here in the States, and by having the product components at Xentris, the configurations can be determined at a later date than if we had to ship directly from Ireland finished package goods.

As you know, our product allows for a variety of configured packaging, so you have the Power Pack, the cable and the various [tips] and, as Bob mentioned, now the Emergency Kit with the flashlight, so Xentris takes in the individual Power Pack boxes, packages them according to the required configuration here in the U.S. with the correct cable and such, and then ships the products in the required sub-carton and master pack boxes according to the customer's requirements. Xentris has brought a tremendous amount of knowledge and experience to the program through their packaging and logistic capabilities and the knowledge of how customers receive products.

So the first shipment of this program was received by Xentris last week for in-store delivery this month. We plan to be at approximately 20 stores and to promote the product availability through advertising and other means so consumers will know where to go and buy the product. As Bob mentioned, we can't go into any other specifics regarding this program as going forward we look to be measured by shipments and sales as we will report quarterly, but we are very excited to have the product carried by Best Buy and hope you will continue to follow our progress.

Operator

Your next question comes from Bart Blout - Sawtooth Capital.

Bart Blout - Sawtooth Capital

Yes, I wonder if Frank would care to comment on what he saw in joining the company of Medis and what he sees in the future and some of the knowledge that he brought with him from his previous employment and how he sees it going forward? Then second of all, I think it would behoove everybody so there was considerably less confusion if you got together and you posted on your website so that we don't run into misquotes or misunderstandings or some of the various unfortunate things that have happened and put them on the website about what the - for example, the hope for delivery is, the timetable, the this and the this and the -

Robert Lifton

Let me just repeat again. Wherever we can with respect to the relationship with a particular customer, we try to be very, very specific to the extent that that customer allows us to say something that deals with their plans or programs. And as you can imagine, since we're dealing with some of the largest companies in the world, which have their own rules and regulations and since they are the 800-pound gorillas, we must abide by those rules and regulations to a T.

Bart Blout - Sawtooth Capital

I'm not really speaking to that.

Bart Blout - Sawtooth Capital

So we have a map by which to follow which way and how your journey is proceeding, whether it's interrupted.

Frank Romero

Let me summarize what I got out of that. Initially, why did I leave my previous employer and come to Medis? Well, I left HP to come to Medis as I have become familiar with the product and the market opportunity over a period of time. And with today's devices requiring more and more power, there is a perceived need, anyway, to maximize power on the go and to keep devices running and the users more productive on the go. As I possess consumer electronics and telecommunications experience, I believe that this product line addresses this need, and I'm excited to be here at Medis.

Additionally, where do we see sales coming from for Medis? Well, I'm still coming up to speed here and I have begun to work with the team, Michelle and others here at Medis, on a defined sales program, and I have begun to reach out to my relationships here in the industry to further develop and refine our sales program going forward.

I'm also very committed to being here at Medis, and I'm optimistic to growing sales with the team here at Medis.

Operator

Your next question comes from [Jerry Messano - Dolphin James].

Jerry Messano - Dolphin James

Obviously looking back, NCS, QuestStar, ASE, you know, and some of the power points that we got in 2007, it states here clearly that these - QuestStar placed an order for a million units, NSE placed an order for 250,000 units, ASE placed an order for 200,000 to 400,000 units per month. With the fact that you're probably at the end of the three-year agreement that you have with [Celestica] regarding the - you have a three-year deal there with them  you know, how much is going off the line? Are these orders being filled or inventoried or something? And, if you have a three-year agreement with Celestica on this line, are you renewing that? Obviously, I guess you have to. You can't pull the line out.

Robert Lifton

Jerry, first of all, with respect to Celestica, of course we will be renewing our relationship with Celestica. And based on our production schedules, the relationship is flexible enough to allow for changes in the production schedules that have ensued.

As I indicated in my opening remarks, we have unfortunately been late in some of the developments that we've had planned. Let's take, for example, a product which I personally believe is a major opportunity for us and that is the Advanced Power Management System. We decided about a year and a half ago that we had to build a system to be able to supply the increasing power demands of products like the iPhones and the Blackberry and the like.

