New Energy Systems (NYSE AMEX:NEWN)

Q: What is the background of the company ?

A: New Energy Business history:

The company began producing battery shells and caps in 2002, came public in the U.S. in 2004, and entered into the production, assembly and distribution of lithium ion battery packs in the 2nd half of 2008. In December 2009, we acquired Anytone International, which focuses on mobile power backup systems. In January 2010, New Energy acquired NewPower, which manufactures lithium ion battery cells.

Anytone and New Power History:

Anytone manufactures and sells back-up power systems that are used to support some very well known products, such as iPhone and iPad. If your cell phone battery dies, you can simply plug the phone into the portable charger. These devices typically have 4-7 times more power than the original OEM battery.

New Power’s major products are lithium ion battery cells, used in a wide array of portable electronics.

As a result of these two acquisitions, the company is now vertically integrated, meaning that we can internally source lithium ion battery cells and packs, and, in this way, offer competitive pricing while expanding our margins.

Anytone will become the main business of the company and its products are our major focus right now. For New Energy's current direction, our major products are tending toward end user consumer products, and we plan to increase our market share and revenue in the future both domestically in China, which comprises 95% of the company’s sales, as well as internationally. North America, in particular, represents a sizable, higher margin, market opportunity for the company.

Q: Growth rates in the next 3-5 years?

A: The overall market is currently growing an average of 20% per year. New Energy expects to achieve organic growth rates greater than the overall market. This does not include potential acquisitions.

Q: How will the company achieve this growth?

The domestic market is our primary focus right now, but we have plans to expand internationally and have already introduced our product in Europe through an alliance with a company called A-Solar. We also plan to grow our business through new product introductions, by expanding Anytone’s higher margin branded products and by increasing the amount of direct sales to OEMs and retailers.

Q: Where do you see the company in the next 3-5 years on a segment basis?

A: For the business model we can separate it into 3 areas:

• Branding and marketing - We've invested a lot of money into branding and marketing to expand our sales.
• Production - we do not anticipate investing heavily in production since we have sufficient internal capacity and use third party contract manufacturers. So as we grow our revenues, we should benefit from operating leverage inherent to our business.
• R&D to create new products - the focus here will be strong and is one of our main competitive advantages. As such, we average one new patent application per month, and typically launch 1-2 new products per month.

Q: Can you explain this industry in China?

A: Yes

• The industry and competitive situation will depend on our product line. For our lithium ion battery shells and caps, our original products, the market competition is not very strong, but the margins are low. 50% of our production is for internal use and 50% is for sales outside the company.
• Battery cells, which our company produces through NewPower, has very strong competition.
• In the battery pack assembly and distribution business, the competition is very strong. We have two ways to differentiate ourselves. We have a complete battery pack. Currently we are selling our own lithium ion battery pack under our own brand name in the market.
• The mobile power backup system is Anytone’s major product and we are one of the leaders in this emerging industry in China, so the competition for Anytone’s products is not very strong right now. We believe we will keep our competitive position in the short and long-term. Right now we are the leader in this market. We will invest a lot in R&D for mobile power backup systems.

Q: What are NEWN's competitive advantages?

A: Anytone has several competitive advantages. We began producing mobile power backup systems much earlier than other companies in China, so Anytone's brand name awareness is greater our competitors. Our products tend to hold more charge, and recharge the respective devices faster. We’re also able to offer these products at attractive price points, while maintaining very healthy margins. Lastly, we are able to rapidly launch new products into the market, keeping up with the latest new product introductions such as iPhone and iPad.

Q: Can you explain each segment by total revenue and net income? (Can you fill in these numbers correctly, I know what I have is not correct and is disorganized)?

A: Given that the acquisition of Anytone and NewPower took place in December 2009 and January 2010, the second quarter is the first full quarter of having both companies part of New Energy, so I’ll give you the breakdown for the second quarter of 2010.

• Revenue increased 355% to $23.4 million in the second quarter of 2010
• Anytone accounted for $10.8 million in sales
• New Power accounted for $8.3 million of sales
• Revenue from battery assembly and distribution accounted for $1.8 million
• Revenue from shells and caps accounted for $2.5 million in sales

On an organic basis:

• Anytone sales increased 86.1% versus Q209, prior to acquisition
• NewPower sales increased 53.8% versus Q209, prior to acquisition
• Battery Assembly and Distribution sales increased 34.6%, excluding Anytone and NewPower
• Shells and Caps sales increased 45.5%

Bottom line:

• Adjusted EPS* increased 59.1% to $0.35 per diluted share (excludes amortization and non-cash stock compensation)
• GAAP EPS increased 27.3% to $0.28 per diluted share

Generated $6.5 million of cash flow from operations

[company doesn’t provide net income by segment]

Q: Can you explain your main competitors?

Main competitors are small factories in China. The largest competitor is a private Taiwanese company, larger than Anytone, but their backup battery system sales are less than Anytone.

Q: What is your full capacity EPS?

A: NewPower is the only division with capacity constraints, but currently operating at just 50% capacity. With minimal capex, we can easily triple capacity.