Exhibit No. 99.1
CHINA BAK BATTERY INC.
FIRST QUARTER 2006 EARNINGS & 2005 FISCAL YEAR UPDATE
FEBRUARY 10, 2006
Operator: Good morning ladies and gentlemen, my name is Melissa and I
will be your conference facilitator today. At this time I would like to welcome
everyone to the China BAK Battery Inc. first quarter financials and corporate
update conference call. All lines have been placed on mute to prevent any
background noise. After the speaker's remarks there will be a question and
answer period. If you would like to ask a question during this time please press
star then the number one on your telephone keypad. If you would like to withdraw
your question press the pound key. Thank you.
It is now my pleasure to turn the floor over to your host Matt
Hayden from Hayden Communication. Sir, you may begin your conference.
Matt Hayden: Thank you Melissa and thank you to everyone who's joining us
on the call today. As we recently passed the one year anniversary of China BAK
Battery becoming a publicly traded company we wanted to take this opportunity to
provide shareholders and investors with a summary of the first quarter and
fiscal 2005 year-end results as well as an update regarding the Company's
progress and growth strategy for this year.
2005 witnessed several material events as the Company
significantly grew its business, raised capital to expand its manufacturing
capacity and grew its customer base while controlling manufacturing costs,
improving yields and began the tradition to a broader product portfolio, all
which positively impacted margins. Our call today with be hosted by Mr. Jim
Groh, the Company's U.S. based Executive, who will provide a business overview,
summary of last year's accomplishments, a perspective of the market opportunity
as well as a discussion of the growth initiatives for 2006. In addition Michael
Drennan, the Company's Financial Advisor, will discuss the Company's first
quarter and fiscal 2005 results, while Dr. Henry Mao, the Company's Chief
Operating and Chief Technical Officer, will be available to answer technical
questions during the Q&A session.
Before we get started I'm going to review the Safe Harbor
statement. Statements in this conference call that are not descriptions of
historical facts are forward-looking statements related to the future events and
as such all future forward-looking statements are made pursuant to the
Securities and Litigation Reform Act of 1995. All forward-looking statements
related to the business of China BAK Battery and its subsidiary companies which
can be defined by the use of forward-looking terminology such as believes,
expects or similar expressions, involve known and unknown risks and
uncertainties. China BAK Battery is under no obligation and expressly disclaims
any such obligation to update or alter its forward-looking statements whether as
a result of new information, future events or otherwise. The company is subject
to the consideration and risks of operating in the PRC. These include risks
associated with the political and economic (inaudible), foreign currency
exchange and the legal system in the PRC.
With that out of the way, I will now turn the call over to Jim
Groh. Jim congratulations on a solid year and a great start to 2006. The floor
is yours.
Jim Groh: Thank you Matt and thank - good morning and thank you to
everybody joining us. We welcome those of you who are new and learning about BAK
and we also welcome our old friends who've been involved with us from the
beginning here.
Fiscal 2005 indeed was a successful year for our company as we
topped $100 million in revenues for the first time, expanded our margins, and we
completed two financings which raised approximately $60 million. This capital
set the stage for continued growth by enabling us to expand our production
capacity while leveraging a larger base of working capital. We utilized this
capital infusion to expand our manufacturing capacities which came online and
has enabled us to operate at a production rate of 22 million cells per month
when we exited the first quarter in December, up from 15 million cells per month
previously. It's important to note that since this increased capacity just
recently came online and provides incremental growth capability during quarters
two to four of this fiscal year, we also announced yesterday new manufacturing
agreements with original equipment manufacturers including Lenovo and A123
Systems. These announcements represent significant growth opportunities and are
key to our future strategies. I'm going to expand on this later. We also
installed the capability and began producing lithium polymer batteries, which
address a large number of growing applications for various electronic devices.
As we brought new production online we began to build inventory in anticipation
of new business both being won and pursued which positions us well for fiscal
2006 and beyond.
Since this is our first conference call and since we have many
people joining us who are new to the BAK story, I'm going to start by providing
an overview of the Company, discussing our core market verticals and our growth
opportunities. I'll also spend some time discussing our operational initiatives
and how the business is involving to plan. After Mike Drennan discusses the
first quarter and fiscal 2005 financial results, I'll then discuss the Company's
macro drivers and our 2006 goals and objectives and open the floor for
questions.
