Sunvault Energy - AUG 2013 - Baystreet€¦ · service with Energizer Holdings Inc. where he spent the latter portion of his career serving as Director-Strategic Ventures. While at

Siddharth Rajeev, B.Tech, MBA, CFA Analyst

Pooneh Ruintan, MEcon. MSc. Finance Associate

August 26, 2013

2013 Fundamental Research Corp. “10 Years of Bringing Undiscovered Investment Opportunities to the Forefront “ www.researchfrc.com

PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT

SunVault Energy Inc. (OTC BB – SVLT) – Possible cost-effective solution for solar energy generation

and storage

Sector/Industry: Renewable Energy / Solar Systems www.sunvaultenergy.com

Market Data (as of August 26, 2013)

Current Price US$1.25

Fair Value N/A

Rating* N/A

Risk* N/A

52 Week Range N/A

Shares O/S 64 mm

Market Cap US$80 mm

Current Yield N/A

P/E (forward) N/A

P/B N/A

YoY Return N/A

YoY TSXV -24.4%

*see back of report for rating and risk definitions

• All the figures in this report are in US$.

Highlights • SunVault’s mission is to develop a unique cost-effective solar system,

which can generate and store power, with zero to minimal reliance on additional power from the grid. According to the company, unlike conventional solar energy generation and battery storage projects, projects that use SunVault’s proposed suite of products will not be dependent upon government subsidies or tax incentive programs to be economic.

• Through seamless integration of energy generation and storage at the molecular level, SunVault expects significant improvement in efficiency and cost reduction. The company will use several recently developed technologies developed internally, and by Universities and industry collaborators. SunVault’s primary intellectual property (“IP”) is the unique way in which they intend to integrate those technologies / concepts into a single system.

• SunVault’s key founders are former employees of the battery manufacturer, Energizer Holdings (NYSE: ENR).

• The company has devised a five step plan to achieve its mission. The attractiveness of this approach is that the intermediary products developed in each step (generation) have the potential for commercial sales. This allows the company to be cash-flowing even while their main product, or the Generation 5 product (a product that will be able to generate and store electricity simultaneously), is under development.

• A team at MIT conducted an independent evaluation of SunVault’s technology. Although they praised SunVault’s very unique technology proposition and business plan, they felt that, more quantitative analysis on physical, chemical, electrical, energy, and power requirements are required.

• SunVault went public on June 21, 2013.

• SunVault expects to start generating cash flows in the next 6 months through solar energy generation and storage projects in Alberta, Canada.

SunVault is focused on the development of low-cost, high-efficiency solar systems through the seamless and simultaneous

integration of energy generation and storage at the molecular level. Key founders of the company, combined, have 40 years of experience with Energizer.

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Overview

Corporate

Structure

Cost effective energy generation and storage have always been the primary concern for solar power producers. Although the cost of photovoltaic (“PV”) modules has dropped considerably over the past few years, all the other costs associated with solar systems (including power conversion, inverters, battery, and installation costs) remain high, and make solar systems uneconomic/unattractive in most parts of the world. Regions where

conventional solar power generation is attractive are regions where the producers

receive government subsidies or tax incentives. Most solar systems (residential, industrial, and solar farms) are not self-sufficient, and rely on the grid (as a substitute) for access to baseline power. Power from the grid is used when solar input decreases / stops at night, or in cloudy conditions, and/or when demand peaks. SunVault’s mission is to develop a unique

cost-effective system, which can generate and store power, with zero to minimal

reliance on additional power from the grid. SunVault intends to achieve this goal through the integration of four patent-pending technologies developed internally by SunVault, and licensing agreements with the University of British Columbia (UBC), and two industry collaborators. SunVault’s primary IP, or competitive advantage, is the unique way in which they intend to integrate the technologies into a single system, while cutting the overall cost of solar generation/storage. SunVault is in the process of finalizing licensing / royalty agreements, associated with the technologies that will be used. The projections presented in this report do not account for the costs associated with licensing / royalties to partners.

If the company is successful in their mission, their system will be a revolutionary

breakthrough for the solar industry. This system could potentially eliminate the electricity bills for every end-user by making them self-sufficient for their energy needs.

SunVault is based in Dallas, Texas. Its key founders are former Energizer employees, John Crawford and Dr. Mark Schubert. Together, they have about 40 years of experience with Energizer.

In May 2013, four entities (names listed below) acquired 78.74% of the outstanding shares, or 4 million shares, of a publicly listed company, Organic Treehouse Ltd. (for approximately $350k). This transaction resulted in a change of control. Organic did not have any significant business, cash or debt at the time.

(i) West Point International Inc., controlled by Millennium Treads International Inc. (ii) Millennium Treads International Inc., controlled by Derek Bannister (iii) Sunvault Holding Inc., controlled by Millennium Treads International Inc. (iv) Sunvault Holding Corp., controlled by Derek Bannister

Background information on the above entities was not provided to us. Immediately after the transaction, the company appointed John Crawford as President, CEO and CFO, and Rory Husch as Secretary. Prior to the change in control, Organic had 5.08 million shares outstanding. The company currently has 64 million shares outstanding. The ticker symbol is ‘SVLT’.

