Greetings, and welcome to Electrovaya First Quarter 2018 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Richard Halka, Executive Vice President and Chief Financial Officer for Electrovaya. Thank you. You may begin.
Thank you, Operator. Good morning, everyone, and thank you for joining us on today's conference call to discuss Electrovaya's First Quarter 2018 Financial Results. Today's call is being hosted by Dr. Sankar Das Gupta, CEO of Electrovaya, and myself, Richard Halka, EVP and CFO. On February 14th, Electrovaya issued a press release concerning its business highlights and financial results for the three months ended December 31st, 2017. If you would like a copy of the release, you can access it on our website. If you would also like to view our financial statements, management discussion and analysis, you can access those documents on the SEDAR website at www.sedar.com. As with previous calls, our comments today are subject to the normal provisions relating to forward-looking information.
We will provide information relating to our views regarding trends in the market, including the size and potential for growth and our competitive position in our target markets. Although we believe that expectations reflected in such forward-looking statements are reasonable, such statements involve risks and uncertainties, and actual results may differ materially from those expressed or implied in such statements. Additional information about factors that could cause actual results to differ materially from expectations and about material factors or assumptions applied in making forward-looking statements may be found in the company's press release announcing the first quarter results and the most recent annual information form and management's discussion and analysis under risks and uncertainties, as well in other public disclosures documents filed with Canadian Securities Regulatory Authorities. Also, please note that all the numbers discussed in this call are in U.S. dollars, unless otherwise noted.
Now let me turn the call over to Dr. Sankar Das Gupta, CEO of Electrovaya.
Thank you, Richard, and good morning, everyone. Thank you for taking the time to listen in on our Fiscal First Quarter Results Conference Call. I want to begin by discussing Litarion. As you know, we announced a voluntary preliminary structured insolvency process for the German subsidiary last month on January 25th, 2018. While the initial market reaction to this news was negative, this course of action, we believe, was absolutely the correct one for Electrovaya's long-term financial health. Moreover, it was necessary to position the company for future success. Let me now provide some context so that you all understand why we made this decision and why it is so important for the future of the company. Let's begin with the financial performance.
Litarion was creating a large cash drain on Electrovaya, and then we had complex difficulties with our landlord, who was one of the founders of the Kamenz complex, that we had no option but put Litarion into a voluntary preliminary insolvency. What is now the consequence of Litarion's insolvency to Electrovaya? As we noted in yesterday's news release, the cash burn or cash usage at Litarion was $17.5 million last year and $1.8 million in Q1 2018. By removing Litarion from our books, our operating results improved dramatically, and we are much closer to profitability. We had an operating loss of $2.7 million in the first quarter with Litarion stripped out. The loss from Litarion's discontinued operations was $12.5 million, but this loss disappears in future periods.
With these costs no longer appearing on our income statements, we are significantly closer to reaching breakeven. Now, let me step back and provide a little perspective. When we purchased Litarion in 2015, we saw it was a best-in-class plant with strong electrode and separator production capacity. Working with Litarion helped us to develop our industry-leading lithium iron battery products. It was an important period in Electrovaya's evolution. However, as you know, the high volume orders for Litarion from European OEMs and other large customers have taken longer than expected to materialize. We cannot predict the timing of the OEMs. The simple fact was that Litarion had a great deal of excess capacity that we don't need. It made no sense from a strategic standpoint to carry so much capacity while the markets for our products are still developing.
It just meant that we would continue to incur large losses that would affect our financial position and results. We also determined that at this point in our development, we no longer need to own contract manufacturing facilities to manufacture components like electrodes and separators. Litarion's business of manufacturing electrodes and separators is becoming commoditized and low margin, and requires very high volumes to sustain the operating costs. The future of Electrovaya is delivering complete lithium-ion battery products to large global customers. It is not in commoditized electrode and separator production. We no longer control the intellectual property tied to Litarion's separator as a result of this decision, and this is not essential to Electrovaya.
Let me assure everyone that we are continuing to supply batteries to customers with no material disruption to our business, and we retain very significant amounts of IP tied to our electrode, cell, and battery technology. We can continue to purchase ceramic separators from Litarion as we have been doing. In addition, we can now extend purchases to other global manufacturers in our supply chain. We have evaluated ceramic separators being produced globally and have identified others that are compatible with our battery systems. Buying from manufacturers in Asia has the potential to reduce cost and shorten lead times significantly, and it will not have any negative impact on our product quality or product performance. We are confident that we can fulfill large customer orders in the future without the need to own a plant making components.