Shenzhen BAK Battery Company Limited was founded on August 3,
2001 and has grown in that short time to become one of the largest manufacturers
of replacement lithium-ion or LI-ION battery cells in the world. On January 20,
2005 China BAK Battery Inc. completed a reverse merger and began to trade
publicly in the U.S. with a formal name change happening in February. We
currently maintain a 1.9 million square foot manufacturing facility located on a
90 acre manufacturing campus in Shenzhen, China. We employ approximately 8,250
people. For those of you who are new to our industry Lithium-ion is the de facto
standard for rechargeable battery technology used in portable applications. If
you've got a cell phone it's a 99.9% chance that that cell phone utilizes
Lithium-ion technology. Lithium-ion technology offers significantly higher power
in a given footprint, are light-weight and the batteries have much longer cycle
life and have no memory effect. Our technology has essentially replaced NiCad
and nickel-metal hydride technology in portable applications.
2
When established, the Company's first major business segment
was the production of cell phone battery cells which were sold to replacement
battery manufacturers. These are third party manufacturers who sell under their
own brand name or sell to major retailers under a private label. This is a very
good business, especially in China where it is estimated that there are more
than 380 mobile phone handsets in use today. To put this into perspective, this
amounts to more handsets than there are people in the United States and this
number is expected to substantially grow in the next several years. Also an
interesting and unique characteristic of the market is that used cell phones in
China are not disposed of like they are in the U.S. Instead they are sold and
resold to an existing distribution network as even the poorest segments of
society have need for a cell phone. This has resulted in a geometric increase in
the installed base of handsets which continually need batteries and where our
replacement batteries - battery cells are sold. Our potential market is the
total installed base of handsets. Currently we estimate that BAK has achieved a
market share in this segment in excess of 60%. This business provides a solid
base and platform from which we will expand.
On September 16th we raised $43 million with the proceeds
being utilized to build-out increased manufacturing capacity of our existing
products, automate certain manufacturing processes to increase both through-put
and yields and to fund expansion of our production capabilities to include new
products, specifically laptop computer batteries and lithium polymer battery
cells. We have also established production on a new high power lithium battery
cell for a new customer named A123 Systems. With A123 we jointly developed a new
36 volt battery to drive a new line of cordless power tools produced and
marketed by Dewalt.
We made good progress in expanding our capacity and product
expansion plans during the past year, positioning us well for 2006. In our
mobile phone sales we have increased our capacity from 15 million pieces per
month last August to its current level of 22 million pieces per month. This
capacity expansion came online near the end of the first fiscal quarter, which
was the quarter ending in December, and emanates from increased manufacturing
lines, increased staffing and additional automation that has improved
through-put on all of our lines. Simultaneous with this, we have been able to
reduce material cost in approved yields all of which has positively impacted our
margins.
In terms of new products we are right on track. We invested a
portion of the proceeds from the September capital raise in a high volume
production line for lithium polymer batteries. Lithium polymer batteries utilize
Lithium-ion energy technology in customizable small formats. They are used to
power Bluetooth headsets, mp3 players and ultra light-weight cell phones. We
have begun a ramp up of lithium polymer products and have seen capacity grow to
one million pieces per month. Further product growth is being pursued in the
form of laptop computer sales. All production equipment for this product line
has been ordered and the production line is currently under construction. We
estimate that our facilities will be ready for production early in the second
calendar quarter.
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Lastly in terms of new customers and new products, we recently
announced an exciting partnership with a company named A123 Systems and a
manufacturing agreement with Lenovo, a company which is becoming a dominant
player in cell phone production. A123 Systems is an emerging supplier of
specialty high-powered batteries which utilize a new nano lithium phosphate
technology based on patented nano technology developed at the Massachusetts
Institute of Technology or MIT. A123 is the exclusive licensor of this
technology and we began collaborations with them in early 2005 to design,
develop and establish a commercially producible product in a high volume
production line exclusively for the manufacturing of the A123 batteries.
According to our partner A123, its new high powered battery products will be
used in a variety of product applications including power tools, medical devices
and hybrid electric vehicles. These products meet the most stringent tier-one
OEM quality requirements. This is a cutting edge breakthrough technology and we
are delighted to be part of this project which we anticipate will carry more
favorable margins than our core business.
The first commercial application for these high powered
batteries are for power tools. Dewalt, a division of Black and Decker, recently
hosted a coming out party in the form of a large press event in Orlando, Florida
where the company's power tool division president and other key members of the
management team unveiled the new 36 volt family of products with the tag line
The Power of Corded Without the Cord. Bruce Brooks, President of Dewalt
Construction, commented that this was one of the most exciting product launches
in a number of years. Currently the company Dewalt produces over 30 cordless
products and has sold an estimated 50 million 18 volt rechargeable batteries to
power their tools. Dewalt embarked on a multi-year project to identify a
rechargeable battery technology that could meet the power demands where cordless
power tools would replace corded power tools. This search ended when they met
123 who had developed the technology to create some of the most powerful,
durable and light-weight batteries available today.