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Purpose

Management

The purpose of this report is to evaluate the attractiveness of the business plan proposed by SunVault. The company has yet to publicly disclose many details of their business plan or the technologies / concepts that will be used to execute the business plan. Therefore, we will

not be making any comment on the valuation or attractiveness of the company’s shares

as an investment. This report will only highlight the strengths/weaknesses of the business plan / technology, based on the information disclosed to date. Brief biographies of the management team, as provided by the company, follow:

John Crawford, President, CEO and CFO

Immediately prior to joining SunVault Energy Inc., Mr. Crawford resigned after 22 years of service with Energizer Holdings Inc. where he spent the latter portion of his career serving as Director-Strategic Ventures. While at Energizer, John leveraged executive-level relationships to expand business in Specialty Power and Lighting GBU’s, developed organizational capability and leadership confidence relative to adjacent market entry and interpreted technology/market trending as a function of corporate navigation tactics. John holds numerous patents and graduated with honors from the University of Missouri-Rolla with a Bachelor of Science in Mechanical Engineering.

Mark Schubert, Ph.D. – Chief Technical Officer

Prior to joining SunVault in February 2013, Dr. Schubert was a Chief Scientist at the Energizer Battery Company. During his nearly 17 years at Energizer, Mark impacted every business unit through the commercialization of several key foundational technologies. Dr. Schubert is a prolific inventor with 16 US and international patents and additional pending. As he has since 2001, Dr. Schubert will continue to serve as an Executive Editor for the Journal of Applied Polymer Science, the world's largest peer-reviewed scientific journal covering polymer science. Dr. Schubert holds a Bachelor of Science in Biomedical Engineering and a Ph.D. in Macromolecular Science both from Case Western Reserve University in Cleveland, Ohio.

Rory Husch – Secretary

Mr. Husch is the founder and has been the operator of a computer information system design and management company for the past eleven years.

Allen Crowley – Director

Mr. Allen Crowley has over 40 years' experience in utilities and the electricity industry; working for companies such as West Kootenay Power, Aquila Energy Canada and the Alberta Electric System Operator. He has held widely varied, senior corporate positions and consulted for electricity utilities in the areas of; utility rate making, regulation, retail and wholesale marketing and sales of energy and derivative hedging products and complex financial modeling as a function of engineering economics. He is currently V.P. Regulatory

Page 4



Solar in the US

and Canada

and Market Studies, EDC Associates Ltd.

William Richardson - Director

William Blaine "Bill" Richardson III was governor of New Mexico from 2003 to 2011. Bill Richardson was born in California but raised mostly in Mexico City. He received his bachelor's (1970) and master's (1971) degrees from Tufts University, then worked on Capitol Hill in Washington, DC. By the end of the 1970s he was a New Mexico resident with political ambitions, and in 1982 he was elected to the U.S. House of Representatives, where he served until 1997. During the administration of President Bill Clinton he served as the U.S. ambassador to the United Nations (1997-98) and as Secretary of Energy (1998-2001). After Clinton's term ended, Richardson lectured, served on corporate boards and worked as a consultant with Kissinger McLarty Associates (headed by Henry Kissinger and former Clinton chief of staff Thomas McLarty).

Although SunVault’s target market will not be restricted to the US/Canada, the following section discusses the size of the solar market in the US/Canada – as they are likely to be SunVault’s first target markets. Canada’s solar capacity totaled 827 MW in 2012, an increase of 48% over the country’s 2011 capacity of 559 MW. Solar energy consumption represented 1.3% of the total energy consumption in Canada in 2012. (Source: BP Statistical Review of World Energy June 2013) The graphs below show the average consumption and capacity per year for the US and Canada, compared to the global total from the years 1990 to 2012. As can be seen, the consumption of solar power has been on the rise since the 1990s, with major increases in recent years. Europe and Asia are the largest contributors to global consumption and capacity.

Solar Consumption (MWh)

Page 5



Solar Capacity (MWh)

Source: BP Statistical Review of World Energy June 2013

It is clear from the above charts, that solar power has been gaining popularity over the last decade, but Canada’s solar industry continues to lag relative to global capacity and consumption. The map below shows the distribution of PV capacity within Canada for 2012. Ontario is

the number one player, representing 90%+ of total Canadian capacity.

Source: National Survey Report of PV Power Applications in Canada 2012

Page 6



Existing Solar

Systems

In order to understand the inefficiencies of existing solar systems, it is important to have a look at the processes involved in a system. Solar systems are primarily categorized into three: off-grid, grid-connected, and grid-connected with battery. The grid is a local electric utility’s infrastructure that supplies electricity to homes and businesses. Off-grid systems are installed remotely in locations where there is no grid available. The diagrams of each system are shown below:

An Off Grid PV system

Source: New Mexico Solar Energy Association and Solar Energy Industry Association

A Grid- Connected System A Grid Connected System with Battery

Source: CMHC

The steps involved to convert the transient (conventional) solar input to stable energy

output is complex and expensive due to the electronics / number of components / labor

required. For the storage devices / batteries to perform efficiently, power must be delivered within a narrow window – which is done through voltage controllers. Also, the DC output from the battery has to be converted to AC before electricity is supplied to end-users. The average cost of solar systems for different sizes of homes (2KW – small home / 10KW –

Page 7



large home), as of 2009, is shown in the table below. The table is presented only for cost comparison between the three type of systems; more recent data is presented in subsequent sections.