That system took time to build, and as we were developing it, the needs kept changing. For example, the first iteration of that system had a small lithium polymer battery in it which was 300 milliamperes. The second iteration of that system, after we started to watch what was happening in the market, had a lithium polymer batter of 500 milliamperes. I can tell you that today that lithium polymer battery in that system is 1.4 amperes, the equivalent of 1,400 milliamperes, almost four times to five times as much as the initial plan we had made.

Why? Because as we watched the development of the iPhone and the Blackberry and the enormous amount of power that they needed and the enormous amount of power you needed to charge them, we had to keep stepping up the product that we were offering. Now we're offering a product which is almost the equivalent of the wall in terms of its power. But that took time, each iteration took time to do and each iteration took time to develop, and now we're at the final stages of that iteration.

Now, that product, that Advanced Power Management, is one of the key products that some of those customers want to have available to them as they go out into the marketplace to sell the products because after all, as we indicated before, the smartphones are one of the major needs of power.

And so we're now starting with those customers, providing them with the sampling that they need to go out to their own customer base and to present those products to their customer base and start to take the orders that they're expecting to get from them and that we're looking for them to deliver to us. So that process unfortunately took time, but finally we're here and finally we have the products in hand to do it.

Now during that period of time, two things have happened. One is that the need of the consumer has grown immeasurably. And as I indicated, even - just think about it, Jerry. Think that 60 million new applications to the iPhone this month alone since they opened up for open software. Imagine what that means in terms of the amount of power that people need, the amount of battery life that people need. So on the one hand, that happened and that was extremely valuable to us. And on the other hand what happened is that we have developed a product in the Emergency Power Kit that we think is going to be a very attractive product and the feedback that we've gotten from everybody has been very, very affirmative on that product.

So although we were late and although I, for one, am extremely unhappy about it, it was the nature of what happened in the world that we were dealing with. It's a fast-changing world. We had to change with it very quickly, and I think we're now in a position where we do have products to be able to give to those customers that you mentioned so they can go out and meet the terms of our relationship.

Operator

Your next question comes from [Adam Hoff - Vault Partners].

Adam Hoff - Vault Partners

You referenced earlier that you had to raise the price in order to account for the spread, and I was wondering if you could quantify the spread, either the cost of production, the expected sale price or just generally what margin are you targeting?

Robert Lifton

I don't think that it would be helpful to us vis-à-vis our customers to know exactly what our costs are and what our spread is and what we're looking to make on it because it gives them negotiating position that is not helpful to us in any way at all.

I will say that the initial pricing when we first started talking about pricing was $8 for the Power Pack and we were actually providing Power Management Systems at much lower prices, and that price today - Michelle, correct me if I'm wrong - is $9.45?

Michelle Rush

Yes.

Robert Lifton

For the Power Pack. And we have a price for the Power Management which is a specific price now. And different prices for the two Power Managements.

Michelle Rush

Correct.

Operator

Your next question comes from Tom Leach - Preakness Hills Capital.

Tom Leach - Preakness Hills Capital

A couple of accounting questions - outstanding share count? The outstanding, not the weighted.

Michael Resnick

The outstanding is just under 46 million.

Tom Leach - Preakness Hills Capital

How many are authorized?

Robert Lifton

There's a shareholder meeting this afternoon at 2:00. The votes are already in to increase the amount of authorized shares, so that the total amount authorized will be how much?

Michael Resnick

I think it's going up to 55.5, I think - 57.5. Hold on.

Robert Lifton

We'll come back with the answer to that. It's either 55, 57.5 million shares.

Operator

Our next question comes from Rudy Luo - Westrock Advisors.

Rudy Luo - Westrock Advisors

Do you know the current short interest out there?

Robert Lifton

The current short interest is approximately - I don't know the exact number.

Rudy Luo - Westrock Advisors

10 points for a million shares, all right. From June 25 to July 11 it was down more than 1.3 million shares in short interest. Your stock [come] nowhere. Just to let you know, looking retrospectively, I really - the short interest has not been increased for one year.