Earlier this year Dewalt launched seven new products featuring
this 36 volt battery: the drill, a full-size circular saw, reciprocating saw,
SDS rotary hammer, impact wrench and jig saw. These new - the batteries employed
in these power tools offer two to three times the run time of 18 volt batteries,
significantly higher power while offering users 2,000 charges and all of the
same weight of traditional batteries. As A123's manufacturing partner we are the
fourth - we are at the forefront of technology and we are excited about the
future. According to A123 its new high-powered battery products will be used in
a variety of other product applications including medical devices and hybrid
electric vehicles.
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We had previously disclosed the company's plan to expand into
the OEM channel of distribution. We made significant progress here also. In the
fourth quarter over 20% of our business came from the OEM channel and in the
first fiscal quarter OEMs represented 26% of our sales. We have also recently
announced a strategic partnership agreement with Lenovo. You probably know
Lenovo from their purchase of the IBM PC business. What you might not be aware
of is that their executives recently announced plans to make cell phones the
second product pillar of the company and their goal is to become the largest
manufacturer in China. This progress is already well underway as they sell a
unique perfume emitting cell phone that women in China simply can't resist. We
believe that this partnership with Lenovo represents a significant growth
opportunity for our company. We have been producing Lithium-ion cells for Lenovo
since August of last year and our new strategic cooperation agreement will allow
both companies to jointly contribute and share resources to further product
development efforts. This will expand our current relationship and facilitate
the development of new battery solutions for Lenovo. And for anyone who's
interested in looking at the announcement, I'll refer them to the online
Shanghai Business Daily dated November 22, 2005.
We are also continuing through qualification and negotiation
with other leading cell phone OEMs. We have a lot of horses in the race here and
our intent is to grow OEM sales significantly during 2006 and beyond. Besides
growth in the cell phone business we believe that our success in forging a
relationship with A123 and our ability to successfully introduce a lithium
polymer battery line to the OEM channel are testaments of our team's ability to
execute to a plan.
Now let's touch briefly on operations. We have a
multi-facetted strategy to manage and optimize our product costs. First of all
we addressed the reduction of every element of product cost on a cost sheet. We
are relentless in our pursuit of material cost reductions through strategic
sourcing initiatives and use of our purchasing power to gain the lowest material
cost. We use the availability of low cost labor to minimize both direct labor
and SG&A expenses. We have low construction cost and we've executed several
successful initiatives to improve product yields in manufacturing. For those of
you with an appreciation of manufacturing operations, please note that we
accomplished these yield increases while increasing our manufacturing capacities
by over 40%.
Another key facet of our cost strategy is to employ world
class automation where it optimizes cost or increases value in terms of
through-put, yield improvement, waste reduction or product safety. Execution of
these strategies is evident in the gross margin improvements we've been able to
accomplish. Our growth is further absorbing fixed manufacturing costs while a
favorable product mix is just starting to have it's impact. These factors
combined have enabled BAK to become a low cost manufacturer and to effectively
compete for new business while growing revenues with current customers.
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Lastly I'd just like to briefly comment on the technical side
of our business. Those of you who know us understand that our strategy is
multi-faceted. It's based on technical excellence but in a low cost
manufacturing environment. The architect of our technical strategy is Dr. Henry
Mao, our COO and CTO, who is on the call with me today. He is currently in Korea
where he is already working to sell out the laptop computer capacity which will
be coming online in April of this year. Henry is known worldwide as an expert in
Lithium-ion technology. He has constructed a technical capability that we
believe is second to none. We have a new advanced Lithium-ion research lab on
our manufacturing campus where we invested millions of dollars for specialty
equipment and instrumentation. We have staffed the department with engineers
from Japan, China and Canada. We believe we have crafted a unique ability to
take laboratory developments and transfer them in partnership with a third party
to a commercially viable product which is then produced in one of the lowest
cost facilities in the world. We think that the advantage of our approach is
that it gives us great leverage and partnering with best-in-class researchers
and avoids the situation where we spend lots of money and research on a product
that's never produced. The A12 relationship - the A123 relationship reflects the
successful execution of this strategy.
Before I get into a discussion of the industry and the macro
trends which drive our results, let me turn the call over to Mike Drennan, the
Company's Financial Advisor, for a discussion of our financial results. Michael.
Michael Drennan: Thanks Jim. Good morning everyone. Rather than taking this
time to simply read the numbers that are already in the December 10-QSB and the
September 10-KSB filings, since those are already available to you on the SEC
website, I thought that I would spend this time to put them in perspective and
to try to give you some additional insight into them. As I review the Company's
results all of the numbers will be in U.S. dollars which is the Company's
reporting currency. Also please remember that our year-end is September 30th so
that the fiscal 2005 year ended September 30, 2005 and the first quarter of
fiscal 2006 ended on December 31, 2005. I'll start by focusing on the Company's
most recent financial results for the first quarter ended in December and then
finish by touching on fiscal 2005.