Much like the change in the semiconductor industry, where the designers went from processing microprocessors in their own billion-dollar fab plants to now a fabless processing facility where they do not own the fab plant. This is a fabless battery production where we do not carry extraneous overheads. Obviously, this is not the outcome we envisioned when we purchased Litarion, we have emerged from this process with an outstanding line of lithium-ion battery products to power material handling electric vehicles. We now have an asset-light operating model, which is supported by an outstanding supply chain. We are confident that this restructuring puts us on a sounder financial footing and in a strong position to benefit from emerging customer demand. I will now turn the call over to Richard to review our first fiscal first quarter financial highlights in greater detail. Richard?
Thank you, Sankar. As you saw in our news release yesterday, Litarion is included in our Q1 financial statements as discontinued operations. When I refer to discontinued operations, I am specifically talking about Litarion. When I discuss operating results, that excludes Litarion and only includes continuing operations. Revenue for the three months ended December 31st, 2017, was approximately $750,000 or 3/4 of a million dollars. This was similar to the $0.73 million we reported for the first quarter last year. Two of our customers each represented more than 10% of total revenue during Q1 2018, and about 85% of our revenue came from materials handling vehicle sector. Quarterly revenue is obviously very dependent on sales timing and delivery.
I would note that we only recorded a small amount of revenue from the Walmart Canada order during Q1. The bulk of it, about 90%, will be recognized during the second quarter. As a reminder, that order is worth CAD 4.3 million. The operating loss in Q1 was $2.7 million, up from $0.9 million last year. This was primarily due to higher G&A and finance costs relative to a year ago. The loss from discontinued operations was $12.5 million compared to $1.6 million in Q1 2017. Put together, the company recorded a loss of $15.2 million or $0.10 per share, up from $2.4 million or $0.03 per share. Inventory was $3.5 million as at December 31st, 2017.
That compares to $4.1 at September 30th, 2017, which was our fiscal year-end. We drew down stocks during Q1 2018 for order fulfillment. Turning to our balance sheet, we ended the first quarter with $1.2 million of cash, $1 million of restricted cash, and $0.9 million of trade and other receivables. We're continuing to manage our working capital very carefully during this period of relatively low revenue as we wait for battery sales to accelerate. One thing that should improve our working capital position significantly is a planned sale of our head office building in Mississauga. I'd like to provide an update on that process. Last year, we agreed to sell the facility, then lease back a portion of it for nine months. The sale was expected to close the end of February.
The purchaser asked for an extension on closing as it needed additional approvals to operate the premises. We decided that since this was an unsolicited approach, we would be better off listing the building for sale and evaluating all the potential offers. As of February 9th, the property is listed with an asking price of CAD 24.9 million, which our broker believes is a reasonable value. Following the sale, we expect to either lease back a portion of the property or move to other leased premises. As I noted last quarter, we're in a period in our business cycle in which liquidity is tighter than normal. We expect our working capital position to improve as we deliver more orders. I'll now turn the call back to Sankar to wrap up.
Thank you, Richard. It is important to understand that we are a technology company offering a brand-new line of products in an emerging market. Our lithium-ion battery systems have superior technology that dramatically improves the safety and cycle life of material handling vehicles. We believe no one else has produced motive power lithium-ion batteries for this industry that are comparable to Electrovaya's, and customers are not going to adapt to them overnight. It takes time for them to test and validate our products. This is a process we have gone through over the last year. We have now received validation from many large Fortune 500 companies, and that gives us confidence that we are going to see much stronger order volume in 2018 and beyond. There is an enormous opportunity in this materials handling electric vehicle sector with a large addressable market.
The application is mission-critical for the users. Often, the vehicles are working round the clock, three shifts, and six or seven days a week. The batteries are charged and discharged multiple times every day in the electric vehicle. Only the fittest battery survive the brutal testing and operation. A vast majority of all forklifts currently in use are electric and lead-acid battery-powered. The market is demanding higher performance motive power. Hence, you saw the initial interest in fuel cell-powered forklifts, and now we are coming in strong. Despite our small size, we believe we are the leading provider of lithium-ion batteries for this market in North America. The reason is superior performance and higher productivity for the operations in e-commerce and logistics. The return on investment is attractive.
