Altairnano Q4 08 Conference Call
Altairnano Q4 08 Conference Call (March 2009)
(1:24 Audio time mark)
Terry Copeland (TC): Good morning and welcome to our year end conference call. This is Terry Copeland, President and CEO of Altairnano. With me today are John Fallini , CFO, and Robert Pedraza, Vice President of corporate strategy.
Today we’ll take a look at this past year, strategic decisions we’ve made and executed against, and what we’ve learned. We’ll talk about where we are and what we’ve put in place to deliver real market solutions that solve real world power and energy problems. A year ago, at the time I was named interim president, Altairnano was focused on three primary businesses: power and energy systems, performance materials, and life sciences. I’ll speak to each of these and where we are now.
In 2007 we entered into a development and services agreement with Elanco, a subsidiary of Eli Lilly to develop Renalin for the animal health world. We were taken by surprise early in the third quarter of 2008, when Elanco informed us that they were halting their program. Since that time we’ve strategically evaluated other partner opportunities and are currently in negotiations with a potential candidate. While the potential market for our material is significant, we are concerned that the development timeline is roughly 2½ years, so any real revenue is not in the immediate future. I firmly believe that our resources and talent are best applied to opportunities that exist today to solve problems that are being experienced now and to pursue opportunities that have a much shorter distance to commercial reality. The same can be said for the development program we have with Spectrum Pharmaceuticals. There’s no significant revenue expected over the next couple of years. We will continue to assist development of both these products for the long run but we have reduced our manpower to more appropriately reflect this timeline.
Also a year ago, we had just finished commissioning of our pilot plant for the Altairnano Hycrochloride Process, through AlSher, our joint venture with Sherwin Williams. We ran various processes within the pilot plant for several months and built a database of engineering results all the while looking for a third party with interest in the novel process for production of TiO2. As the economy worsened during the year it was evident that neither Sherwin Williams nor Altairnano was willing to make the substantial capital investment necessary to scale the process farther. We made the decision to find a third party to support the next phase. While we’ve spoken to a number of companies, domestic and international, none have been willing to make a financial commitment. As a result we’ve dramatically cut back our resources dedicated to this program until such time as a third party investor is identified to move forward with the development work. It’s fair to say that, like the Life Sciences Program, there is no prospect for significant near term revenue from the performance materials business.
In March of 2008, we announced the warranty claim for 47 battery packs with Phoenix Motorcars due to a potential design issue which we had uncovered at that time. Later in the year we resolved the problem with Phoenix and they agreed to the use of a simple safety device and we negotiated the return of those battery packs. Since that time Phoenix has continued to struggle financially and the prospect of any orders has diminished as well.
Through 2008 we fielded a number of other transportation requests mostly from small start up companies similar to Phoenix . We determined early on that each one of these companies needed a different pack design for each auto body and each of these required a great deal of engineering time and effort on our part. While we have a strong cadre of talented engineers we simply don’t have the number of engineers required to support the intense customization required by most applications in the HEV, PHEV sector. These efforts are best handled by tier one integrators and today, our focus is the selling of cells to such integrators who have the necessary resources required to properly design and engineer the battery packs.
In 2008 we learned an important lesson that reinforces this decision. DesignLine International, DLI, approached us in the second quarter last year and asked us to support their efforts in the mass transit vehicle market. They had an integrator willing to take our cells and proceed under the model I just described. As it turned out the integrator was not able to meet DLI’s timeline and we were then asked by DLI to do the required design and build of the initial systems. We reluctantly agreed and they placed an order which we announced in October. The first system that we delivered had to be rebuilt because of integration issues at the materials level, not the cell level. I don’t want to get into details but we had specified one material and were provided with a second material that didn’t meet the original specifications. We built a replacement system that went back to DLI and it was installed in a bus and, to my knowledge, is still being operated by DLI. As most of you are probably aware, DLI announced at the end of February their planned purchase of cells from Gaia in Germany , to meet their near term needs. While we were disappointed at the announcement, I think it reinforces our strategic decision to pursue competent integrators proficient in managing the complex and varied customer-driven customization requirements for individual HEV and PHEV applications.
You’ve also seen some press coverage for Proterra regarding our technology. Proterra, you may know, is a start-up manufacturer targeting HEV buses for municipalities. They successfully demonstrated their new bus design in California last month. Proterra has acted as their own integrator and done their own design work. This has resulted in a much smoother relationship and represents an appropriate model for us going forward. I should add that Proterra has expressed optimism in landing commercial orders later this year.
Through last year, and into 2009, our work with the military continues to advance. We completed the scope of work for the first phase of the Office of Naval Research program and should have the scope for Phase 2 agreed to shortly. In this phase we’ll build a number of modules that will be sent to the Navy for testing. Money for Phase 3, which should complete in 2010, was appropriated last fall.
The M119 howitzer program has also been moving on schedule. The next milestone will be to deliver 40 batteries to the Army for testing at the end of this month. Again, everything is on target.
In the fourth quarter of 2008 we initiated a program for the British Ministry of Defense, through BAE Systems, intended for another naval application. This too is moving along smartly and we anticipate that program to be expanded in the first half of this year.
In October of 2008 we hired a sales person focused specifically on military opportunities. This individual, a retired Army Lieutenant Colonel, has hit the ground running and has identified numerous other opportunities that we’re now pursuing.
Within power and energy systems the biggest news of the year for us was the successful demonstration of our technology by the AES Corporation and the subsequent independent report from KEMA that basically said our 2MW battery performed as advertised. One of the 1MW systems has been moved to the PJM ISO facility in Norristown , PA , connected to the grid, and on a real time basis is providing revenue for AES. Since the publication of that information we’ve fielded a number of inquiries regarding the technology. Of course, we are also working with AES to identify larger follow-on opportunities.
Let me take a moment to expand on exactly what it was we built for AES. This will be important as I outline where we will be going in 2009. To be precise we built a 2 Megawatt lithium titanate battery for AES. Included in that was the battery management system. AES then acted as their own general contractor in putting together the complete system to enable the grid regulation capability. Additional components that were needed included the trailers, associated HVAC systems, transformers, inverters and an assortment of other items necessary to connect the battery directly to the grid. Essentially we provided key critical components but AES, with our support and guidance, developed the platform necessary to connect all these components to the grid and create a system capable of clean, efficient frequency regulation.
Even at the component level, and with a successful demonstration and commercial market validation behind us, we knew the pricing of the battery, and the battery management system, was still too high to support broad commercial acceptance. We launched an immediate initiative focused on cost reduction through value engineering. This effort was led by Dan Voelker, Vice President of engineering and operations, and the engineering group in Anderson , Indiana . This team has done a terrific job and we have already taken out roughly half of the cost of the original system with an improved design. We have additional design plans to achieve even further reductions going forward.
In speaking with other prospective customers in the energy sector beyond AES we asked questions to really understand what the market needed. We validated that what the energy and utility market really wants and needs, is not just the performance of our batteries, but an entire energy storage system capable of being fully integrated with the grid and capable of delivering quick results. Unlike transportation utility applications leverage a much more systematic approach minimizing unnecessary custom configurations. Solutions can be built using modular building blocks to meet specific customer criteria. This means faster scalability. Within every smart customer purchasing decision, and the utility sector is no exception, time-to-value is critical.
Today, we know that Altairnano’s total energy storage system approach serves three distinct market applications, which in the past, was simply defined as stationary power. First, frequency regulation, as we demonstrated with AES, impacts the overall smart grid arena where we can help create a more efficient, resilient, and reliable electricity grid. Our customers in this application will be utilities, independent system operators or ISO’s, merchant operators, municipalities and even rural electric cooperatives.