Revenues for the first quarter were $26.1 million almost $1
million or 4% more than a year ago primarily due to higher volumes. The number
of units sold during the quarter increased by 11% in total with most of this
increase in aluminum K cells. The overall weighted average unit selling price
was 7% lower than last year with decreases in all product lines other than
aluminum K cells.
The big story for the quarter was the improvement in gross
margins increasing from 17.4% of revenues last year to 27.1% this year. This 10
point improvement in margins is broken down as follows. Six points came from
lower raw material prices through increased volume pricing and 4 points were
contributed by improved labor efficiencies with yield improvements offsetting
all other cost increases.
Operating expenses were up about $1 million from last year
from 8.1% of revenues last year to 11.8% of revenues this year. One of the
biggest contributors to this increase were the public Company expenses since
this year the Company had to deal with the SB2, 10-KSB, other regulatory
filings, an audit, investor relations and you know the rest of the drill. But
last year they didn't have to deal with any of that as a private company in the
first fiscal quarter. The Company also invested significantly more in research
and development and selling efforts this year in anticipation of the increased
manufacturing capacity that came online. Finally the Company incurred additional
bad debt expense in order to increase its receivable reserves and I'll talk to
that a little bit more later.
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The end result of all this is that operating income increased
by over $1.6 million or 70% from the first quarter of last year. Finance costs
were about the same as last year but the Company did benefit from their improved
cash position by investing some of their unrestricted cash to earn over $300,000
of additional income this quarter. Income taxes were only 3.3% of pretax income,
significantly lower than the preferential 15% tax rate that the company enjoys
by locating its facilities in the Shenzhen Special Enterprise Zone due to the
recent significant plant and equipment investments it has made. As a result, net
income for the quarter increased almost $2 million or 110% on a 4% sales
increase from 7.2% of sales last year to 14.5% of sales this year.
Earnings per share only increased from $0.06 per share last
year to $0.08 per share this year since the number of shares increased by 18
million due to the two equity offerings during fiscal 2005.
Turning to the balance sheet, the big story here from a year
ago is the improvement in liquidity. Working capital improved from a deficit of
$28 million last year to a surplus of $18 million this year primarily due to the
$56 million of net proceeds from the two equity offerings in fiscal 2005. Total
cash of $36 million at December 31, 2005 included restricted cash of $25 million
that served as security for the Company's $73 million of short-term loans and
notes payable. Accounts and notes receivable increased another $23 million from
$27 million or 99 days of sales a year ago to $50 million or 175 days of sales
this year. Let me provide some detail there.
Notes receivable at December 31, 2005 were $9.4 million and
were essentially comprised of December sales to three high volume customers with
good payment histories. All these notes are due by June 30, 2006 and $1.4
million of them had been discounted as of the end of December. Gross accounts
receivable were $42.5 million at December 31, 2005 but the reserve of $1.8
million or 3.5% of total receivables for a net balance of $40.7 million. There
were 13 customers with individual balances of $1 million or more comprising
about 70% of the total aging. 63% of the total aging is due within 90 days with
another 25% due within the next 90 days. The accounts receivable reserve fully
covers all receivables older than 270 days, 100%. Now the company has a
dedicated credit department that closely monitors each customer's purchases and
payments as well as their financial condition so that they can intervene if they
spot any problems. While the company is concerned with the growing levels of
these receivables, they also recognize the need to work with their key customers
as they look to grow their revenues to fill their new production capacity.
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Inventories also increased by $18 million from a year ago with
turns dropping from 4.3 last year to 2.1 as of this quarter. Now the company
purposely built inventory this year in anticipation of the sales ramp that has
already started in the second quarter of fiscal 2006 as well as to provide
adequate finished goods to cover the plant's shutdown for the Chinese New Year
celebration. The company expects to work its two-month supply of finished goods
at December 31, 2005 down to one and a half months at current sales levels by
the end of the second fiscal quarter with further improvements as sales continue
to ramp up in the future. The company was also able to benefit with a six point
improvement in gross margins due to this increased level of purchasing during
the quarter.
Property plant and equipment increased by $43 million from a
year ago with sales per dollar invested dropping from $4.10 a year ago to a
$1.70 this quarter. The Company expects this measurement to recover in the
future as they fill the available production capacity. Short-term loans and
notes payables increased by $20 million from a year ago but the increase in
equity more than offset this as the debt-to-equity ratio dropped from 2.5 a year
ago to eight tenths currently. Despite the $91 million increase in total assets
from a year ago, the Company's increase in earnings more than compensated,
raising the return on assets from 6.6% a year ago to 7.8% this year.