Source: http://www.motherearthnews.com-2009

As we can see from the table above, the off-grid system is the most expensive. The total cost of the off-grid system is about 23%-30%, and 7%-8% higher than the grid connected, and the grid-connected with battery, respectively.

In the following section, we estimate the cost of a complete solar system by adding the current cost of each of the major components - inverter, solar panel, and batteries

Cost of an inverter - The average market price of an inverter in the US/Canada is currently about $0.71 per watt. Therefore, the cost of an inverter, for different home sizes, is as follows:

Cost 2kw-

small/

average

homes

5kw-

average/big

homes

10 kw-

gigantic

homes

Solar

Inverter $1,420 $3,550 $7,100

Cost of solar panels – Various sources indicate that in Q1-2013, the upfront cost of purchasing and installing a solar panel is between $5 - $7 per watt. We used the average rate of $6 per watt in our analysis:

Cost 2kw-

small/

average

homes

5kw-

average/big

homes

10 kw-

gigantic

homes

Solar Panel $12,000 $30,000 $60,000

It should be noted that the price of solar panels alone, in the US, ranged between $0.79 to $2.44 per watt – which indicates that more than half of the total price comes from installation and other costs. SunVault expects end-users of their systems to have a

significant cost reduction related to installation and electronic component elimination.

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Cost of batteries - Currently, the cost of batteries is about $100 per kilowatt-hour. Therefore, the total cost of batteries is shown below:

Cost 2kw-

small/

average

homes

5kw-

average/big

homes

10 kw-

gigantic

homes

Solar

Batteries $2,000 $4,000 $10,000

Based on all the cost inputs mentioned above, the total upfront installation cost of an

off-grid PV system is shown below:

Cost 2kw-

small/

average

homes

5kw-

average/big

homes

10 kw-

gigantic

homes

Upfront

Cost of an

Off-Grid

Solar PV

System $15,420 $37,550 $77,100

* The above table does not include costs associated the charge controller – which is not significant

relative to the total costs.

Source: Fundamental Research Corp.

Based on the above, the total upfront costs range between $7.5 to $7.7 per watt. The upfront cost of an off-grid system for homes declined by about 34% since 2009, primarily due to the decline in the cost of PV panels. SunVault’s management believes that they can

bring this cost down to under $2 per watt.

The PV Systems in solar farms are much larger in size compared to home systems. The total price of large PV systems, with a capacity 100+ KW, was between $3.37- $3.9 per watt in Q1-2013.

Payback period for solar systems

The payback period depends on the total cost per watt, the electricity cost per kWh in the area, and the average number of sunlight hours in the location. The chart below illustrates the various payback periods.

Page 9



Strategy

Products

Source: http://www.solarpanelscostguide.com/

Based on the chart above, for $7.5-$7.7 per watt (the total upfront cost of PV systems in homes), and an average electricity price of $0.55 per kWh (which is the average FIT price in Ontario for less than 10 KW project size), the payback period will be about 10 years. In contrast, SunVault believes the payback period for end-users of their products, based on the above assumptions, will be less than 2 years. SunVault’s mission is to seamlessly integrate PV energy generation and storage, at the molecular level, to significantly improve the efficiency, and reduce costs of existing solar systems. The company has devised a five step plan to achieve its mission. Each step, or

generation, will be a step towards the final product, which will be a system that

integrates generation and storage at the molecular level. The attractiveness of this approach is that the intermediary products developed in each generation have the potential for commercial sales. Management also claims that the product development for each generation will not be fully serialized – meaning the company does not have to wait for one generation to be completely developed before commencing development of subsequent generations. This allows the company to be cash-flowing, even while their main product,

or the Generation 5 product, is under development. The following section discusses the company’s five generations of products.

Generation 1 - Residential

SunVault’s objective for this generation, which will be targeting residential users, is to – 1) improve the aesthetics of existing PV cells (existing modules have glossy surfaces) by matching the color of PV cells to the background (roof), and 2) reduce the cost of storage. In this generation, the PV module and the storage device will be separate products. PV Technology - PV cells are typically black in color as black absorbs all the colors. The basic principle is the higher the light absorbed by the PV cells, the higher the energy produced. This is the reason why PV modules are never white in color as white reflects the

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entire visible color spectrum. SunVault’s goal is to develop proprietary thermoplastic films that can be applied to existing PV modules. The film will have the same color as the background, and thereby, enhance the aesthetics of the PV modules. The problem with changing the color of films, as mentioned earlier, is that light absorption might not be optimized for every color. As a result, efficiency is affected when the color of films are changed. SunVault believes that their proprietary dyes will allow them to match the color of the PV modules to the background, without significantly impacting efficiency. The proprietary dyes allow the cells to capture light from a much broader spectrum relative to existing PV cells, and partially offset the loss of efficiency due to adding the film to the surface of a solar panel. The image on the left below shows existing PV cells, while the one on the right shows PV modules, with SunVault’s film, of the same color as the background. Notice the improvement in aesthetics.

