Altairnano Q4 08 Conference Call (March
2009)
Fiscal Year 2008 Financial Results
(1:24 Audio time mark)
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
Through 2008 we fielded a number of other transportation requests mostly
from small start up companies similar to
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
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
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
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
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
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,
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
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.
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.
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.
TC:
No.
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.