CEO Commentary

STATUS REPORT   -   16.01.2013


The year 2012 was characterised by significant changes within the Company. The new strategic orientation of iQ Power AG with a view to becoming a pure technology company that markets its developments in the form of licences was resolved and largely implemented in 2012.

With this move, the Company is returning to its original business model. However, the detour via a company with in-house production was necessary, as this was the only way to persuade the market of the quality of the technologies developed and the battery products based on them, to generate a correspondingly high degree of attention and sustained strong demand on the market and, ultimately, to win over a growing number of battery producers as licence partners for the technology and its benefits.

The reorientation of iQ Power AG and the resulting disposal of operating units by way of management buy-outs (MBO) led to a significant streamlining of the Company’s cost structure and a considerable reduction in risk.

In future, the success of iQ Power AG will depend on the success of its licensees and further in-house developments in the area of energy storage technology.

To this end, we are working on the continuous improvement and optimisation of our core technology, while simultaneously continuing with our patent pipeline strategy. Significant progress in this area led to a new patent application in the fourth quarter of 2012 that will open up new potential for iQ Power AG. Further patent applications will follow in 2013. We are also investigating other energy storage technologies.

Strategy

This year, iQ Power will further expand the reorientation of the Company that began in 2012. The improved new construction iQP-2 â€" a mixing unit with passive mix elements for flooded batteries â€" is the subject of a patent application and will open up entirely new opportunities for the battery production of our licence partners and for iQ Power AG and its business model.

The new iQP-2 design will enable battery producers to use iQ Power’s mixing technology directly in their batteries without having to make any adjustments or changes to their tools. Whereas licence partners were previously required to make cost-intensive shape adjustments, this will not be necessary in future thanks to the new design and the universal solution it provides. The parts in the new iQP-2 design are not affected by how the respective battery producers have designed the interior of their products. This will also immediately remove the inhibitions on the part of potential licensees who were put off by the need for adjustments to their products.

The new universal solution covers around 85% to 90% of the battery designs on the market. Adjustments will be necessary in exceptional cases only and will not relate to the interior design of the battery itself, but instead can be implemented quickly and simply on the design of the iQP-2 components.

With this in mind, iQ Power has resolved to expand its business model in an appropriate manner: as well as marketing the technology in the form of licences, in future iQ Power will also centrally produce and market all of the plastic components for the mixing units based on the new iQP-2 design. Licensees will order and purchase the components from iQ Power. Manufacturing and logistics for the plastic components will be performed by third parties.

This strategy has many benefits for licensees and iQ Power AG alike: Licensees will not have to invest in the development of moulding tools and the production of iQ components, but instead can offer their customers the full range of batteries with electrolyte mixing using iQ Power technology right from the start. And, of course, licensees can also be safe in the knowledge that the components purchased via iQ Power meet the latter’s quality standards.

In the same way, this move ensures that iQ Power retains control over its technology and how it is used. For the Company, the central marketing of components will represent an additional source of income â€" as well as raising the barriers for product piracy.

The three internationally established standard series of starter batteries in accordance with the DIN/EN (Europe), JIS (Japan) and BCI (North America) standards give rise to around 50 different construction designs. The financing required for the manufacture of the necessary moulding tools for these variants has already been secured through the new capitalisation measure (see below).

Licensing business

As of the start of 2013, iQ Power AG has licence agreements and preliminary licence agreements in all of the world’s major markets. The licensees vary in terms of their orientation and brand awareness. The Brazilian manufacturer Moura and the Austrian manufacturer Banner are established suppliers of original equipment and are also active in the aftermarket, while iQ Power Asia in South Korea, Smart Battery in the USA, Zhersu Power in Kazakhstan and Interbat in Slovenia are exclusively manufacturers with a focus on the aftermarket.

In 2013, iQ Power will primarily generate licence income from iQ Power Asia and Smart Battery. iQ Power Asia is currently in the process of relocating its lead plate manufacturing from Malaysia to the battery plant in South Korea in order to bring together all of the production steps under one roof. Production has been temporarily suspended and is expected to resume in March. Despite this interruption, demand for the products of iQ Power Asia remains lively, thereby ensuring that the production facility will have a high utilisation rate once it comes back online. According to the latest information, Smart Battery in the USA will start to deliver its first products in the first quarter of 2013. If both licence partners meet their targets, iQ Power AG will report a profit on a monthly basis by the end of 2013.

In Kazakhstan, the licensee Zhersu Power is working towards starting production this year. The manufacturers of initial equipment Moura and Banner will continue and/or begin testing and integration work in 2013. The management of iQ Power does not expect to generate income from either of these manufacturers in 2013.

Capitalisation measures

The successful completion of the capital increase in the fourth quarter of 2012 has stabilised iQ Power AG’s medium-term liquidity position. The full subscription of the capital increase was ensured through the conclusion of an investment agreement. The details of this agreement are subject to strict confidentiality, but the key elements were announced in a press release on 17 December 2012.

The option to purchase iQ Power AG’s shares in iQ Power Asia Inc. and the approval of a further round of financing at similar conditions to the last capital increase that are contained in the agreement must be considered in their entirety. Although iQ Power AG will lose its interest in the potential future profits of iQ Power Asia Inc., it will also be freed from the financial risks as it will not be impacted by future investments in the expansion of production in South Korea.

iQ Power AG is also receiving strong financial support. In the past, a lack of financial stability led to serious restrictions on the Company’s scope of action.

As announced in December, a further capital increase involving voting and preference shares is planned. Accordingly, an Extraordinary General Meeting is likely to be held in the second half of February in order to resolve the necessary changes to the Articles of Association. Details of the capital increase will be announced once all of the technical details have been clarified and the Board of Directors has officially resolved the measure. The capital increase will be used to repay all of the outstanding debts and liabilities of iQ Power AG and to finance the Company’s strategic expansion as described above. Accordingly, the coming capital increase will be larger than the capital increase implemented in 2012. Subscription rights will be granted to all shareholders. If the exercise of subscription rights is not sufficient to ensure the full subscription of the capital increase, all of the remaining shares will be fully subscribed under the terms of the agreement as mentioned on 17 December 2012.

Summary

The reorientation of iQ Power AG in 2012 means that the Company can now focus fully on its technology with the benefit of sufficient financial support and without the burden of in-house battery production. Trends in the automotive industry, such as stop-start applications, combined with the benefits of electrolyte mixing technology for starter batteries that are now generally confirmed and proven on the market and the importance of products with environmentally friendly characteristics are playing into the hands of iQ Power, as are the rapidly growing demands of emerging economies in terms of quality products using state-of-the-art technology.

Charles Robert Sullivan
CEO, iQ Power AG



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