Another thing is, looking back on the March conference call we were all waiting for that HP deal to come out, so basically you mentioned that we were waiting, we're waiting, but it cannot be forever, all right? So you mentioned at that time you would wait until the end of the quarter to finalize. It has been delay after delay and right now, you know, some guy from HP - you know, maybe Frank Romero, whatever - come in to join your company.

That makes people very suspect, you know, what has been going on there. So would you please first comment on the deal [inaudible]. Let me finish. Would you please tell the compensation package you have with Frank Romero?

Robert Lifton

Whatever has to do with compensation packages that are disclosed publicly, we will disclose publicly and that can be found, if it's required to be disclosed, that would be put in the filings that we file.

With respect to HP, as I said before, the relationship is described in the language that we are allowed to use with respect to HP and that language still stands.

And as far as the amount of short position, it's somewhere between 10.5 to 11 million shares short at the present time.

Now, as far as the question that was asked before about the number of shares, when we have completed the amendment to the certificate of incorporation, which votes are already in hand, the number of shares will be raised to 57.5 million shares.

That's the number of authorized. That's not what's outstanding. What's outstanding today is 45,974,419 shares, and that includes 1.5 million shares that we loaned to Citigroup, which we are entitled to get returned to us. So after the return of those shares we would be down to 44 - 43 million, roughly 43 million shares.

Operator

Your next question comes from Samuel Williams - Carrett Asset Management.

Samuel Williams - Carrett Asset Management

Can you tell us how many Power Pack units were actually shipped in the second quarter? Or another way of asking the question is, at what level of capacity is the Galway production?

Robert Lifton

We have the capacity at that plant today - in terms of the shifts that are in place, one full shift is in place - and we have the capacity to move up to roughly 320,000 units per month on that one shift. If we want to increase the capacity from that, we have to add shifts and we'd have to train another shift, which we haven't wanted to train and pay for yet because we've been husbanding our cash. But once we want to increase the capacity from above 320,000 Power Packs per month, we have to train another shift in the time it takes us to do that would be, what, about four weeks? Approximately four weeks to do that. And that would increase our capability.

Operator

Your next question comes from John Lesgy - Private Investor.

John Lesgy - Private Investor

Bob, so we can have a better understanding of the Best Buy deal, can you explain the relationship between Xentris and Best Buy and then also the relationship between Medis and Best Buy?

Robert Lifton

Let me ask Michelle to explain the relationship between Xentris and Best Buy and how Xentris works with its customers generally. And, as I said, we're constrained in saying anything more about the Best Buy relationship as such. But go ahead, Michelle, talk about Xentris and how it works with its customers generally.

Michelle Rush

Great. First of all, I think it would benefit people to go to Xentris' website at xentriswireless.com - X-E-N-TRIS  and you can go into their News. And I don't think it's appropriate for me to comment on their relationship with Best Buy, but you can go into their News and you can see one of their press releases that outlines their agreement with them.

And really what Xentris brings to the table for us is a variety of, first of all, relationships, but also just their expertise in packaging and logistics, the way that they - inventory control and the way that they manage their inventory, their ability to provide complete documentation, labeling services such as UPC codes and the way that the products are boxed in the customer's specific master cartons and such.

And they've brought to us already - in fact, we've been working with them on a number of projects - but their expertise in packaging, so they understand at the retail level shelf space is golden, so the packaging actually really is what sells the product, that message to the customer. You only have a few seconds to do it, and they're the experts there.

And so really the value that they bring to us as in the various programs is, again, their packaging, the way that they understand how retailers and other carriers work and we are already taking advantage of that. But I really would like to - I don't think it's appropriate for us to comment on their relationship with Best Buy, but you can go to their website and look in their News section and understand what type of customers they're working with.

Robert Lifton

Is it true, Michelle, that they provide sort of a fulfillment function?