Source: SunVault Energy

The company’s partner, a technology company based in the U.S. (undisclosed due to confidentiality), is currently working on the development of the dyes for SunVault. According to management, SunVault will own the IP of the developed product. The partner will be paid a flat fee (undisclosed amount) for their R&D services. According to management, a patent application was filed on this technology. Management believes the cost for the film will be approximately $0.80/ft2, or approximately 10% of the cost of the PV module. If the company is able to develop such a solar panel, we believe it will have a lot of applications. The company can sell or license out their technology to existing glass and film manufacturers in the solar industry. The market for their films not only includes aesthetic aspects, but also the ability to use PV modules as a surface for advertising, marketing, or other display purposes.

SunVault hired a team at MIT to do an independent review of the SunVault’s

technology and business plan. Our discussions with management, and the team at MIT, indicate that the company has yet to come up with the exact formulation of the dyes.

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SunVault is not the first to ever try to develop such panels. According to the team at MIT, several companies have tried and failed. Management has not given out too much details on the state of development. Although MIT stated in their report that SVLT’s overall

product portfolio is quite appealing from a conceptual standpoint, they stated that they are “concerned about the competencies and the state of development of SVLT’s products.” MIT believes a “more substantiated analysis of the trades and benefits of the approach are needed.” Energy Storage: SunVault intends to license a patent-pending fabrication process developed by a battery manufacturing company (undisclosed due to confidentiality) for energy storage. SunVault and its partner are currently in negotiations related to an appropriate licensing fee, and/or royalties. The battery, or the energy storage device, called PolyCell™, is basically a multi-chemistry manufacturing platform that has the ability to produce any aqueous-based battery at lowest cost. The manufacturing platform utilizes a patented method to encapsulate in thermoplastic, the anode and cathode at the cell level, using the partner’s fabrication process (thermal sealing). The fabrication process allows multiple cells to be inter-connected, thereby increasing the scalability of the storage device. Lead acid based technology is ideal for this application as it is currently the cheapest technology for stationary applications. According to management, “The most immediate distinction in the PolyCell™ manufacturing format, as compared to all other formats, is the ability to

manufacture a battery up to 4 feet in diameter, 8 feet tall and 480 volts DC, without

supplementary wiring, components or secondary labor thereby greatly reducing component

costs.”

According to management, “the key feature of the PolyCell™ platform is the ability to

manufacture battery modules of any size, shape, or voltage.” – proposed images for small residential applications are shown below.


Management claims that the PolyCell™ manufacturing platform increases the cycle life of traditional lead acid batteries by a factor of 6x, which can be increased further to 10x through known techniques. According to management, pilot production samples have been demonstrated.

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According to SVLT, the current cost of the PolyCell™ battery design is $85/kWh, which can be lowered to $40/kWh through optimization. SVLT believes that, when viewed on a lifecycle basis, their storage systems will be able to store energy at a rate of less than $0.04/kWh. For comparison, lead-acid battery prices are approximately $100 per kWh, and when evaluated on a lifecycle basis, costs $0.30/kWh. Expected Development Timeline – Management estimates the total development time of this generation to be 18 months.

Generation 2 – Solar Farms

PV Technology: This generation of products will be geared to solar farms. Here, instead of aesthetics, the focus will be more on improving and optimizing the configuration of the dyes to increase the ‘light absorption’ capabilities of the solar panels. According to management, the films will provide an increase of at least 2% to the power output from existing solar farms. Energy Storage: SunVault intends to improve the PolyCell™ storage device by adjusting the following key parameters: form factor, voltage, electrodes paste, vent pressure, etc. The energy storage devices will be installed below the PV modules (as shown in the images below), which will lower the footprint of the entire system, but more importantly, control the temperature of the batteries, which has a dramatic effect on battery performance.


Expected Development Timeline- Management estimates the total development time of this generation to be 12 months. According to management, the execution of Generation 2 energy storage is expected to occur in three phases:

1) system optimization,

2) optimization of existing PolyCell™ manufacturing format, and

3) implementation of new large scale PolyCell™ manufacturing method

The first phase, system optimization, will occur using “off the shelf” components.

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According to management, they are currently in the process of securing over 200

installations of 1MW solar farms in Alberta. Further details of this initiative are unknown to us at this point. The optimization of the existing PolyCell™ format will occur simultaneously. Management expects that, in 2 – 3 years, they will be able to complete all three phases.