The first smart grid application we’re aggressively pursuing is the use of clean energy storage systems to more effectively and efficiently manage frequency regulation. Altairnano's advanced energy storage systems are designed to respond within milliseconds to rapid and sudden fluctuations in electricity generation and demand by releasing, or absorbing, power from the electricity grid. Current methods for managing frequency regulation require ramping up, or ramping down, production of conventional generation resources including coal and natural gas facilities. The opportunity for frequency regulation in the U.S. is estimated at 5 to 10 thousand Megawatts.
Renewable integration is the second market. We’re specifically targeting the adoption of photovoltaic generation and utility scale integration. Energy storage is a critical component necessary for the massive integration of solar generation to the grid in the coming years. Here’s one of the reasons why: What happens to a solar array when a cloud comes overhead? The power output, from the solar panels, drops off more rapidly than existing dispatchable demand response can come on-stream. This causes grid instability and, as the percentage of solar generation increases, as a total percentage of the local grid, the problem intensifies. Our battery, with its near-instant response capability, can act as a buffer between the solar farm and the grid and make up for the sudden loss of power until the reserve comes on stream. Conversely, when the cloud cover leaves, the output of the solar farm increases dramatically. The dispatchable demand response which has been activated cannot be backed down quickly enough. This excess power could be shifted to the battery and recharge it making it ready for the next interruption. This buffering, or smoothing, becomes a critical piece of the puzzle that will allow states to meet their mandates for renewable portfolio standards. For example, California has required 20% of their power be produced from renewables by 2010. Our home state of Nevada has mandated 20% by 2015. New York has said 24% by 2013. If PV solar is to be a part of these, then a solution to the short term intermittency is an absolute necessity. Our battery is the right answer at the right time. The third area of interest in stationary power is remote uninterruptible power supply, or UPS, applications. Many people think about the small UPS systems that sit next to office computers but we are addressing significantly larger systems as much as 250kwh or greater. Our lithium titanate systems have the characteristics to play a significant role in remote, severe, or unusually challenging environments where our broad temperature performance, low maintenance, and tremendous battery life become the driving factors. Applications might be located in remote desert, or jungle, areas or even arctic regions - places where you simply don’t want to send service crews on a monthly basis for battery maintenance.
Let me now speak to the American Recovery and Reinvestment Act, often referred to as the stimulus bill and its impact on our business. There are several sections which should be beneficial to us. First, from the DOE Office of Electricity Delivery and Reliability, is a $4.5 billion dollar electrical grid modernization program. Covered projects include demand responsive equipment, systems to enhance security and reliability of the energy infrastructure, energy storage research, development, demonstration and deployment, and those projects that facilitate recovery from disruptions to the energy supply, and for implementation of programs authorized under Title 13 of the Energy Independence and Security Act of 2007. This includes grants of up to 50 percent of qualifying grid investments and of qualifying advanced grid technology. These grants mainly will be to utilities and really speak directly to opportunities for both frequency regulation and renewables integration. Additionally there is a $6 billion dollar Innovative Technology Loan Guarantee Program directed at similar programs. As we announced yesterday, we will be pursuing these funds in concert with appropriate parties like AES and others. Also out of DOE Office of Energy Efficiency and Renewable Energy is a $2B program directed at advanced battery manufacturing grants. The purpose of this program is to create a cell manufacturing base in the US that will be able to compete with the Asian companies. We’re joining with a number of other companies in a consortium called the National Alliance for Advanced Transportation Batteries, or NATTBatt for short. The intent is to build a single site where companies would be able to purchase line time to build their own cells while keeping safe their proprietary information.
All of these stimulus programs offer great opportunities for us and our customers. It is a two-edged sword, however, as the potential availability of federal funds has caused anyone interested in purchasing our technology to delay their purchase decisions. The simple perspective has become: “Why not spend federal dollars first?” So while the stimulus package increases our potential sales, it also delays them until the government is capable of reviewing the stack of applications and actually spending the money. The processes to support the programs aren’t in place at DOE at this point. We’re hopeful that Secretary Chu will keep his promises to begin spending these funds as quickly as possible, even as early as April. President Obama has referenced the desire for “shovel ready” projects and I know for a fact that there are proposed projects using our technology that meet that criteria. Let me now ask John Fallini to give you the specifics of the financials for 2008. John?
John Fallini (JF): For the year ended December 31st, 2008, revenues declined to $5.7 million from $9.1 million in 2007. Operating expenses decreased to $35.9 million from $42.2 million in 2007. The net loss for the period was $29.1 million, or 34 cents per share, compared to a net loss of $31.5 million, or 45 cents per share, in 2007. Net cash consumed during 2008 was $22.1 million dollars vs. an increase of $37.5 million in 2007. There were three major drivers that caused this huge difference between the cash consumed in 2008 vs. 2007. First, cash used in operations was $12.2 million dollars higher in 2008 than in 2007. The major driver of this difference, however, was $ 7.1 million dollar higher accounts payable balance on December 31st, 2007 related to 2007 activities than on December 31st, 2008. Second, in 2007 the Company received cash investments of $2 million from Sherwin Williams for the AlSher joint venture, $3 million from the AES Corporation in conjunction with the large stationary power project undertaken with that company, and a $40 million dollar direct investment from the Al Yousuf LLC, while in 2008 the Company only received a $10 million dollar investment from the Al Yousuf LLC. Finally $10.6 million dollars of auction rate notes were converted to cash in early 2007 prior to the market for them freezing up. The basic and diluted weighted average shares outstanding for the year were $85.9 million compared to $71 million for 2007. Revenue generated from product sales and commercial collaborations declined by $3.3 million and $900K dollars respectively in 2008 compared to 2007 primarily as a result of decreased sales in the automotive sector and the completion of a number of commercial collaborations. Revenue from Contracts and Grants increased by $800K dollars in 2008 over 2007 primarily as a result of the Office of Navel Research grant. Operating expenses were $34.9 million for the year of 2008, down from $42.2 million for 2007. The major drivers for this decrease were, (the) $5.0 million reduction in cost of sales tied to our lower product volumes, $9.7 million decrease associated with the 2007 inventory write-off and the Phoenix warranty expense in 2007 that was reversed in 2008. These items were partially offset by increases of $1.5 million in R&D expense and $900K in Sales & Marketing, the $1.7 million forgiveness of the notes receivable from Phoenix , and the $3.6 million settlement and release of claims with Al Yousuf LLC.
Our balance sheet weakened during the course of 2008 primarily as a result of the consumption of cash to fund ongoing operating activities. Total assets declined from $73.9 million dollars at the start of the year to $48.1 million at the end of the year. The major drivers for this decrease were a $22.1 million dollar decrease in cash, a $1.4 million dollar decrease in the market value of our Auction Rate Securities and Spectrum stock, and the forgiveness of the $1.7 million dollars in notes receivable from Phoenix Motorcars associated with the cancellation of our supply agreement and resolution of all outstanding issues with them.
We stated in our first quarter conference call that the burn rate was too high and we’re taking steps to address that fact. We further stated that we expected the burn rate in the second half of the year to be closer to $2.0 million dollars than the much higher first quarter rate. Since then we have taken a number of steps, as discussed in the subsequent quarterly earnings calls, to reduce that burn rate and I’m pleased to state that, during the second half of 2008, we averaged a net monthly burn rate of $1.6 million dollars well below our target of $2.0 million per month. This is an area we continue to focus heavily on as we move into 2009.