As customers continue to experience the difference these batteries can make for them, we believe they will want to outfit entire fleets of forklifts with Electrovaya's products. Take Walmart, for example. They are replacing the lead-acid batteries at one of their distribution centers with our lithium-ion batteries. We believe that this will be the single largest fleet of forklifts in North America that is powered by lithium-ion batteries. Walmart has possibly more than 150 distribution centers. If one of those centers is generating stronger operating performance out of their forklifts, we expect that others would begin to take note. The same goes for other major companies that have a very large number of distribution centers, many of whom are already using and validating our batteries.
We are focus only on this forklift market opportunity, there are, we believe, approximately 5,000 distribution centers in the U.S. and growing as e-commerce and logistics industry becomes larger and need to be competitive and efficient. The industry is also conservative. We are getting good traction, and five U.S. Fortune 500 companies and others have started issuing purchase orders to us. At the same time, we are also excited about the potential for OEM orders in North America. The OEMs are continuing to develop new products and markets using our batteries. Their markets are evolving slowly. Thanks to our forklift products, there is a potential for much stronger sales in the near term, even without a substantial contribution from OEMs.
As I said earlier, we are moving forward with an asset-light model that will minimize our operating costs, but not affect our ability to meet rising demand from customers, as outsourced manufacturing is very scalable. We can handle significant sales growth in both the immediate term and in the longer term as the markets for our products continue to mature. The last few months have been a very frustrating time for shareholders. I am a significant shareholder, I have shared in the pain. The restructuring and rightsizing of our operations were necessary decisions for the long-term health of Electrovaya. I'm more confident than ever in our technology and believe we have an outstanding future ahead of us. That concludes our remarks this morning. Richard and I would now be pleased to answer any questions you may have. Sherry, please open the line to questions.
Yes, thank you. At this time, we'll be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is from Carter Driscoll with B. Riley FBR. Please proceed with your question.
Good morning, Richard. Good morning, Sankar.
Morning, Carter.
Help me understand, just the mechanics of the process with Litarion, in terms of your decision to shutter versus the landlord trying to force reclamation of the asset. In conjunction with that, you know, when you acquired Litarion, you talked, you know, I think at length with the differentiation of the separator material and the, you know, the properties being key for battery differentiation. Is it the fact that other ceramic separators have caught up to the technology that they had, or is it not as valuable as you once thought it was? I have a couple follow-ups. Thank you.
Carter, I'll just start, and then I'll leave the separator question.
Sure
-to Sankar, being the scientist here. It was basically a sequence of events that unfolded in Germany. Essentially, the standoff with the landlord was the straw that broke the camel's back. In order to protect shareholders' value in terms of our assets over there, we had to go into this involuntary preliminary insolvency. They appoint a administrator from the government who is not actually running the operations, but all decisions have to be approved by him. We'd like to do in that period is an M&A process has been started. We would, you know, like to see the asset sold to someone who can provide the volume, and then our objective would be to seek a supply contract.
This will unfold over, you know, these things can take quite a while, but over the next few months. Essentially, yes, it was our hand was more or less forced to protect our position over there. Now I'll turn it over to Sankar on the separator question.
Carter, the Litarion, the ceramic separator, we like it. It's an excellent separator. Before we owned the Litarion separator, it was owned by another large German company. The problem they tried to market the Litarion separator to a large number of lithium-ion battery users. The problem we figured out was the usability of the separator was very difficult to use in the machinery. Litarion separator was never a mainstream product for the lithium-ion batteries. Where we did some good work with Litarion folks, is we figured out how to use that ceramic separator in a lithium-ion battery cell. That technology, that was a very important development, I believe, over the last two years.
Like all technologies, in addition to Litarion, there has been others who also tried to produce ceramic separators. None of them have any large market or any market share whatsoever because the difficulty of using that separator. Now we are in a situation where, yes, we can buy from Litarion, or we can buy from other ceramic separator companies, none of whom have any market share. We know how to use those separators in manufacturing and putting together cells. We are in a very good position that we can not only buy from Litarion, but from other ceramic separators and produce that high quality, safety, and more important, cycle life in lithium-ion batteries.
All right. Wait. I have two follow-ups just to that point. The first is, Litarion is gonna continue to operate while in their insolvency, there is some level of supply available to you of that separator. Second point is, you know, separators are not easily interchangeable. Typically, it's a complete rebuild of a product, especially for critical applications such as mobile usability or ones that, you know, as you said, alluded to earlier, have heavy-duty cycles, especially in material handling. Have you specifically tested replacement ceramic separators in products that are in customers' hands today?
