Earnings Call: Q1 2018

Feb 15, 2018

Earnings release

Greetings, and welcome to Electrovaya First Quarter twenty eighteen Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. 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 twenty eighteen financial results. Today's call is being hosted by Doctor. Shankar Dasgupta, CEO of Electrovaya and myself, Richard Halka, EVP and CFO. On February 14, Electivaya issued a press release concerning its business highlights and financial results for the three months ended December 3137. 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. And now let me turn the call over to Doctor. Shankar 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 Laterion. As you know, we announced a voluntary preliminary structured insolvency process for the German subsidiary last month on January 2538. 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. Lichen 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 Khamis complex that we had no option, but put Lighterion into a voluntary preliminary insolvency. What is now the consequence of Laterion's insolvency to Electrovaya? As we noted in yesterday's news release, the cash burn or cash usage at Lateran was $17,500,000 last year and $1,800,000 in Q1 twenty eighteen. By removing Lateran from our books, our operating results improved dramatically and we are much closer to profitability. We had an operating loss of $2,700,000 in the first quarter when Laterion stripped out with Lyterion stripped out. The loss from Lyterion's discontinued operations was $12,500,000 but this loss disappears in future periods. And 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 Lighterion in 2015, we saw it was a best in class plant with strong electrode and separator production capacity. Working with Lighterion helped us to develop our industry leading lithium ion battery products. It was an important period in Electrovaya's evolution. However, as you know, the high volume orders for Littarian from European OEMs and other large customers have taken longer than expected to materialize. We cannot predict the timing of the OEMs. And the simple fact was that Lighterion 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. Laterion'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 lighter 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 Lightyearen 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 costs 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 $1,000,000,000 fab plants to now a flap less 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 Lighterion. But 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, Shankar. As you saw in our news release yesterday, Laterion is included in our Q1 financial statements as discontinued operations. When I refer to discontinued operations, I am specifically talking about Lighterion. When I discuss operating results, that excludes Lighterion and only includes continuing operations. Revenue for the three months ended December 3137 was approximately $750,000 or 750,000 This was similar to the $730,000 we reported for the first quarter last year. Two of our customers each represented more than 10% of total revenue during Q1 twenty eighteen, 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 4,300,000.0. The operating loss in Q1 was CAD 2,700,000.0, up from CAD 900,000.0 last year. This was primarily due to higher G and A and finance costs relative to a year ago. The loss from discontinued operations was $12,500,000 compared to $1,600,000 in Q1 twenty seventeen. Put together, the company recorded a loss of $15,200,000 or $0.1 per share, up from $2,400,000 or $0.03 per share. Inventory was $3,500,000 as of December 3137. That compares to 4.1 at September 3037, which was our fiscal year end. We drew down stocks during Q1 twenty eighteen for order fulfillment. Turning to our balance sheet. We ended the first quarter with $1,200,000 of cash, $1,000,000 of restricted cash and $900,000 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 February. However, 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 9, the property is listed with an asking price of CAD24.9 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 lease 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 Shankar 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 Electrovirus 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 survived 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 want they will want to outfit entire fleets of forklifts with electrovirus products. Take Walmart for example. We 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 forklift, we expect that others would begin to take note. And 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 focused firmly on this forklift market opportunity and 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, but 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. But 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 outsource 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, so I have shared in the pain. But 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. You. Our first question is from Carter Driscoll with B. Riley FBR. Please proceed with your question. Good morning, Richard. Good morning, Shankar. Good morning, Carter. So help me understand, just the mechanics of the process with Viterion in terms of your decision to shutter versus the landlord trying to force reclamation of the asset. And in conjunction with that, when you acquired Laterion, you talked, I think at length with the differentiation of the separated material and 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? And then I have a couple of follow ups. Thank you. Carter, I'll just start and then I'll leave the separator question to Shankar 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 voluntary preliminary insolvency. That runs they appoint an administrator from the government, who is not actually running the operations, but all decisions have to be approved by him. And what are we'd like to do in that period is an M and A process has been started. We would like to see the assets sold to someone who can provide the volume. And then our objective would be to seek a supply contract. So this will unfold over these things can take quite a while, but over the next few months. But