Generation 3

In this generation, the company intends to bring generation and storage into one single appliance. Here, the company intends to use a vertical appliance that uses conventional active PV material (coated with SunVault’s proprietary films) to generate electrical power, which is integrated with the PolyCell™. Research conducted by MIT shows (a patented concept) that 3D PV cells have two primary advantages (shown in the chart below) compared to existing horizontal 2D PV cells – higher power production per footprint, and leveling voltage and power fluctuations, due to changing intensity of sunlight (cloudy, night, etc) - which is very key to lower power conversion requirements for a solar system, as mentioned earlier. SVLT management believes that their technology does not infringe upon MIT’s patent as SVLT products have a unique orientation. We are not in a position to comment on the potential for infringement as it would be beyond the scope of this report.

Source: MIT

The following image shows the proposed design of SVLT’s vertical appliance.

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The vertical appliance will employ conventional PV blades (with film developed in previous generations) in parallel. The active PV material may be on one or both sides of the blade. The PolyCell™ will be the structural backbone of the vertical appliance. Management states that the dyes developed for Generation 1 and 2 will be further improved/configured, in this generation, to expand the range of collectible photons. The height, width, and weight of this appliance for a typical house will be 3’x 3’x 9’ (feet). MIT, in their report, expressed that they feel there is not enough quantitative analysis of the expected performance, size of the appliance, and details on whether the proposed blade design is the best and most optimized. According to management, SunVault is evaluating MIT proposals to jointly design a product format that can be commercialized. Expected Development Timeline - Management estimates the total development time of this generation to be 21 months. SunVault will partner with MIT to optimize the exact structure of the appliance. Generation 4

This is where the company will start to integrate generation and storage at the molecular level – a concept inspired by a patent-pending technology developed by the University of British Columbia. The concept is similar to photosynthesis – a process used by plants to convert light energy into chemical energy. Here, instead of lead-acid batteries, storage will be accomplished using chemical mediators. Multichromophore reaction centers (RC) will be the equivalent to PV cells.

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The blades of the vertical appliance developed in generation 3 will include both the reaction centers and the mediators. Such an integration has the potential to significantly reduce conversion electronics and associated costs. Although UBC’s technology has several advantages, including high quantum efficiency (photon to electron conversion), SunVault management believes that the protein-based RCs used by UBC has poor stability, and high cost. SunVault has contracted the previously mentioned development company to

develop a synthetic multichromophore RC (as opposed to a single phase), wherein each

chromophore will harvest its own portion of the solar spectrum – this will allow the RC

to absorb a wide spectrum. The mediators will be transparent to the solar spectrum to allow light access to the reaction centers. SunVault is currently working on developing the optimum mediator. Management does not believe there is an overlap nor potential for patent infringement, as UBC uses only liquids (as RC and mediators), while SunVault intends to use a multi-phase membrane approach. As SunVault has yet to arrive at the optimum configuration for its system, we are not in a position to speculate on whether there is potential for patent infringement. Expected Development Timeline - Management estimates the total development time of this generation to be 33 months.

Generation 5

SunVault’s ultimate goal is to store charge via the mediators in solution with the reaction centers, a single phase approach. It is an extension of generation 4, where the RCs will be in a 3D structure, which will effectively increase its concentration (the same concept as MIT’s 3D PV). The RCs will be placed in a liquid. Similar to UBC’s concept, this generation will only use liquids. Again, we are not in a position to comment on whether this will result in patent infringement. This generation is expected to have more integration between the RCs and mediators, which will result in an overall increase in efficiency. Expected Development Timeline - Management estimates the total development time of this generation to be 45 months.

MIT, although highly impressed with the innovative idea, had concerns regarding not enough quantitative analysis being supplied regarding the size requirement, design options to match the energy requirement for generations 4 and 5 – which they felt are extremely critical

Page 16



Execution

Strategy

pieces of information for the success of this technology. MIT felt that, overall, more

quantitative analysis on physical, chemical, electrical, energy, and power requirements

is needed. SunVault expects to collaborate with MIT and/or other Universities to accelerate the development of the Generation 5 product.

According to management, the company has to raise $20 million in capital to develop the five generations of products. They will need another $120k for generation 1. The company expects to complete its demonstrations of Generation 1 by Q4-2013.

According to management, the company is currently expecting investments from two

investment fund management firms - Radiant Investment Management Inc. (an investment management company based out of Toronto, with about $30 million in assets under management) and Jordan Advisory Service Inc. (an investment management firm based out of Vancouver). According to management, both Radiant and Jordan are looking to create two separate investment funds that could potentially invest in Sun Vault. Details of the amount/type of investments are unknown at this moment.

SunVault intends to commercialize its products through three different divisions /avenues:

1. SunVault Energy Materials

2. SunVault Energy Storage Systems

3. SunVault Energy Appliances

A brief explanation of the business strategy of each division / avenue follows:

Materials – The company’s strategy here is to market its “All-in-One” technology, as the name suggests, which will include one single unit that can store and create energy simultaneously at the molecular level. Based on the system that they have developed so far (see image below), the company believes the earliest adopters could be businesses in the remote sensor / display / medical device markets. According to management, the company is in the process of entering into a Development Agreement with an international producer of dye-sensitized solar cells (DSSC). The two entities, jointly, intend to supply the remote sensor, displays, medical devices markets, etc.