The company has an investment of $3.9 million dollars in Auction Rate Notes. During the first quarter we determined that the financial market for these instruments was not recovering in the short-term and reflected an impairment of 20 percent of the value of these notes, or $780,000 dollars, on our balance sheet as of March 31, 2008. Financial markets have continued to deteriorate during the remainder of 2008 but the underlying corporate bonds that comprise these notes, and the bank holding them, remain strong. It is our conclusion that these notes are still only temporarily impaired although to a greater extent than earlier in the year. Consequently we have reflected a total temporary impairment allowance on these notes of $1,092,000 dollars as of December 31st, 2008. We will continue closely to monitor this situation in the future but at this point are anticipating that we may need to hold these notes until they mature in 2017. I’ll now turn the call back over to Terry.
TC: Thanks John. While 2008 was a transition year for Altairnano, we believe 2009 holds many opportunities for our energy storage systems. We’ve sharpened our focus on nearer term opportunities and have become more diligent on the programs in which we are spending our time and money. Our technology can solve problems, big problems, such as the reliability and availability of power in military settings. We can help states and associated utilities throughout the country achieve aggressive mandates calling for the integration of renewable energy. We can provide a better, cleaner way of doing things like replacing the use of fossil fuel power generation facilities for managing grid stability, that is, frequency regulation.
2009 will surely be a challenging year with the economy in a deepening recession. We believe that the best way to navigate is to stay focused on what we do best and that’s to focus on our energy storage solutions. These solutions are right in the target zone for the American Recovery and Reinvestment Act that should enable our customers to move forward with significant projects even in the sluggish economy.
Finally, I’d like to add that, we don’t believe in creating news. We prefer to focus on results and want our news to be based on substance. Going forward we’ll take a more open approach in sharing with you our visions, our strategies, and tactics. We intend to communicate more regularly and by that I mean generally through press releases. We’re overhauling our website and intend to go live with it next month. You’ll see a better focus on what, and who, we are today, what makes us unique, and the problems we can solve. We’re making progress in building a strong, high growth company and let me assure you once again that we are committed to building Altairnano in ways that will make our shareholders proud and profitable and enhance shareholder value. We’ll continue to lead Altairnano with an honest, ethical, strong, and decisive leadership style providing clear direction to meet our business objectives. Now I’d like to open the call up for investor questions. Operator, please go ahead.
Q & A Session (25:30 Audio time mark)
Operator: …We’ll take our first question from Jeff (Indiscernible) with Global Hunter Securities.
Jeff: I thank you. Good morning. A quick question about the cost reduction of the production costs. You mentioned that you’ve figured out a cost reduction system and have identified some other cost areas to revue, so what are we looking at in terms of (indiscernible) materials or the overall costs? How much further do you think costs can come down in the overall production costs? And what would you anticipate for kind of an average selling price for your batteries?
TC: I don’t want to speak directly to those numbers. No sense helping our competition out, telling them what our costs are, or even what our selling prices are, to folks. I will say that, as I said in my prepared statement, we have taken half the costs out of where we were with the development system and I think it’s quite reasonable to expect another halving of that number.
Jeff: And what would the time frame be on that? For the next half?
TC: The next half? Probably, uh… I would say certainly over 18 to 24 months it should be possible.
Jeff: In terms of the energy storage opportunity, do you have the system in place, the final design in place, to be able to supply, once the demand is there, once you find customers for that application, or would there still be some development time?
TC: Good question, Jeff. Yes, we do have that design in place. Of course as we work on cost reductions this design will change somewhat but, to answer your first question - Yes, we have a commercial design ready-to-go.
Jeff: Are you starting to see potential customers there? Do you think this would be orders by the end of the year or is everyone still waiting for some of these government programs to clear the market?
TC: There’s probably a mix but I think most folks, as I said, you know, are suffering in this economy and, you know, their corporate reactions are: “Gee, if we get several dollars to spend on this, that would be a smarter move.” So I think there is a delay in activity. Military, on the other hand, I think it is continuing to move, and will move aggressively on those programs that we have going. We’ve had great success there. They’ve been very pleased and have stated that they haven’t seen any other technology that can do what we do so military is less impacted by the recession. I think the utilities, and what not, are struggling, but that the stimulus bill will help them significantly and I do know, as I said, that there are projects that are going to be submitted against those programs using our technology.
Jeff: And, speaking of which, you mentioned that you are supplying 40 batteries to the Army for testing by the end of this month? Is that correct?
TC: Correct. That’s for the M119 howitzer project. That’s correct.
Jeff: And that would have a direct impact on the revenue for this quarter?
TC: That’s part of the project that we’ve got with them and there are milestone payments within that project. Yes.
Jeff: OK. I see. And what is the opportunity, on this project, for the rest of the year beyond these initial 40 batteries?
TC: Of course it will depend on the success of the testing but we’re very optimistic. Then the army has to think about how quickly they want to deploy these systems in the field. We don’t have an accurate time-line of their deployment effort but we would anticipate that that would begin to build up towards the end of the year.
Jeff: So the initial testing would be, basically, from here until the end of the year?
TC: Yes. Probably not quite that long. But it will, any time the military wants to deploy a new technology they want to test the heck out of it. They want to be absolutely confident, first and foremost, in its safety and in its ability to achieve the desired results. So, there’s an inordinate level of testing that goes on for these things. I would expect that to be, at least, a 6 month kind of timeframe.
Jeff: And the last question I have, with the British Ministry of Defense, at what stage are we with them? Have they already accepted any batteries or are they still in, kind of, the design phase?
TC: That program was begun in the fourth quarter of last year with, what we’ve called, a Phase 1A. We expect, or anticipate, that Phase 1B will be coming shortly and increase the level of work that we’re going to be doing for them. Beyond that will be, of course, a Phase 2, perhaps toward the end of this year. But, again, this is military work, it’s related to naval activity, and so they’re going to be testing our systems to the nth degree to be confident that they do what we say they can do and that they’re safe.
Jeff: Basically you have supplied a battery to them?
TC: We have supplied information and some cells for testing and we’re working aggressively in that… again, this program was just started late in the fourth quarter.
Jeff: OK. Sorry, one last question, just real quick, what’s the new share count that we should use going forward?
JF: The shares that we had as of the end of, as of yesterday, actually, were 93,153,271.
Jeff: OK. Thank-you.
TC: Thank-you, Jeff.
Operator: …We’ll go next to Craig Irwin, Merriman.
Craig: Thank-you. Thanks for taking my question. I just want to follow up a, a while back you were suggesting that there could potentially be some follow-on orders out of AES that you thought that this was something that we could potentially get traction with them. Where do we stand as far as, you know, potential further units with this important partner?
TC: Good-morning Craig, and thanks for the question. It’s safe to assume that the comment I made about companies, in general, delaying their purchase decisions and wanting to pursue federal funds first, could apply to AES.
Jeff: OK. OK. Excellent. Excellent. And just changing subjects a bit. Obviously you’ve done a good job bringing down your cash burn, but really the cash position is not great. And I was wondering what the opportunities were to further reduce the cash consumption below current levels?