Michelle Rush

Absolutely. Logistics and distribution. I mean, they've got the ability because of their location to ship really efficiently and effectively in the U.S. to the different distribution centers, the different required stores where the product is going.

And they have, again, they understand the customer's packaging requirements. Every customer is different. I mean, they want it in a certain box and it's got to be labeled a certain way and the label's got to be placed in a certain place. And the fact that they can bring in the Power Packs and configure in a JIT situation a Power Pack with a 2watt, with a mini-USB tip in one packaging configuration for one customer and turn around and provide a Power Pack with a 1-watt and an additional tip for another customer or even for the same customer in that just in time is critical in today's market.

So they have the flexibility, they definitely have the expertise and they understand the requirements that the customers want to receive products.

Robert Lifton

So it's fair to say that in those cases where we're using Xentris as the distributor or middleman, if you will, we ship to them and then they take the product we ship to them, re-box it, relabel it and do everything that the particular customer wants, and even ship to that customer's either central distribution system or to that customer's individual stores. Is that a correct statement?

Michelle Rush

Yes, absolutely.

Operator

Your next question comes from [Steven Goldman] - Private Investor.

Steven Goldman - Private Investor

I spoke to Michelle's secretary about this but you probably remember putting batteries in your refrigerator so they'd last a lot longer when they were only partially used, and I spoke to [Andy] the other day about this. If you start to use a Power Pack, then the spec is it's only going to last for three months. But if you start to use it and then you put it in the refrigerator, since the chemical reaction is - the rate of a chemical reaction is reduced in half for every 10 degrees centigrade reduction in temperature and since most refrigerators reduce the temperature by 20 degrees C. and most freezers reduce it by more than 30, you could get a times four to times eight extension in the shelf life once you started the Power Pack if you put it in the refrigerator.

I don't know how it would survive freezing. Has anyone looked at that?

Gennadi Finkelshtain

Well, first of all, if you will come to the website of anybody producer, you will see what the [inaudible] to store a battery in the freezer, number one.

Number two, basically, to put our products out there, we activate it and the freezer will not [inaudible] our product. Our product works in minus 10, minus 8, minus 18.

And definitely regarding shelf life after activation, it will not [inaudible] a program and it can improve shelf life or use time, okay?

We did not make with investigation in our company, but definitely [this is the case.] And we can put on the instruction some recommendation if you can prolong use time after activation, put in cold environment. And I will discuss this with [Israel Fisher] and probably we will do it.

Operator

Your next question comes from [Henry Melman] - John Hancock Funds.

Henry Melman - John Hancock Funds

I was just wondering if there is a drop-dead date in terms of when you will absolutely receive in quantity the 2watt power cord for commercial distribution?

Michelle Rush

We currently have been putting that product through the UL process. We're very optimistic based on a previous testing that we've done on one of the products that Bob mentioned, one of the first iterations of the 2watt cable. And we expect that we will have quantity of that product based on the customers' requirements for Christmas sales. In the retail channel, really that Christmas, to have it in the distribution center, is in early October, and we're very confident that we're going to meet that date with the 2-watt cable to get it in in time for Christmas.

Operator

Your next question comes from Foster Greene - Coburn & Meredith.

Foster Greene - Coburn & Meredith

Perhaps for Michelle, is Xentris also the distributor for Verizon?

Michelle Rush

Yes, they are.

Foster Greene - Coburn & Meredith

Can we infer anything from that?

Robert Lifton

No, I don't think we can infer anything on any names, Foster.

Michelle Rush

Yes.

Robert Lifton

But what I think is fair to say - and Michelle, correct me if I'm wrong - that Xentris is pleased and excited about this product and plans to offer it or has started offering it to others of their customers so that if you go to the Xentris website, you'll see some of the customers whom they represent and certainly a number of those customers Xentris is in the process of presenting the product to. Michelle, is that correct and do you want to elaborate on that in any way at all?

Michelle Rush

Yes, that's correct. In fact, really there are three companies in this area, and Xentris is the company that we were very familiar with prior to the introduction, the formal introduction, in entering into this program with them. And so we were familiar with them based on other companies that we've been working with, and we are very pleased with what they've done with the product so far just based on this first introduction. And we're excited to be working with them.