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Source: SunVault website

According to Pike Research, the remote sensing power market currently generates

$770 million in annual revenues globally, with the potential to grow to $1.5 billion by

2020 (see chart below). Pike also estimates that, by 2020, approximately 27,000 remote sensing systems, based on renewable and alternative energy, will be delivered annually.

Management believes that commercialization of their products in the remote sensing and medical device markets, will eventually enable them to break into larger-scale electrical utility, industrial, commercial and residential applications, by removing traditional solar panels on the roof, wiring, connections, batteries in the basement, charge controllers, and most importantly, the high labor costs.

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Financial

Projections

Storage Systems – In this segment, Sun Vault’s strategy is to market its energy storage solutions, PolyCell™, to solar and wind farms in deregulated markets, starting with Alberta. Deregulated markets allow for energy arbitrage – which is, basically, storage when energy prices are low, and then sell when prices are higher. According to management, their high-efficiency ,and lower cost batteries, should enable them to store energy at a reasonable cost, and sell energy when prices are high. Management’s initial plan is to install their storage systems at 200, 1 MW sites in Alberta. Management believes their two new additions to the board, William (Bill) Richardson and Mr. Allen Crowley, will play a crucial role in the roll-out of this strategy. Management has not provided us any evidence of the potential to deploy their systems at 200 sites. Therefore, we are not in a position to comment on the outcome of this initiative. Appliances – This is the company’s solution (the vertical appliances described in detail earlier in the report) for the larger-scale applications mentioned above. The following section shows the expected cash flows from the execution of the three strategies described above. 1) Materials and Appliances - Our cash flow projections are based on a percentage of the entire solar market, captured by the company in the US and Canada only. The total capacity in the US/Canada is currently 8,139 MW. If SunVault captures 1% market share in the first 10 years of operations, the cash flows will be as follows. As details of the sales price / margins, for the products supplied to remote sensor / display / medical device markets are unclear at this moment, we chose to use the potential pricing / margins of the appliances for the projections below.

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10

1 2 3 4 5 6 7 8 9 10

System Cost ($/W) 2.75 2.75 2.75 2.75 2.75 2.75 2.75 2.75 2.75 2.75

Total MW 8 16 24 32 40 48 56 64 72 80

Revenues $22,000,000 $44,000,000 $66,000,000 $88,000,000 $110,000,000 $132,000,000 $154,000,000 $176,000,000 $198,000,000 $220,000,000

COGS $13,200,000 $26,400,000 $39,600,000 $52,800,000 $66,000,000 $79,200,000 $92,400,000 $105,600,000 $118,800,000 $132,000,000

Gross Profit $8,800,000 $17,600,000 $26,400,000 $35,200,000 $44,000,000 $52,800,000 $61,600,000 $70,400,000 $79,200,000 $88,000,000

Selling, General and Administrative $4,400,000 $8,800,000 $13,200,000 $17,600,000 $22,000,000 $26,400,000 $30,800,000 $35,200,000 $39,600,000 $44,000,000

EBITDA $4,400,000 $8,800,000 $13,200,000 $17,600,000 $22,000,000 $26,400,000 $30,800,000 $35,200,000 $39,600,000 $44,000,000

Tax $1,320,000 $2,640,000 $3,960,000 $5,280,000 $6,600,000 $7,920,000 $9,240,000 $10,560,000 $11,880,000 $13,200,000

Net Income $3,080,000 $6,160,000 $9,240,000 $12,320,000 $15,400,000 $18,480,000 $21,560,000 $24,640,000 $27,720,000 $30,800,000

The following assumptions were made: - SunVault will receive $2.75/W installed as revenues - Gross margins of 40% (provided by management)

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- Selling, General and Administrative expenses of 20% of revenues

- SunVault will own and/or have unrestricted access to all the associated IPs - We have not accounted for licensing / royalty costs, as they are unknown at this point. If SunVault captures 10% market share in the first 10 years of operations, the cash flows will be as follows:

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10

1 2 3 4 5 6 7 8 9 10

System Cost ($/W) 2.75 2.75 2.75 2.75 2.75 2.75 2.75 2.75 2.75 2.75

Total MW 80 160 240 320 400 480 560 640 720 800

Revenues $220,000,000 $440,000,000 $660,000,000 $880,000,000 $1,100,000,000 $1,320,000,000 $1,540,000,000 $1,760,000,000 $1,980,000,000 $2,200,000,000

COGS $132,000,000 $264,000,000 $396,000,000 $528,000,000 $660,000,000 $792,000,000 $924,000,000 $1,056,000,000 $1,188,000,000 $1,320,000,000

Gross Profit $88,000,000 $176,000,000 $264,000,000 $352,000,000 $440,000,000 $528,000,000 $616,000,000 $704,000,000 $792,000,000 $880,000,000

Selling, General and Administrative $44,000,000 $88,000,000 $132,000,000 $176,000,000 $220,000,000 $264,000,000 $308,000,000 $352,000,000 $396,000,000 $440,000,000

EBITDA $44,000,000 $88,000,000 $132,000,000 $176,000,000 $220,000,000 $264,000,000 $308,000,000 $352,000,000 $396,000,000 $440,000,000

Tax $13,200,000 $26,400,000 $39,600,000 $52,800,000 $66,000,000 $79,200,000 $92,400,000 $105,600,000 $118,800,000 $132,000,000

Net Income $30,800,000 $61,600,000 $92,400,000 $123,200,000 $154,000,000 $184,800,000 $215,600,000 $246,400,000 $277,200,000 $308,000,000

The following table shows the expected Enterprise Value (EV) based on different discount rates and market share assumptions.