With respect to fiscal 2005, the Company enjoyed another
consecutive record year for both revenues and profitability. Net income grew
$5.6 million or 83% on revenue growth of $38.2 million or 60% from the prior
year. As a percentage of revenues, net income increased from 10.6% in fiscal
2004 to 12.1% in fiscal 2005 with all the improvements coming once again from
gross margins which increased 350 basis points. Weighted average unit selling
prices increased 2% from fiscal 2004 to fiscal 2005 while manufacturing costs
decreased 1.5%, with steel sales contributing the major of the increase.
And with that, I would like to return the call to Jim.
James Groh: Thanks Mike. Okay I'd like to turn our view from internal to
external and talk a little about some of the macro trends in our business. The
market for Lithium-ion batteries is estimated to be in excess of $2.5 billion
and I want to explain that as at our cell prices and we're certainly up-channel.
We believe this business will grow in excess of 20% on a worldwide basis and at
even a greater rate in China. Beyond cell phones there are a variety of other
applications including laptops, power tools, hybrid electric vehicles, mp3
players and other consumer electronics. Some of these applications like power
tools and ATVs have required further development of the core technology in order
to make lithium energy technology suitable for particular applications. As
evidenced by our announcement with A123 this development is not only underway
but at BAK it's been put into production. These new technological achievements
create a plethora of new opportunities for us to manufacture an ever increasing
line of battery cells for power hungry portable applications.
8
As most of you know, the Chinese market for cell phones is
tremendous. The handset user base was approximately 380 million as of the end of
October, ranking number one in the world according to the Ministry of
Information Industry. China's stated goal is to add another 250 million users,
significantly more than exists in all of the U.S., in China over the next five
years. If this happens, China alone with account for 25% of the global mobile
phone market. We like folks to understand that we sell consumable products.
While Lithium-ion technology produces consumables which last far longer than
competing technologies it is consumable nonetheless. Accordingly a portion of
our ongoing revenue is recurring due to a razor blade business model. As the
installed base of devices continues to develop, our potential market opportunity
expands geometrically. We will benefit from the sale of cells for the original
handsets to the OEM and re-sell battery cells for those devices again and again
in the replacement market. The appeal of a consumable business is the nature of
its growth, the stability it imparts and the fact that you see major changes
coming long in advance.
So as you can see the market is substantial and our
opportunity to grow our market share is significant as we continue to be a low
cost supplier of high quality Lithium-ion and lithium polymer battery cells. New
portable products are transitioning from older technology to Lithium-ion and the
trend towards mobile entertainment and communication products is driving
additional growth. New cell phones require significantly more power to
accommodate new features like digital cameras, mp3 players, GPS locating
technology and other technologies. Coupled with the sheer growth in consumers in
places like China we feel we are very well positioned to grow both our market
share and grow with the overall markets we participate in.
Let me spend just a moment talking about 2006 initiatives. The
first is the continued pursuit of expanding our OEM relationships particularly
with cell phone manufacturers including names like Lenovo I discussed earlier.
This initiative extends to other applications as well including small consumer
electronics and laptops. Speaking of laptops, this is our second main growth
initiative. It is a product initiative and we believe it offers a significant
opportunity to the company. Lastly we see a significant scale-up in the volumes
of high powered lithium phosphate battery cells accruing from our relationship
with A123 Systems. Mr. Lee our CEO and Mr. Han our CFO and the members of the
Senior Management Team believe this year will be another solid year
characterized by rapid growth. While we decline to give specific sales targets
or sales volumes by product line, Mr. Lee and Mr. Han do have a view towards
their expectations in terms of net income and expect to report a minimum
increase in net income of 100% for fiscal 2006 over fiscal 2005. This would be
in the $24 million range. Depending on the scale-up of certain customer
programs, the Company may achieve or even exceed the $27 million make good
number that has been disclosed on our SEC filings. We will get a better feel for
this in the next quarter as we see how our initiatives and more importantly our
customer scale-up develop.
It has been a very productive first year for BAK as a public
company and we hope that our shareholders are pleased with our progress,
financial performance and growth prospects. I'd like to thank all of you for
being on the call today. Just in terms of housekeeping, I would like to confirm
with everyone that the Company will be speaking, specifically Dr. Henry Mao and
myself, at the Roth Capital conference on February 21st and we may have an
opportunity to see some of you folks out there. So we welcome those of you new
to BAK and we thank you for your interest in our company. And very importantly,
we'd like to thank those early investors who not only provided the company with
financial support but with advice and counsel that has been so critical to the
development of our company.
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And with that I conclude our prepared remarks and I'm happy to
open the call for questions.
Operator: At this time I would like to remind everyone if you would like
to ask a question press star then the number one on your telephone keypad. We'll
pause for just a moment to compile the Q&A roster.
Thank you. Your first question is coming from Wilson Jaeggli
with Southwell Partners.