TC: Excellent question. As we look at the 3 business units from last year we have taken, and are continuing to take, an aggressive stance with both Life Science and Performance Materials. Neither of those businesses is going to give us near-term revenue. So we’re scaling back our efforts there. That certainly will continue. We have some options for further reducing some of our expenditure there that we will do. And we’re taking, on a regular basis, a look at our cash flow. I will tell you that one of the significant changes from last year has been in our Internal Systems. We had, really, and old, and outdated accounting system that didn’t really enable us to assign accountability for our budgets internally. We shifted to a new system that went ‘hot’ on January 1 and that really gives every individual in the company, every manager, good visibility on what they’re spending against their budgets and we will be holding people accountable to that. That’s a tool that we didn’t have last year.
Craig: Excellent. Excellent. And then just, considering that you’ve been tapering down the costs, can you talk to us a little bit about Cap Ex for this year. Is there a budget that you’re able to talk about now as far as Cap Ex for the full year? Can you just give us some color about that?
TC: Good question. Cap Ex will depend on the rate at which we actually receive orders. We have an expansion plan that we have targeted but we’re not going to be expending capital against that unless we’re confident that the orders are coming in. It just doesn’t make sense. So we will be postponing any capital decisions until such time as we’re confident we actually need to spend that money. We’re also looking at capital expenditures to see how we can modify them, through leasing, to reduce cash flow, those kinds of things. We’ve done that last year and we’re going to continue to do that this year.
Craig: OK, Excellent. And my last question… The Auction Rate Securities that you have on your balance sheet, can you just clarify for us - Are they included in the ‘Cash and Cash Flowence’ number or is this what’s listed under ‘Long Term Investments’?
JF: They’re under ‘Long Term Investments’.
Craig: OK. Thanks a lot.
JF: We’re not carrying them as cash.
Craig: Thank-you very much.
TC: Thanks Craig.
Operator: …We’ll go next to James Watson.
James: Good-morning… Terry.
TC: Hi James.
James: My question has to deal with performance of the battery. I’ve kind of been expecting an improvement, or matching electrode upgrade, or a set of specifications that deal with just one chemistry. And, can you talk on the first question of where we are, as far as, say, having a second generation battery?
TC: I think, as I discussed earlier with our cost reduction plan, that the optimization, I think, is what you’re really getting at, the optimization of the cell chemistry for a specific application is part of that overall cost reduction plan. So, that’s kind of a long answer. The short answer is: Yes we’re looking at optimizing the entire cell system, both anode and cathode, and how they work together, as well as looking at other opportunities for improvements, electrolytes, separators, all of that, and we do have designs on-board that will enhance the performance.
James: OK. But nothing we’re ready to publish right away.
James: My next question, or follow-up question, has specifically to do with the Navy. The US Navy project. That was in several phases and one of the phases that I was looking to get to was the design of the unit that would actually might be put into an ship. Are we that far yet?
TC: Not yet. The design for that will actually begin in, that’s not fair, the design is on-going but the final design for a large 2.5 megawatt system will be based on the building blocks that we generate in Phase 1 and 2 and that design would occur in, say, Phase 3. Again, that’s the complete design. Recognize that we’re building this, sort of first, at the submodule level, then at a module level, and on-going.
Operator: …We’ll go next to Paul Zenonni.
TC: Sorry, was that Paul?
Paul: Hello. Yes.
TC: Thank-you.
Paul: My question is one regarding railroads. It’s my understanding that railroads use what they call ‘Dynamic Braking’ going over the mountains out west there. This is apparently dissipates all the energy coming down the mountains through resistors. And it occurs to me that this would be an extremely good application for, a battery powered locomotive, you might say, to push the thing up the mountain and recover all this energy on the way down. Has Altairnano opened any discussions, or considered, this application?
TC: The topic that you’re discussing really is ‘regenerative braking’ and that’s actually a part of, not only railroad systems, but it’s a big part of transportation systems. All the, for instance, Proterra’s bus, uses regenerative braking. One of the advantages of our battery system is its ability to take on that energy in a very rapid mode where other chemistries can’t do that. So, yes, that’s clearly something that everybody in the industry is looking at. We have had some level of discussions with railroads but not really on what I would call “Inter-city” kinds of systems at this time.
Paul: Oh no, this is not ‘inner-city’, this is over the mountains.
TC: ‘Inter’, not ‘Intra’.
Paul: Huh? What? Int..? Oh, Well, yes… but not on the flat lands so I’m not, I’m not suggesting its use is to run a train on the level country. This is only an application over the mountains and, uh, pushing, because at the present time to bring a freight train over the Rockies, or the Sierra Nevada, they use several, they hitch on several locomotives to push it up over it and, uh, on the way down they dissipate the energy which is not, rather than recover it, um, and um, you know, the application, here, is really quite specific and you’re talking about several megawatt hour units to do this job on a train.
TC: Understood, yes, and I agree with you it would be a very interesting application. We have not spoken, with, to my knowledge, to railroad companies, with that specific application in mind.
Paul: Oh. Yes. Well, it would appear to me, you know, that the batteries could be charged and discharged several times a day going back and forth over the mountains. And, um, by the way, you often refer to your units as 2.5 megawatt units. I believe that you mean 2.5 megawatt hour units?
TC: No. I actually mean 2.5 megawatt units. I’m talking about the power output and not the energy storage.
Paul: That’s on what, a 10 minute discharge?
TC: If we look at, for instance, the AES system that was tested last year, that was a 2 megawatt system and roughly 500 kilowatt hours so it would be basically 2 Megawatts useful to a 4 C rate. (pause) Thanks Paul.
Operator: …We’ll take a follow-up from Craig Irwin.
TC: Go ahead, Craig.
Operator: Mr. Irwin your line is open. Please check your mute button.
Craig: Thank-you. I know this question is probably a little bit technical. But, in some of my discussions with the major automotive OEMs, they’re looking to incorporate titanate electrode technology opposite iron phosphate technology. Um, and, I was wondering if you had been involved in any of the discussions or participated in any of the early development activity alongside any of these OEMs?
TC: I will say only peripherally at this point, Craig, that has not been a major driver for us. I think there are other issues that come to play if you put the iron phosphate cathode against a titanate anode? Energy storage is one of them.
Craig: Agreed. Agreed. Agreed. Excellent. And the other question, you know, I hate to get too granular on this, but the Phase 1 contract that you mentioned, usually those are pretty short in duration - less than 6 months. Is this something we can expect to be completed, sort of, by the middle of this year?
TC: Are you talking Phase 1 of the ONR, the Office of Naval Research, or the BAE?
Craig: Exactly, yes.
TC: The ONR? That’s basically complete at this point time and, just to cover the bases, we expect Phase 1 of BAE to complete this year as well.
Craig: And then Phase 2, fairly quick, behind that? Any idea, roughly, how large Phase 2 could be for each of these opportunities?
TC: ONR we’re talking, probably 9 months, 9 to 12 months, for Phase 2, and BAE, a little hard to say at this point, I would anticipate roughly the same.
Craig: And do you have approximate dollar values there or is that something that you’re not able to get into?
TC: Not for BAE but Phase 2 for ONR should be reconciled, here, in the next month, or so, we think, and at that time we’ll be able to talk about it.
Craig: OK. Excellent. Thank-you very much.
TC: Thank-you, Craig.
Operator: Having no further questions in the queue I would like to turn the conference call back over to Dr. Copeland for any additional, or closing, remarks.
TC: I’d like to thank, thank-you for your help operator. I’d like to thank everybody for their questions. It is always a pleasure to speak with you. On behalf of the entire management team and all Altairnano employees, we would like to thank you for your time, interest and support of Altairnano. Thank you very much and have a good day.