94,519,772 1% 2.00% 3.00% 4.00% 5.00% 6.00% 7.00% 8.00% 9.00% 10.00%

5% $149,634,043 $299,268,087 $448,902,130 $598,536,173 $748,170,217 $897,804,260 $1,047,438,303 $1,197,072,347 $1,346,706,390 $1,496,340,434

10% $94,519,772 $189,039,544 $283,559,315 $378,079,087 $472,598,859 $567,118,631 $661,638,403 $756,158,175 $850,677,946 $945,197,718

15% $69,657,919 $139,315,838 $208,973,757 $278,631,676 $348,289,595 $417,947,514 $487,605,433 $557,263,353 $626,921,272 $696,579,191

20% $53,482,855 $106,965,709 $160,448,564 $213,931,419 $267,414,274 $320,897,128 $374,379,983 $427,862,838 $481,345,692 $534,828,547

25% $42,208,223 $84,416,445 $126,624,668 $168,832,891 $211,041,113 $253,249,336 $295,457,559 $337,665,781 $379,874,004 $422,082,227

30% $34,062,739 $68,125,478 $102,188,216 $136,250,955 $170,313,694 $204,376,433 $238,439,171 $272,501,910 $306,564,649 $340,627,388

35% $28,021,636 $56,043,273 $84,064,909 $112,086,545 $140,108,182 $168,129,818 $196,151,454 $224,173,091 $252,194,727 $280,216,363

40% $23,442,616 $46,885,233 $70,327,849 $93,770,466 $117,213,082 $140,655,699 $164,098,315 $187,540,931 $210,983,548 $234,426,164

45% $19,905,132 $39,810,264 $59,715,396 $79,620,528 $99,525,660 $119,430,792 $139,335,924 $159,241,056 $179,146,188 $199,051,320

50% $17,125,383 $34,250,766 $51,376,149 $68,501,532 $85,626,915 $102,752,298 $119,877,681 $137,003,064 $154,128,447 $171,253,830

Market Share

Discount

Rate

2) Energy Storage Systems – although the company believes they can target all the deregulated markets in the world, for conservatism, we have only included projections for the proposed initiative in Alberta.

- SunVault’s cost for a 200 kWh unit - $43.4k (according to management) - Management estimates net cash flows of $133k (over a 10 year period) for each 200

kWh installation

The table below shows the EV based on the above assumptions.

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Risks

Conclusion

$45,822,751 50 100 200 400 800 1,600

5% $13,741,729 $27,483,458 $54,966,915 $109,933,831 $219,867,661 $439,735,323

10% $11,455,688 $22,911,375 $45,822,751 $91,645,501 $183,291,002 $366,582,004

15% $9,782,102 $19,564,205 $39,128,409 $78,256,819 $156,513,637 $313,027,274

20% $8,526,850 $17,053,700 $34,107,399 $68,214,798 $136,429,596 $272,859,193

25% $7,564,437 $15,128,875 $30,257,750 $60,515,499 $121,030,999 $242,061,998

30% $6,811,697 $13,623,395 $27,246,789 $54,493,578 $108,987,156 $217,974,312

35% $6,212,232 $12,424,463 $24,848,926 $49,697,852 $99,395,705 $198,791,409

40% $5,726,975 $11,453,950 $22,907,900 $45,815,801 $91,631,602 $183,263,203

45% $5,328,331 $10,656,662 $21,313,324 $42,626,647 $85,253,295 $170,506,590

50% $4,996,444 $9,992,888 $19,985,777 $39,971,554 $79,943,107 $159,886,215

Discount Rate

No. of 1 MWh installations

The following risks, though not exhaustive, may cause our estimates to differ from actual results:

• The company is in early R&D stages with respect to its flagship technology.

• The team at MIT feels that many of the details provided are based on expectations rather than solid and proven technologies.

• The core technologies used by SunVault are based on technologies developed by third-parties. Management does not believe they will be infringing any patents, or have any IP related concerns.

• Access to capital and share dilution

• Management is heavily experienced in battery / storage devices; their experience with solar devices is not as extensive.

Overall, we believe SunVault offers a very unique value proposition. Management’s long experience with Energizer (NYSE: ENR), and relationships with major Universities and industry players are major strengths. However, the company is in very early stages of development with regard to its flagship technology, and we cannot speculate at this time if and when they will get any traction in the market with their products.