And they have a great customer base. They understand really the retail and the carrier market. And again, I would really encourage you to go to their website and take a look at what they do and what they offer, and you'll see the value that retailers and carriers see in working with Xentris.

Operator

Your next question comes from Bart Blout - Sawtooth Capital.

Bart Blout - Sawtooth Capital

Bob, just in summary I want to say that everyone wants - that I know of, anyway - you guys to win. And the reason that - those that have been with you a long time have been put through hell, and I don't suppose it's been too easy on you, either. And there has to be a better way to bring about for shareholders the process that you're going through so that the confusion is less and we can ignore what is being done by the [shorts] let alone the SHO thing, which is criminal behavior to be allowed.

Operator

Your next question comes from Kent Holden - Camfund.

Kent Holden - Camfund

Yes, I saw that deferred revenue increased this quarter by $16,000 and I was curious, going forward now, are we actually going to have a revenue line and a cost of good lines in the income statement?

Michael Resnick

That's going to depend going forward on the level of the revenues and the experience level in terms of when the product is out there and if there's any returns and allowances. That's the experience that our auditors are requiring us to obtain before we can actually realize the revenue process. So it's not that we can give a date certain.

Robert Lifton

It's based on the auditor's decision based on experience. Is that what you're saying?

Michael Resnick

Right. It is based on the experience in consultation with the auditor.

Operator

Your next question comes from Tom Leach - Preakness Hills Capital.

Tom Leach - Preakness Hills Capital

At the time of the last conference call, Bob, you talked about investing in a marketing program to push the sales of Power Pack. Could you talk about that, what type of resources are required and when that's going to start?

Michelle Rush

We have engaged with a company to start marketing the product, both through traditional press as well as bloggers, tech writers and such, and in the process now of finalizing some advertising for the Power Pack to be available this month.

Robert Lifton

As it relates to having the product on the market.

Michelle Rush

Yes, absolutely.

Robert Lifton

So we're active and spending a lot of time looking at advertising opportunities. We've hired a company to do layouts for ads and the like and deciding which publications to put the ads in. And that process has to be moved along very quickly. Is that right, Michelle?

Michelle Rush

Yes, it's been moving along very quickly.

Robert Lifton

And then we have also started marketing in a broader way on Internet and viral networking and the like. And Frank, I know you've been starting an outreach program all over parts of the world on that subject. Do you want to mention that?

Frank Romero

Yes. No, I've begun to introduce the product to my contacts in the industry and the reception has been really positive about the product and how exciting the product is, how innovative it is and that it does, in fact, address a need.

Michelle Rush

I would like to also say that the Emergency Kit is actually coming out at a great time for us. September is National Emergency Preparedness month, and we've seen a lot of interest on that product line based on the marketing campaigns that companies are doing in September. So we would expect that we would see some coverage from that also.

Operator

Your next question comes from Harold Weber - Smith Barney.

Harold Weber - Smith Barney

In regard to this Emergency Kit you're talking about upcoming, how much of this are you going to be capable of shipping into the market over the next 60 days based on that comment?

Robert Lifton

Michelle, Frank, what is - our timetable for that is for the Christmas season?

Michelle Rush

Yes. The timeframe is for being able to have - the packaging, we're working with, you know, defining the packaging now. We had a couple of options in the flashlight arena, quite a few options actually, so we defined the flashlight, are working with the manufacturer.

There is a change in the flashlight because, you know, traditionally flashlights use batteries, and so we're using our fuel cell to keep that flashlight powered. So with the change that we needed to make in, you know, whether it be an offtheshelf or specialized flashlight that we're offering in the kit, so we will have products in time for the Christmas season.

Operator

And there are no further questions at this time.

Robert Lifton

Well, thank you all very much for your patience, and I look forward, now that the products will be on the market, I look forward to much exciting times ahead for all of us. Thank you very much.

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