Altairnano Investor Portal
Altairnano Q4 08 Conference Call
Altairnano Q4 08 Conference Call (March 2009)
(1:24 Audio time mark)
Terry Copeland (TC): Good morning and welcome to our year end conference call. This is Terry Copeland, President and CEO of Altairnano. With me today are John Fallini , CFO, and Robert Pedraza, Vice President of corporate strategy.
Today we’ll take a look at this past year, strategic decisions we’ve made and executed against, and what we’ve learned. We’ll talk about where we are and what we’ve put in place to deliver real market solutions that solve real world power and energy problems. A year ago, at the time I was named interim president, Altairnano was focused on three primary businesses: power and energy systems, performance materials, and life sciences. I’ll speak to each of these and where we are now.
In 2007 we entered into a development and services agreement with Elanco, a subsidiary of Eli Lilly to develop Renalin for the animal health world. We were taken by surprise early in the third quarter of 2008, when Elanco informed us that they were halting their program. Since that time we’ve strategically evaluated other partner opportunities and are currently in negotiations with a potential candidate. While the potential market for our material is significant, we are concerned that the development timeline is roughly 2½ years, so any real revenue is not in the immediate future. I firmly believe that our resources and talent are best applied to opportunities that exist today to solve problems that are being experienced now and to pursue opportunities that have a much shorter distance to commercial reality. The same can be said for the development program we have with Spectrum Pharmaceuticals. There’s no significant revenue expected over the next couple of years. We will continue to assist development of both these products for the long run but we have reduced our manpower to more appropriately reflect this timeline.
Also a year ago, we had just finished commissioning of our pilot plant for the Altairnano Hycrochloride Process, through AlSher, our joint venture with Sherwin Williams. We ran various processes within the pilot plant for several months and built a database of engineering results all the while looking for a third party with interest in the novel process for production of TiO2. As the economy worsened during the year it was evident that neither Sherwin Williams nor Altairnano was willing to make the substantial capital investment necessary to scale the process farther. We made the decision to find a third party to support the next phase. While we’ve spoken to a number of companies, domestic and international, none have been willing to make a financial commitment. As a result we’ve dramatically cut back our resources dedicated to this program until such time as a third party investor is identified to move forward with the development work. It’s fair to say that, like the Life Sciences Program, there is no prospect for significant near term revenue from the performance materials business.
In March of 2008, we announced the warranty claim for 47 battery packs with Phoenix Motorcars due to a potential design issue which we had uncovered at that time. Later in the year we resolved the problem with Phoenix and they agreed to the use of a simple safety device and we negotiated the return of those battery packs. Since that time Phoenix has continued to struggle financially and the prospect of any orders has diminished as well.
Through 2008 we fielded a number of other transportation requests mostly from small start up companies similar to Phoenix . We determined early on that each one of these companies needed a different pack design for each auto body and each of these required a great deal of engineering time and effort on our part. While we have a strong cadre of talented engineers we simply don’t have the number of engineers required to support the intense customization required by most applications in the HEV, PHEV sector. These efforts are best handled by tier one integrators and today, our focus is the selling of cells to such integrators who have the necessary resources required to properly design and engineer the battery packs.
In 2008 we learned an important lesson that reinforces this decision. DesignLine International, DLI, approached us in the second quarter last year and asked us to support their efforts in the mass transit vehicle market. They had an integrator willing to take our cells and proceed under the model I just described. As it turned out the integrator was not able to meet DLI’s timeline and we were then asked by DLI to do the required design and build of the initial systems. We reluctantly agreed and they placed an order which we announced in October. The first system that we delivered had to be rebuilt because of integration issues at the materials level, not the cell level. I don’t want to get into details but we had specified one material and were provided with a second material that didn’t meet the original specifications. We built a replacement system that went back to DLI and it was installed in a bus and, to my knowledge, is still being operated by DLI. As most of you are probably aware, DLI announced at the end of February their planned purchase of cells from Gaia in Germany , to meet their near term needs. While we were disappointed at the announcement, I think it reinforces our strategic decision to pursue competent integrators proficient in managing the complex and varied customer-driven customization requirements for individual HEV and PHEV applications.
You’ve also seen some press coverage for Proterra regarding our technology. Proterra, you may know, is a start-up manufacturer targeting HEV buses for municipalities. They successfully demonstrated their new bus design in California last month. Proterra has acted as their own integrator and done their own design work. This has resulted in a much smoother relationship and represents an appropriate model for us going forward. I should add that Proterra has expressed optimism in landing commercial orders later this year.
Through last year, and into 2009, our work with the military continues to advance. We completed the scope of work for the first phase of the Office of Naval Research program and should have the scope for Phase 2 agreed to shortly. In this phase we’ll build a number of modules that will be sent to the Navy for testing. Money for Phase 3, which should complete in 2010, was appropriated last fall.
The M119 howitzer program has also been moving on schedule. The next milestone will be to deliver 40 batteries to the Army for testing at the end of this month. Again, everything is on target.
In the fourth quarter of 2008 we initiated a program for the British Ministry of Defense, through BAE Systems, intended for another naval application. This too is moving along smartly and we anticipate that program to be expanded in the first half of this year.
In October of 2008 we hired a sales person focused specifically on military opportunities. This individual, a retired Army Lieutenant Colonel, has hit the ground running and has identified numerous other opportunities that we’re now pursuing.
Within power and energy systems the biggest news of the year for us was the successful demonstration of our technology by the AES Corporation and the subsequent independent report from KEMA that basically said our 2MW battery performed as advertised. One of the 1MW systems has been moved to the PJM ISO facility in Norristown , PA , connected to the grid, and on a real time basis is providing revenue for AES. Since the publication of that information we’ve fielded a number of inquiries regarding the technology. Of course, we are also working with AES to identify larger follow-on opportunities.
Let me take a moment to expand on exactly what it was we built for AES. This will be important as I outline where we will be going in 2009. To be precise we built a 2 Megawatt lithium titanate battery for AES. Included in that was the battery management system. AES then acted as their own general contractor in putting together the complete system to enable the grid regulation capability. Additional components that were needed included the trailers, associated HVAC systems, transformers, inverters and an assortment of other items necessary to connect the battery directly to the grid. Essentially we provided key critical components but AES, with our support and guidance, developed the platform necessary to connect all these components to the grid and create a system capable of clean, efficient frequency regulation.
Even at the component level, and with a successful demonstration and commercial market validation behind us, we knew the pricing of the battery, and the battery management system, was still too high to support broad commercial acceptance. We launched an immediate initiative focused on cost reduction through value engineering. This effort was led by Dan Voelker, Vice President of engineering and operations, and the engineering group in Anderson , Indiana . This team has done a terrific job and we have already taken out roughly half of the cost of the original system with an improved design. We have additional design plans to achieve even further reductions going forward.
In speaking with other prospective customers in the energy sector beyond AES we asked questions to really understand what the market needed. We validated that what the energy and utility market really wants and needs, is not just the performance of our batteries, but an entire energy storage system capable of being fully integrated with the grid and capable of delivering quick results. Unlike transportation utility applications leverage a much more systematic approach minimizing unnecessary custom configurations. Solutions can be built using modular building blocks to meet specific customer criteria. This means faster scalability. Within every smart customer purchasing decision, and the utility sector is no exception, time-to-value is critical.