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Fundamental Research Corp. Equity Rating Scale:

Buy – Annual expected rate of return exceeds 12% or the expected return is commensurate with risk Hold – Annual expected rate of return is between 5% and 12% Sell – Annual expected rate of return is below 5% or the expected return is not commensurate with risk Suspended or Rating N/A— Coverage and ratings suspended until more information can be obtained from the company regarding recent events.

Fundamental Research Corp. Risk Rating Scale:

1 (Low Risk) - The company operates in an industry where it has a strong position (for example a monopoly, high market share etc.) or operates in a regulated industry. The future outlook is stable or positive for the industry. The company generates positive free cash flow and has a history of profitability. The capital structure is conservative with little or no debt.

2 (Below Average Risk) - The company operates in an industry where the fundamentals and outlook are positive. The industry and company are relatively less sensitive to systematic risk than companies with a Risk Rating of 3. The company has a history of profitability and has demonstrated its ability to generate positive free cash flows (though current free cash flow may be negative due to capital investment). The company’s capital structure is conservative with little to modest use of debt. 3 (Average Risk) - The company operates in an industry that has average sensitivity to systematic risk. The industry may be cyclical. Profits and cash flow are sensitive to economic factors although the company has demonstrated its ability to generate positive earnings and cash flow. Debt use is in line with industry averages, and coverage ratios are sufficient. 4 (Speculative) - The company has little or no history of generating earnings or cash flow. Debt use is higher. These companies may be in start-up mode or in a turnaround situation. These companies should be considered speculative. 5 (Highly Speculative) - The company has no history of generating earnings or cash flow. They may operate in a new industry with new, and unproven products. Products may be at the development stage, testing, or seeking regulatory approval. These companies may run into liquidity issues, and may rely on external funding. These stocks are considered highly speculative.

Disclaimers and Disclosure

The opinions expressed in this report are the true opinions of the analyst about this company and industry. Any “forward looking statements” are our best estimates and opinions based upon information that is publicly available and that we believe to be correct, but we have not independently verified with respect to truth or correctness. There is no guarantee that our forecasts will materialize. Actual results will likely vary. The analyst and Fundamental Research Corp. “FRC” does not own any shares of the subject company, does not make a market or offer shares for sale of the subject company, and does not have any investment banking business with the subject company. Fees were paid by SVLT to FRC for one report. The purpose of the fee is to subsidize the high costs of research and monitoring. FRC takes steps to ensure independence including setting fees in advance and utilizing analysts who must abide by CFA Institute Code of Ethics and Standards of Professional Conduct. Additionally, analysts may not trade in any security under coverage. Our full editorial control of all research, timing of release of the reports, and release of liability for negative reports are protected contractually. Distribution procedure: our reports are distributed first to our web-based subscribers on the date shown on this report then made available to delayed access users through various other channels for a limited time. The performance of FRC’s research is ranked by Investars. Full rankings and are available at www.investars.com. The distribution of FRC’s ratings are as follows: BUY (68%), HOLD (8%), SELL (5%), SUSPEND (19%).

To subscribe for real-time access to research, visit http://www.researchfrc.com/subscribe.php for subscription options. This report contains "forward looking" statements. Forward-looking statements regarding the Company and/or stock’s performance inherently involve risks and uncertainties that could cause actual results to differ from such forward-looking statements. Factors that would cause or contribute to such differences include, but are not limited to, continued acceptance of the Company's products/services in the marketplace; acceptance in the marketplace of the Company's new product lines/services; competitive factors; new product/service introductions by others; technological changes; dependence on suppliers; systematic market risks and other risks discussed in the Company's periodic report filings, including interim reports, annual reports, and annual information forms filed with the various securities regulators. By making these forward looking statements, Fundamental Research Corp. and the analyst/author of this report undertakes no obligation to update these statements for revisions or changes after the date of this report. A report initiating coverage will most often be updated quarterly while a report issuing a rating may have no further or less frequent updates because the subject company is likely to be in earlier stages where nothing material may occur quarter to quarter. Fundamental Research Corp DOES NOT MAKE ANY WARRANTIES, EXPRESSED OR IMPLIED, AS TO RESULTS TO BE OBTAINED FROM USING THIS INFORMATION AND MAKES NO EXPRESS OR IMPLIED WARRANTIES OR FITNESS FOR A PARTICULAR USE. ANYONE USING THIS REPORT ASSUMES FULL RESPONSIBILITY FOR WHATEVER RESULTS THEY OBTAIN FROM WHATEVER USE THE INFORMATION WAS PUT TO. ALWAYS TALK TO YOUR FINANCIAL ADVISOR BEFORE YOU INVEST. WHETHER A STOCK SHOULD BE INCLUDED IN A PORTFOLIO DEPENDS ON ONE’S RISK TOLERANCE, OBJECTIVES, SITUATION, RETURN ON OTHER ASSETS,

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Documents

Sunvault Energy - AUG 2013 - Baystreet€¦ · service with Energizer Holdings Inc. where he spent the latter portion of his career serving as Director-Strategic Ventures. While at