Wilson Jaeggli: Good morning.
James Groh: Good morning Wilson.
Wilson Jaeggli: A couple of questions here, just a number of shares
outstanding. Weighted average share was around 50 million for the quarter,
what's it going to be for the year once we include all the deals that have been
done?
Michael Drennan: Well the actual shares outstanding right now are 48,878,000 so
that base will stay that way through the entire year. The share equivalents are
going to change as the stock price changes throughout the year, I think around
300 thousand shares in the quarter, so total number of options outstanding are 2
million. So the most that it will be at it will be 2 million shares due to the
options so some place in that range you know in the $50 million range is where
it should stay for the balance of the year.
Wilson Jaeggli: Okay so all in at 50 million and at 24 million guidance in
here. In other words we're talking somewhere are $0.50 a share.
Michael Drennan: Right.
Wilson Jaeggli: Okay. Secondly, the major increase here in production, going
from 15 million units to 22 million units, help us understand that a bit. If you
already have 60% of the domestic market you're increasing your production
capability there 47% I don't think you're going to 90% of the market. What - how
long does it take to - in other words what's the rationale for that kind of
major increase in cell production per month and secondly when will that not only
be capacity but actually production?
James Groh: Okay Wilson I was going to repeat the question back to you to
make sure I got it. This is Jim Groh and I'll field the question. Your question
is that we've increased our capacity from 15 million to 22 but with 60 - your
question is with 60% share why would we increase the capacity that much?
Wilson Jaeggli: I wonder you increased your capacity 47.
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James Groh: Okay let me address that first. The 60% share number is in a
very specific segment. That is sales to replace - the third party replacement
battery manufacturers. These - you know it's not the replacement battery market,
it's replacement battery third party manufacturers. If you go into a Radio Shack
or a Circuit City you may - you'll see batteries up there; they don't say Nokia
or Motorola they may send Radio Shack brand. There's a 60% chance that that is
our product. So that specific product that specific segment. We don't have 60%
of the overall cell phone battery business, we've got significant opportunity to
grow share there as we have been especially in replacement share that has
historically been held by Japanese and Korean manufacturers because we offer
equivalent or better quality at much lower cost.
That was your first question I believe and your second
question I'm sorry I--.
Wilson Jaeggli: Yeah the second question is when do you think - I mean we're
talking about 22 million pieces per month in capacity, when will that capacity
be utilized. In other words when will you ramp that production?
James Groh: That's already - we are producing at a rate of 22 million
cells per month (inaudible) not only was the capacity brought on but you know I
think you and I have had this discussion before with Paul you know you look at
our theoretical capacity all in seven days a week or whatever is about 25
million cells per month but of course nobody ever achieves 100%. We're running
right now at 22 million, that's about maxed out of practical capacity and we're
producing at that rate.
Wilson Jaeggli: Okay well great, you're already ramping it then?
James Groh: Yes sir.
Wilson Jaeggli: Could you talk a little bit about the registration of the two
issue pipes that are out there, where you stand on that and I know predictions
aren't very good in this arena working with the SEC but help us with that a
little bit.
James Groh: I'm going to turn this over to Mike Drennan for him to answer
Wilson.
Michael Drennan: Yeah Wilson that's basically what I've been working on for the
last month. All of the filings that the SEC has given us comments on have
already been resubmitted to the SEC, that's both the SB2 filings for the two
offerings that you mentioned. Because of comments that came out of there we
restated the - basically all the financial statements between an 8-K that was
filed on April 7th, the March 10-Q or June 10-Q all of that is back into the SEC
right now. And as of last night we had not received any comments. They've
acknowledged receipt of it and said they were looking at it but we hadn't
received any comments back from them with respect to it. So we've got our
fingers crossed right now that they've got everything they need at this point
and hopefully they'll be able to get us effective very soon.
Wilson Jaeggli: Okay so the ball is in their court in other words?
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Michael Drennan: Absolutely.
Wilson Jaeggli: Okay. Just to make sure we understand the company here,
basically all the revenues generated so far have been in the cell phone battery
market. Is that correct?
James Groh: There's been - there has been revenue from lithium polymer
batteries (inaudible).
Wilson Jaeggli: Could you not quantify that?
James Groh: In the cell phone market.
Wilson Jaeggli: Can you quantify that?
James Groh: We are declining to that do Wilson. We think that's a
competitive disadvantage to.
Wilson Jaeggli: Okay and the - you mention here laptop battery production you
think would begin in April?
James Groh: Yes sir.
Wilson Jaeggli: Good, and how about the high powered relationship here with
Dewalt. Can you talk about what the volume might be there or what we're looking
at the order rate or whatever?