We have been building complete cells with alternative components. You know, the separator is just one component. Carter, it's not difficult. It's actually absolutely one-to-one replaceable. The cells are performing slightly better than what we had before, and I'll tell you why, is because we have cut down the shipping time for materials coming across from Asia to Europe and then going back to Asia. We are finding there's a less parasitic reaction going on, and the product is actually slightly superior. We are saying it's the same.
Okay. Maybe switching gears a little bit. I guess the first component of, you know, liquidity is clearly a pressing issue right now. You know, the sale of the headquarters, you know, would go a long way to relieving some of that pressure. Do you have a realistic timeframe as to when you may be able to effect a transaction or a specific deadline versus what you can pull from your working capital internally? Within that working capital balance today, how much is, you know, finished product, you know, that you could turn into orders, you know, without having to build through the supply chain?
Just trying to get a sense of, you know, moving parts and where the liquidity stands, because it sounds like it depends, at least in the near term, on the sale of the headquarters in Mississauga.
It's Richard here, Carter. The building's getting a great deal of interest. There's not a lot of buildings of this size and nature on the market. We've worked with the real estate agent to develop a 90 - 120day plan. I think that we would expect over that sort of course of time that we would be able to close a deal. It's very early days. We shall see. In terms of where we stand, basically most of our stock is sitting in semi-finished. What I would mention is that we have stock as well, available to us through the supply chain, and we can still purchase stock from Litarion.
We see for the foreseeable future that we are, that our supply channel is robust and will be able to meet any orders that come in.
Yes. Carter, you know, our sales are increasing. As we said that one of the large orders, we only supplied 10% last quarter. That's a $4.3 million order amongst the five Fortune 500 companies. We see the Q2 to be a good growth prospect.
Maybe my last question just in terms of the pending sale of the headquarters. Is there any covenants that either have been tripped by Litarion's insolvency and/or a potential sale, and/or do some of the proceeds potentially go to retiring some of the debt? I'm just trying to get a sense of, you know, who's in line in the pecking order for the cash proceeds potentially.
Carter, that's a good point. As we are in sort of a restructuring period here to go into an asset light, what we wanna do is use a substantial amount of the proceeds to pay down our debt level. You know, interest is expensive. For the size of the organization, we are quite highly levered, we wanna get those debts down. We're working with all of our lenders to ensure they're well in the loop and on board with the process that we are undertaking here.
As far as you're aware, are there no particular covenants that have been tripped by moving towards the headquarter sale? I mean, it's your main fixed asset.
No. No. There has been nothing. They are supportive because of what I said, you know. Basically, they see that this is a good idea, that, you know, it gets the debt level down, and they're supportive of that.
Okay. Maybe Sankar, are you talking about within Walmart, what class of Walmart Canada, what class of material handling trucks that they are using at that first deployment?
It, you know, all our five Fortune 500 companies, they're using. Most of our sales are going into that big reach trucks, which are these 36 V, and I think they're the class one, right?
Yeah.
It is really going more into the class one. We also have some class two demand also. We are across the whole chain of the forklift batteries, and some of our OEMs are using our batteries to drive these monster 80 ton trucks as well. 24 V, smaller trucks, and then the large, larger trucks, which are the class one, and then very mammoth trucks are also being used with our batteries.
This last question is, outside of material handling, you know, where do you think the next potential growth segment will materialize, whether it's, you know, the recreational vehicles, some other types of commercial vehicles? You know, storage seems to be a slow developing market, but just get a sense beyond material handling, where you think you could have some near-term growth.
The material handling market is very large, like we looked at, there's over 5,000 distribution centers. Like this one distribution center, if it fully moves to lithium-ion, is about couple of million dollars. It's a large addressable market. Where we are focusing is where our strength of our battery is, which is a much longer cycle life battery. Where the battery is being used for extensive period and is mission critical. Applications are typically more commercial as against electric vehicle, which is running for an hour. There you really can use, you know, you don't need the high quality batteries.
The electric buses, electric delivery trucks, and we are very pleased to the development of these autonomous guided vehicles is also a big market because those vehicles are running 24 hours a day. We see demand coming from the commercial sector.
Okay. Appreciate you answering all my questions. I'll get back in the queue. Thank you.
Thanks, Carter.
As a reminder, if you would like to ask a question, please press star one. Ladies and gentlemen, we have reached the end of our question and answer session. I would like to end the call by saying thank you for participating in today's conference. You may disconnect your lines at this time, and thank you for your participation.
Yeah. Thanks for listening in, and have a great day. I look forward to speaking with you, when our fiscal second quarter results comes out. Thanks. Bye.