Today, we know that Altairnano’s total energy storage system approach serves three distinct market applications, which in the past, was simply defined as stationary power. First, frequency regulation, as we demonstrated with AES, impacts the overall smart grid arena where we can help create a more efficient, resilient, and reliable electricity grid. Our customers in this application will be utilities, independent system operators or ISO’s, merchant operators, municipalities and even rural electric cooperatives.
The first smart grid application we’re aggressively pursuing is the use of clean energy storage systems to more effectively and efficiently manage frequency regulation. Altairnano's advanced energy storage systems are designed to respond within milliseconds to rapid and sudden fluctuations in electricity generation and demand by releasing, or absorbing, power from the electricity grid. Current methods for managing frequency regulation require ramping up, or ramping down, production of conventional generation resources including coal and natural gas facilities. The opportunity for frequency regulation in the U.S. is estimated at 5 to 10 thousand Megawatts.
Renewable integration is the second market. We’re specifically targeting the adoption of photovoltaic generation and utility scale integration. Energy storage is a critical component necessary for the massive integration of solar generation to the grid in the coming years. Here’s one of the reasons why: What happens to a solar array when a cloud comes overhead? The power output, from the solar panels, drops off more rapidly than existing dispatchable demand response can come on-stream. This causes grid instability and, as the percentage of solar generation increases, as a total percentage of the local grid, the problem intensifies. Our battery, with its near-instant response capability, can act as a buffer between the solar farm and the grid and make up for the sudden loss of power until the reserve comes on stream. Conversely, when the cloud cover leaves, the output of the solar farm increases dramatically. The dispatchable demand response which has been activated cannot be backed down quickly enough. This excess power could be shifted to the battery and recharge it making it ready for the next interruption. This buffering, or smoothing, becomes a critical piece of the puzzle that will allow states to meet their mandates for renewable portfolio standards. For example, California has required 20% of their power be produced from renewables by 2010. Our home state of Nevada has mandated 20% by 2015. New York has said 24% by 2013. If PV solar is to be a part of these, then a solution to the short term intermittency is an absolute necessity. Our battery is the right answer at the right time. The third area of interest in stationary power is remote uninterruptible power supply, or UPS, applications. Many people think about the small UPS systems that sit next to office computers but we are addressing significantly larger systems as much as 250kwh or greater. Our lithium titanate systems have the characteristics to play a significant role in remote, severe, or unusually challenging environments where our broad temperature performance, low maintenance, and tremendous battery life become the driving factors. Applications might be located in remote desert, or jungle, areas or even arctic regions - places where you simply don’t want to send service crews on a monthly basis for battery maintenance.
Let me now speak to the American Recovery and Reinvestment Act, often referred to as the stimulus bill and its impact on our business. There are several sections which should be beneficial to us. First, from the DOE Office of Electricity Delivery and Reliability, is a $4.5 billion dollar electrical grid modernization program. Covered projects include demand responsive equipment, systems to enhance security and reliability of the energy infrastructure, energy storage research, development, demonstration and deployment, and those projects that facilitate recovery from disruptions to the energy supply, and for implementation of programs authorized under Title 13 of the Energy Independence and Security Act of 2007. This includes grants of up to 50 percent of qualifying grid investments and of qualifying advanced grid technology. These grants mainly will be to utilities and really speak directly to opportunities for both frequency regulation and renewables integration. Additionally there is a $6 billion dollar Innovative Technology Loan Guarantee Program directed at similar programs. As we announced yesterday, we will be pursuing these funds in concert with appropriate parties like AES and others. Also out of DOE Office of Energy Efficiency and Renewable Energy is a $2B program directed at advanced battery manufacturing grants. The purpose of this program is to create a cell manufacturing base in the US that will be able to compete with the Asian companies. We’re joining with a number of other companies in a consortium called the National Alliance for Advanced Transportation Batteries, or NATTBatt for short. The intent is to build a single site where companies would be able to purchase line time to build their own cells while keeping safe their proprietary information.
All of these stimulus programs offer great opportunities for us and our customers. It is a two-edged sword, however, as the potential availability of federal funds has caused anyone interested in purchasing our technology to delay their purchase decisions. The simple perspective has become: “Why not spend federal dollars first?” So while the stimulus package increases our potential sales, it also delays them until the government is capable of reviewing the stack of applications and actually spending the money. The processes to support the programs aren’t in place at DOE at this point. We’re hopeful that Secretary Chu will keep his promises to begin spending these funds as quickly as possible, even as early as April. President Obama has referenced the desire for “shovel ready” projects and I know for a fact that there are proposed projects using our technology that meet that criteria. Let me now ask John Fallini to give you the specifics of the financials for 2008. John?
John Fallini (JF): For the year ended December 31st, 2008, revenues declined to $5.7 million from $9.1 million in 2007. Operating expenses decreased to $35.9 million from $42.2 million in 2007. The net loss for the period was $29.1 million, or 34 cents per share, compared to a net loss of $31.5 million, or 45 cents per share, in 2007. Net cash consumed during 2008 was $22.1 million dollars vs. an increase of $37.5 million in 2007. There were three major drivers that caused this huge difference between the cash consumed in 2008 vs. 2007. First, cash used in operations was $12.2 million dollars higher in 2008 than in 2007. The major driver of this difference, however, was $ 7.1 million dollar higher accounts payable balance on December 31st, 2007 related to 2007 activities than on December 31st, 2008. Second, in 2007 the Company received cash investments of $2 million from Sherwin Williams for the AlSher joint venture, $3 million from the AES Corporation in conjunction with the large stationary power project undertaken with that company, and a $40 million dollar direct investment from the Al Yousuf LLC, while in 2008 the Company only received a $10 million dollar investment from the Al Yousuf LLC. Finally $10.6 million dollars of auction rate notes were converted to cash in early 2007 prior to the market for them freezing up. The basic and diluted weighted average shares outstanding for the year were $85.9 million compared to $71 million for 2007. Revenue generated from product sales and commercial collaborations declined by $3.3 million and $900K dollars respectively in 2008 compared to 2007 primarily as a result of decreased sales in the automotive sector and the completion of a number of commercial collaborations. Revenue from Contracts and Grants increased by $800K dollars in 2008 over 2007 primarily as a result of the Office of Navel Research grant. Operating expenses were $34.9 million for the year of 2008, down from $42.2 million for 2007. The major drivers for this decrease were, (the) $5.0 million reduction in cost of sales tied to our lower product volumes, $9.7 million decrease associated with the 2007 inventory write-off and the Phoenix warranty expense in 2007 that was reversed in 2008. These items were partially offset by increases of $1.5 million in R&D expense and $900K in Sales & Marketing, the $1.7 million forgiveness of the notes receivable from Phoenix , and the $3.6 million settlement and release of claims with Al Yousuf LLC.
Our balance sheet weakened during the course of 2008 primarily as a result of the consumption of cash to fund ongoing operating activities. Total assets declined from $73.9 million dollars at the start of the year to $48.1 million at the end of the year. The major drivers for this decrease were a $22.1 million dollar decrease in cash, a $1.4 million dollar decrease in the market value of our Auction Rate Securities and Spectrum stock, and the for
giveness of the $1.7 million dollars in notes receivable from Phoenix Motorcars associated with the cancellation of our supply agreement and resolution of all outstanding issues with them.
We stated in our first quarter conference call that the burn rate was too high and we’re taking steps to address that fact. We further stated that we expected the burn rate in the second half of the year to be closer to $2.0 million dollars than the much higher first quarter rate. Since then we have taken a number of steps, as discussed in the subsequent quarterly earnings calls, to reduce that burn rate and I’m pleased to state that, during the second half of 2008, we averaged a net monthly burn rate of $1.6 million dollars well below our target of $2.0 million per month. This is an area we continue to focus heavily on as we move into 2009.