James Groh: Again especially the sensitivity of the confidentiality with
A123. They have been very kind to allow us to talk about the nature of the
relationship but we can't specifically release any sales numbers we've made to
them. I will say that we started shipping products in volume right at the end of
the calendar year and that is ramping up now.
Wilson Jaeggli: Okay.
James Groh: You know the product wasn't announced to the trade by Dewalt
until I think it was January 16th so it's pretty new stuff. And that's - we've
been held back because until it really got out in the market nobody wanted us to
talk about it.
Wilson Jaeggli: I see. Is this product, Dewalt's product, on the shelves now
at Home Depot or?
James Groh: You know I don't know. I tell you what there's two places I
could send everybody for information. If you'd like to read about A123 there was
a Wall Street Journal article on page B1 which ran November 2, 2005 so if you're
a Wall Street Journal online subscriber you can go pull that article. The other
thing is go to the Black and Decker website and the Dewalt section. They've got
videos on these new products and kind of their promotion plan. I think you'll
learn about it there. I don't know if they've filled the channel yet we're more
interested in filling the channel with Dewalt.
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Wilson Jaeggli: Understandable. Congratulations on an amazing ramp and new
relationships here.
James Groh: I'll pass your comments on to all the management, thank you.
Wilson Jaeggli: Thanks.
Operator: Thank you. Your next question is coming from Patrick Walker
with Walker Smith Capital.
Patrick Walker: Good morning guys, Jim how are you?
James Groh: I'm fine thank you Patrick, how are you?
Patrick Walker: Pretty good, just a couple of follow-up questions. I don't see
depreciation or amortization broken out on this one. Do you have that number?
James Groh: Hold on just a second. It's - the Q is actually on the SEC's
website I saw it there this morning (inaudible) I'll give you the number. I just
want to let you know that it's available. In the quarter it was $1.2 million.
Patrick Walker: And I take it does that explain some of the G&A expense that
appears to go up year-over-year or I'm sorry quarterly?
James Groh: That explains some of it but it's - you know most of that is
up in cost of goods sold. But most - the big increase was the public company
expenses.
Patrick Walker: Sure.
James Groh: And then the - you know the Company's - that's primarily it's.
Patrick Walker: What would be your estimate of total OpEx excluding cost of
goods sold? I mean would it be in this kind of low 3 range?
James Groh: I'm sorry.
Patrick Walker: Do you have an estimate of what you would expect the total
operating expense to be going forward?
James Groh: Total operating expense?
Patrick Walker: Yeah would this be - would this last quarter be representative
of what it's going to be as a public company?
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James Groh: Well it's probably as high as it's going to be. I would expect
it would go down from here. Let's see you talking about just G&A?
Patrick Walker: Yeah.
James Groh: It's about 5.6% of revenue. It's going to trend down from
there because a lot of those costs fixed and as they build capacity and increase
the revenue it's going to drop from there.
Patrick Walker: Okay. And you mentioned in the press release you know business
impacted by seasonality. Can you maybe expand on that a little bit as far as
Chinese New Year would be in this current quarter, correct, and not in the
December quarter, right?
James Groh: What we meant by that was we were referring to the increase in
inventory that we had increased the inventory because of the Chinese New Year in
anticipation of it.
Patrick Walker: Okay.
James Groh: But in terms of sales the big story going forward is going to
be increasing capacity and phone (inaudible) capacity which really doesn't
relate to seasonality.
Patrick Walker: Okay and - but that does explain the inventory build?
James Groh: Absolutely. That was part of it. The other part of it is the,
you know, the company is increasing the revenue going forward, it's already
started, and they built inventory in anticipation of doing that.
Patrick Walker: Right and this 9 million notes receivable, what is that?
James Groh: That's - basically it's three customers. They're large
customers; they've got good credit histories. Although those sales were made in
December all of the notes receivable are due by the end of June so it was a way
of working with the customers and at the same time securing the receivable
balance a little bit better so that they could actually discount those notes.
They've discounted some of them, about $1.4 million.
Patrick Walker: And they're all due to be paid in June?
James Groh: Yes.
Patrick Walker: Okay. Is this going to be an ongoing arrangement where you
would expect to see that line continue or is this a one-off situation?
James Groh: Oh it's probably going to continue to some degree gong
forward.
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Patrick Walker: Okay. And you mentioned the bad debt expense went up or it did
go up but--
Michael Drennan: The reserve went up; it went up by over $1 million from a year
ago.
Patrick Walker: Okay.
Michael Drennan: And basically the bad debt expense increased because the
Company is building the reserve.
Patrick Walker: Okay.
James Groh: Just to make sure we were adequately reserved.
Michael Drennan: Right.
Patrick Walker: Okay well thank you for the update.
James Groh: Thank you.
Michael Drennan: Thanks.