The company has an investment of $3.9 million dollars in Auction Rate Notes. During the first quarter we determined that the financial market for these instruments was not recovering in the short-term and reflected an impairment of 20 percent of the value of these notes, or $780,000 dollars, on our balance sheet as of March 31, 2008. Financial markets have continued to deteriorate during the remainder of 2008 but the underlying corporate bonds that comprise these notes, and the bank holding them, remain strong. It is our conclusion that these notes are still only temporarily impaired although to a greater extent than earlier in the year. Consequently we have reflected a total temporary impairment allowance on these notes of $1,092,000 dollars as of December 31st, 2008. We will continue closely to monitor this situation in the future but at this point are anticipating that we may need to hold these notes until they mature in 2017. I’ll now turn the call back over to Terry.
TC: Thanks John. While 2008 was a transition year for Altairnano, we believe 2009 holds many opportunities for our energy storage systems. We’ve sharpened our focus on nearer term opportunities and have become more diligent on the programs in which we are spending our time and money. Our technology can solve problems, big problems, such as the reliability and availability of power in military settings. We can help states and associated utilities throughout the country achieve aggressive mandates calling for the integration of renewable energy. We can provide a better, cleaner way of doing things like replacing the use of fossil fuel power generation facilities for managing grid stability, that is, frequency regulation.
2009 will surely be a challenging year with the economy in a deepening recession. We believe that the best way to navigate is to stay focused on what we do best and that’s to focus on our energy storage solutions. These solutions are right in the target zone for the American Recovery and Reinvestment Act that should enable our customers to move forward with significant projects even in the sluggish economy.
Finally, I’d like to add that, we don’t believe in creating news. We prefer to focus on results and want our news to be based on substance. Going forward we’ll take a more open approach in sharing with you our visions, our strategies, and tactics. We intend to communicate more regularly and by that I mean generally through press releases. We’re overhauling our website and intend to go live with it next month. You’ll see a better focus on what, and who, we are today, what makes us unique, and the problems we can solve. We’re making progress in building a strong, high growth company and let me assure you once again that we are committed to building Altairnano in ways that will make our shareholders proud and profitable and enhance shareholder value. We’ll continue to lead Altairnano with an honest, ethical, strong, and decisive leadership style providing clear direction to meet our business objectives. Now I’d like to open the call up for investor questions. Operator, please go ahead.
Q & A Session (25:30 Audio time mark)
Operator: …We’ll take our first question from Jeff (Indiscernible) with Global Hunter Securities.
Jeff: I thank you. Good morning. A quick question about the cost reduction of the production costs. You mentioned that you’ve figured out a cost reduction system and have identified some other cost areas to revue, so what are we looking at in terms of (indiscernible) materials or the overall costs? How much further do you think costs can come down in the overall production costs? And what would you anticipate for kind of an average selling price for your batteries?
TC: I don’t want to speak directly to those numbers. No sense helping our competition out, telling them what our costs are, or even what our selling prices are, to folks. I will say that, as I said in my prepared statement, we have taken half the costs out of where we were with the development system and I think it’s quite reasonable to expect another halving of that number.
Jeff: And what would the time frame be on that? For the next half?
TC: The next half? Probably, uh… I would say certainly over 18 to 24 months it should be possible.
Jeff: In terms of the energy storage opportunity, do you have the system in place, the final design in place, to be able to supply, once the demand is there, once you find customers for that application, or would there still be some development time?
TC: Good question, Jeff. Yes, we do have that design in place. Of course as we work on cost reductions this design will change somewhat but, to answer your first question - Yes, we have a commercial design ready-to-go.
Jeff: Are you starting to see potential customers there? Do you think this would be orders by the end of the year or is everyone still waiting for some of these government programs to clear the market?
TC: There’s probably a mix but I think most folks, as I said, you know, are suffering in this economy and, you know, their corporate reactions are: “Gee, if we get several dollars to spend on this, that would be a smarter move.” So I think there is a delay in activity. Military, on the other hand, I think it is continuing to move, and will move aggressively on those programs that we have going. We’ve had great success there. They’ve been very pleased and have stated that they haven’t seen any other technology that can do what we do so military is less impacted by the recession. I think the utilities, and what not, are struggling, but that the stimulus bill will help them significantly and I do know, as I said, that there are projects that are going to be submitted against those programs using our technology.
Jeff: And, speaking of which, you mentioned that you are supplying 40 batteries to the Army for testing by the end of this month? Is that correct?
TC: Correct. That’s for the M119 howitzer project. That’s correct.
Jeff: And that would have a direct impact on the revenue for this quarter?
TC: That’s part of the project that we’ve got with them and there are milestone payments within that project. Yes.
Jeff: OK. I see. And what is the opportunity, on this project, for the rest of the year beyond these initial 40 batteries?
TC: Of course it will depend on the success of the testing but we’re very optimistic. Then the army has to think about how quickly they want to deploy these systems in the field. We don’t have an accurate time-line of their deployment effort but we would anticipate that that would begin to build up towards the end of the year.
Jeff: So the initial testing would be, basically, from here until the end of the year?
TC: Yes. Probably not quite that long. But it will, any time the military wants to deploy a new technology they want to test the heck out of it. They want to be absolutely confident, first and foremost, in its safety and in its ability to achieve the desired results. So, there’s an inordinate level of testing that goes on for these things. I would expect that to be, at least, a 6 month kind of timeframe.
Jeff: And the last question I have, with the British Ministry of Defense, at what stage are we with them? Have they already accepted any batteries or are they still in, kind of, the design phase?
TC: That program was begun in the fourth quarter of last year with, what we’ve called, a Phase 1A. We expect, or anticipate, that Phase 1B will be coming shortly and increase the level of work that we’re going to be doing for them. Beyond that will be, of course, a Phase 2, perhaps toward the end of this year. But, again, this is military work, it’s related to naval activity, and so they’re going to be testing our systems to the nth degree to be confident that they do what we say they can do and that they’re safe.
Jeff: Basically you have supplied a battery to them?
TC: We have supplied information and some cells for testing and we’re working aggressively in that… again, this program was just started late in the fourth quarter.
Jeff: OK. Sorry, one last question, just real quick, what’s the new share count that we should use going forward?
JF: The shares that we had as of the end of, as of yesterday, actually, were 93,153,271.
Jeff: OK. Thank-you.
TC: Thank-you, Jeff.
Operator: …We’ll go next to Craig Irwin, Merriman.
Craig: Thank-you. Thanks for taking my question. I just want to follow up a, a while back you were suggesting that there could potentially be some follow-on orders out of AES that you thought that this was something that we could potentially get traction with them. Where do we stand as far as, you know, potential further units with this important partner?
TC: Good-morning Craig, and thanks for the question. It’s safe to assume that the comment I made about companies, in general, delaying their purchase decisions and wanting to pursue federal funds first, could apply to AES.
Jeff: OK. OK. Excellent. Excellent. And just changing subjects a bit. Obviously you’ve done a good job bringing down your cash burn, but really the cash position is not great. And I was wondering what the opportunities were to further reduce the cash consumption below current levels?
TC: Excellent question. As we look at the 3 business units from last year we have taken, and are continuing to take, an aggressive stance with both Life Science and Performance Materials. Neither of those businesses is going to give us near-term revenue. So we’re scaling back our efforts there. That certainly will continue. We have some options for further reducing some of our expenditure there that we will do. And we’re taking, on a regular basis, a look at our cash flow. I will tell you that one of the significant changes from last year has been in our Internal Systems. We had, really, and old, and outdated accounting system that didn’t really enable us to assign accountability for our budgets internally. We shifted to a new system that went ‘hot’ on January 1 and that really gives every individual in the company, every manager, good visibility on what they’re spending against their budgets and we will be holding people accountable to that. That’s a tool that we didn’t have last year.
Craig: Excellent. Excellent. And then just, considering that you’ve been tapering down the costs, can you talk to us a little bit about Cap Ex for this year. Is there a budget that you’re able to talk about now as far as Cap Ex for the full year? Can you just give us some color about that?
TC: Good question. Cap Ex will depend on the rate at which we actually receive orders. We have an expansion plan that we have targeted but we’re not going to be expending capital against that unless we’re confident that the orders are coming in. It just doesn’t make sense. So we will be postponing any capital decisions until such time as we’re confident we actually need to spend that money. We’re also looking at capital expenditures to see how we can modify them, through leasing, to reduce cash flow, those kinds of things. We’ve done that last year and we’re going to continue to do that this year.
Craig: OK, Excellent. And my last question… The Auction Rate Securities that you have on your balance sheet, can you just clarify for us - Are they included in the ‘Cash and Cash Flowence’ number or is this what’s listed under ‘Long Term Investments’?
JF: They’re under ‘Long Term Investments’.
Craig: OK. Thanks a lot.
JF: We’re not carrying them as cash.
Craig: Thank-you very much.
TC: Thanks Craig.
Operator: …We’ll go next to James Watson.
James: Good-morning… Terry.
TC: Hi James.
James: My question has to deal with performance of the battery. I’ve kind of been expecting an improvement, or matching electrode upgrade, or a set of specifications that deal with just one chemistry. And, can you talk on the first question of where we are, as far as, say, having a second generation battery?
TC: I think, as I discussed earlier with our cost reduction plan, that the optimization, I think, is what you’re really getting at, the optimization of the cell chemistry for a specific application is part of that overall cost reduction plan. So, that’s kind of a long answer. The short answer is: Yes we’re looking at optimizing the entire cell system, both anode and cathode, and how they work together, as well as looking at other opportunities for improvements, electrolytes, separators, all of that, and we do have designs on-board that will enhance the performance.
James: OK. But nothing we’re ready to publish right away.
James: My next question, or follow-up question, has specifically to do with the Navy. The US Navy project. That was in several phases and one of the phases that I was looking to get to was the design of the unit that would actually might be put into an ship. Are we that far yet?
TC: Not yet. The design for that will actually begin in, that’s not fair, the design is on-going but the final design for a large 2.5 megawatt system will be based on the building blocks that we generate in Phase 1 and 2 and that design would occur in, say, Phase 3. Again, that’s the complete design. Recognize that we’re building this, sort of first, at the submodule level, then at a module level, and on-going.
Operator: …We’ll go next to Paul Zenonni.
TC: Sorry, was that Paul?
Paul: Hello. Yes.
TC: Thank-you.
Paul: My question is one regarding railroads. It’s my understanding that railroads use what they call ‘Dynamic Braking’ going over the mountains out west there. This is apparently dissipates all the energy coming down the mountains through resistors. And it occurs to me that this would be an extremely good application for, a battery powered locomotive, you might say, to push the thing up the mountain and recover all this energy on the way down. Has Altairnano opened any discussions, or considered, this application?
TC: The topic that you’re discussing really is ‘regenerative braking’ and that’s actually a part of, not only railroad systems, but it’s a big part of transportation systems. All the, for instance, Proterra’s bus, uses regenerative braking. One of the advantages of our battery system is its ability to take on that energy in a very rapid mode where other chemistries can’t do that. So, yes, that’s clearly something that everybody in the industry is looking at. We have had some level of discussions with railroads but not really on what I would call “Inter-city” kinds of systems at this time.
Paul: Oh no, this is not ‘inner-city’, this is over the mountains.
TC: ‘Inter’, not ‘Intra’.
Paul: Huh? What? Int..? Oh, Well, yes… but not on the flat lands so I’m not, I’m not suggesting its use is to run a train on the level country. This is only an application over the mountains and, uh, pushing, because at the present time to bring a freight train over the Rockies, or the Sierra Nevada, they use several, they hitch on several locomotives to push it up over it and, uh, on the way down they dissipate the energy which is not, rather than recover it, um, and um, you know, the application, here, is really quite specific and you’re talking about several megawatt hour units to do this job on a train.
TC: Understood, yes, and I agree with you it would be a very interesting application. We have not spoken, with, to my knowledge, to railroad companies, with that specific application in mind.
Paul: Oh. Yes. Well, it would appear to me, you know, that the batteries could be charged and discharged several times a day going back and forth over the mountains. And, um, by the way, you often refer to your units as 2.5 megawatt units. I believe that you mean 2.5 megawatt hour units?
TC: No. I actually mean 2.5 megawatt units. I’m talking about the power output and not the energy storage.
Paul: That’s on what, a 10 minute discharge?
TC: If we look at, for instance, the AES system that was tested last year, that was a 2 megawatt system and roughly 500 kilowatt hours so it would be basically 2 Megawatts useful to a 4 C rate. (pause) Thanks Paul.
Operator: …We’ll take a follow-up from Craig Irwin.
TC: Go ahead, Craig.
Operator: Mr. Irwin your line is open. Please check your mute button.
Craig: Thank-you. I know this question is probably a little bit technical. But, in some of my discussions with the major automotive OEMs, they’re looking to incorporate titanate electrode technology opposite iron phosphate technology. Um, and, I was wondering if you had been involved in any of the discussions or participated in any of the early development activity alongside any of these OEMs?
TC: I will say only peripherally at this point, Craig, that has not been a major driver for us. I think there are other issues that come to play if you put the iron phosphate cathode against a titanate anode? Energy storage is one of them.
Craig: Agreed. Agreed. Agreed. Excellent. And the other question, you know, I hate to get too granular on this, but the Phase 1 contract that you mentioned, usually those are pretty short in duration - less than 6 months. Is this something we can expect to be completed, sort of, by the middle of this year?
TC: Are you talking Phase 1 of the ONR, the Office of Naval Research, or the BAE?
Craig: Exactly, yes.
TC: The ONR? That’s basically complete at this point time and, just to cover the bases, we expect Phase 1 of BAE to complete this year as well.
Craig: And then Phase 2, fairly quick, behind that? Any idea, roughly, how large Phase 2 could be for each of these opportunities?
TC: ONR we’re talking, probably 9 months, 9 to 12 months, for Phase 2, and BAE, a little hard to say at this point, I would anticipate roughly the same.
Craig: And do you have approximate dollar values there or is that something that you’re not able to get into?
TC: Not for BAE but Phase 2 for ONR should be reconciled, here, in the next month, or so, we think, and at that time we’ll be able to talk about it.
Craig: OK. Excellent. Thank-you very much.
TC: Thank-you, Craig.
Operator: Having no further questions in the queue I would like to turn the conference call back over to Dr. Copeland for any additional, or closing, remarks.
TC: I’d like to thank, thank-you for your help operator. I’d like to thank everybody for their questions. It is always a pleasure to speak with you. On behalf of the entire management team and all Altairnano employees, we would like to thank you for your time, interest and support of Altairnano. Thank you very much and have a good day.
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