Operator: Thank you. Your next question is coming from Barry Kitt with
Pinnacle Funds.
Bill House: Hey Jim, it's Bill House.
James Groh: Oh hi Bill.
Bill House: How are you?
James Groh: Fine.
Bill House: Just a quick question on the capacity increase from 15 to 22
million units per month. This refers to the cell phone only and is that true?
James Groh: No Bill, there would be a million pieces per month of lithium
polymer in there also in terms of capacity.
Bill House: Okay and this doesn't include though the capacity that was
built for power tool and laptop batteries?
James Groh: There's no capacity for laptops and power tool it has some in
there but again I've got to steer clear of giving specific power tool numbers if
you don't mind.
Bill House: But needless to say that the building has space for quite a
bit of additional capacity once the laptop and power tool were to ramp?
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James Groh: Yeah it does. I was just in the facility a couple of weeks ago
and we did a tour and you can see there's a lot of production coming out in the
power tool area and there's a lot of new stuff going in the backend of the
building, but yes we've got plenty of space to expand. To optimize facility
cost, we sometimes build out facilities that remain empty for several months and
have no equipment in them. But the way construction works in China, crews
actually move there and once you kind of get them there it's lower cost to put
up the facility if you're expecting to be able to fill it later than to do it in
smaller pieces. So we've got plenty of room to expand.
Bill House: Thank you Jim.
James Groh: You're welcome.
Operator: Thank you. Your next question is coming from Lew Moser with
Mafax Investors.
Lew Moser: Yes I had looked at the registration for insider trading and
noticed that in January of this year there's almost three quarters of a million
shares that are up for sale. I was wondering in view of everything being
positive here why that's - you know, why that is?
Michael Drennan: Oh the statements - the 144 registrations I think that--
Lew Moser: Yeah.
Michael Drennan That you're referring to and those as you know are notices of
intent to sell. Doesn't mean necessarily that the companies are - the investors
are necessarily going to sell the shares but they wanted to have the flexibility
to do that and that's as far as I know is why they filed the Form 144s.
James Groh: Yeah these are some of the very early original investors in
the initial capital raises who bought in at I think the official cap raise was
done somewhere in the $2 dollar. Some of these funds only get to recognize
profits after they've transacted. So at the current share price they've had a
pretty good run and I can only guess that some folks are feeling they want to
take the profits off the table on behalf of their - you know the people have
money in their funds.
Lew Moser: Right, right, okay that's it.
Operator: Thank you. Once again I would like to remind everyone if you
would like to ask a question please press star then one on your telephone
keypad.
Your next question is coming from Beau Johnson with China
America Fund.
Beau Johnson: Good morning gentlemen this is Beau Johnson. I'd like to ask
you about your previously announced intention to achieve certification from
Motorola and how that particular relationship has developed?
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James Groh: You know it's progressing; it's not progressing as fast as we
would have liked. We are still in the process of being qualified by Motorola.
There have been evaluations and visits where we are improving certain of our
capabilities of that certain of the tier-one OEMs want us to have. You know
we've expanded our OEM, let's say our OEM work beyond just Motorola to as you
saw Lenovo and we have others we have not yet disclosed that are tier-ones. And
I'd say our approach now though is to pursue the sale of our capacity with
tier-one OEMs as fast and as furiously as we can so I think we're kind of
thinking we're not Motorola dependent to succeed in the OEM business, it could
come from any number of tier-one OEMs. But specific to your question, we don't
have an announcement as of yet. We are proceeding and we do expect to be
shipping mobile phone cells to OEMs in significant quantity later this year.
Beau Johnson: Thank you. One other question, can you share with us your
strategy as far as the eventual listing of this on a major exchange?
James Groh: You know all energies are going through - getting through the
registration statement and anything we might have done in that might have caused
us to re-file it. We will pick up all those issues as soon as we get you know
the initial fundraising shares registered. But clearly the company has a plan to
migrate to a different exchange from the OTCBB once we get the stuff behind it.
We have identified independent directors; we've taken some of the steps to put
in the required corporate governance. When we get through the registration we're
ready to make some steps and make an announcement.
Beau Johnson: Thank you gentlemen, as an early investor in this thing we're
very, very proud to have you in our portfolio thank you.
James Groh: We're glad to have you thank you.
Operator: There appear to be no further questions. I would like to turn
the floor back over to Mr. Groh for any closing remarks.
James Groh: I'll just reiterate the thanks from all of the management team
for the support we got. As I said not just financial but as a newly traded
public company in the last year we've received invaluable wisdom and counsel
from a lot of you. We thank you, we appreciate it, we hope you're pleased with
us, and we look forward to speaking to you in the future. Thank you.
Operator: Thank you. This concludes today's teleconference. You may now
disconnect.
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