essentially, yes, it was our hand was more or less forced to protect our position over there. And now I'll turn it over to Shankar on the separator question. Carter, the Lyterian the ceramic separator, we like it. It's an excellent separator. Before we owned the Lyterian separator, it was owned by another large German company. And the problem and they tried to market the lighterian separator to a large number of lithium ion battery users. The problem we figured out was the usability of the separator was very difficult, very difficult to use in the machinery. So, lighterian separator was never a mainstream product for the lithium ion batteries. Where we did some good work with Lightarian folks is we figured out how to use that ceramic separator in lithium ion battery cell. And that technology was that was a very important development I believe over the last two years. Now, like all technologies, in addition to Lightarian, there has been others who also tried to produce ceramic separators, but none of them have any large market or any market share whatsoever because the difficulty of using that separator. So now we are in a situation where yes, we can buy from light air, but we can buy from other separate ceramic separator companies, none of whom have any market share, but we know how to be how to use those separators in manufacturing and putting together cells. So we are in a very good position that we can not only buy from Lightyearn, but from other ceramic separators and produce that high quality safety and more important cycle life in lithium ion batteries. All right. So I have two follow ups just to that point. First is, so Lighterion has is going to continue to operate while in their insolvency. So there is some level of supply available to you of that separator. And then second point is 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, as you said a little earlier, have heavy duty cycles, especially in two zero 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, the separate is just one component. Carter is not difficult. It's actually absolutely one to one replaceable. And 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 is a less parasitic reaction going on and the product is actually slightly superior, but we are saying it's the same. Okay. Maybe switching gears a little bit. So is I guess the first component of liquidity is clearly a pressing issue right now and the sale of the headquarters will go a long way to relieving some of that pressure. Do you have a realistic timeframe as to when you may be able to in effect the transaction or specific deadline versus what you can pull from your working capital internally? And within that working capital balance today, how much is finished product that you could turn into orders without having to build through the supply chain. So just trying to get a sense of moving parts and where your liquidity stands because it sounds like it depends, at least in the near term, on the sale of the headquarters in Mississauga. Yes. It's Richard here, Carter. The building is 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, I would say about a ninety to one hundred and twenty day plan. So I think that we would expect over that sort of course of time that we would be able to close a deal. But it's very early days, we shall see. In terms of where we stand, basically most of our stock is sending 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 Lyterion. So we see for the foreseeable future that we are that our supply channel is robust and we'll be able to meet any orders that come in. Yes. And Carter, our sales are increasing. As we said that one of the large orders, we only supplied 10% last quarter. That's a $4,300,000 order amongst the Fortune 500 companies. So we see the Q2 to be a good growth prospect. Maybe my last question is in terms of the pending sale of the headquarters. Is there any covenants that either have been tripped by like Carian's insolvency and or 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 who's in line with pecking order for the cash proceeds potentially? Yes. Carter, that's a good point. As we are in sort of a restructuring period here to go into an asset light, What we want to do is use substantial amount of the proceeds to pay down our debt level. Interest is expensive. For the size of the organization, we are quite highly levered. So we want to get those debts down. There's no we're working with our all of our lenders to ensure they're well in the loop and onboard with the process that we are undertaking here. As far as your where 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. Basically, they see that this is a good idea, that it gets the debt level down and they're supportive of that. Okay. Maybe Shankar, 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? All our Fortune 500 companies, that they're using Carter, most of our sales are going into that big reach trucks, which are these 36 volts. And I think they're the class one, right? Yes. Yes, it is really going more into the Class one. We also have some Class two demand also. So 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. So 24 volts smaller trucks and then the larger trucks which are of Class one and then very mammoth trucks also being used with our batteries. And then this last question is outside of material handling, where do you think the next Central Growth segment will materialize, whether it's the recreational vehicles, some other types of commercial vehicles, 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. And like we looked at, there's over 5,000 distribution centers. And like this one distribution center, if it fully moves to lithium ion, it's about couple of million dollars. So it's a large addressable market. But where we are focusing is where our strength of our battery is, which is a much longer cycle life battery. And so where the battery is being used for extensive period and is mission critical. So applications are typically more commercial as against electric vehicle, which is running for an hour, there you really can use you don't need the high quality batteries. But 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 twenty four hours a day. So we see demand coming from the commercial sector. Okay. Appreciate you for answering all my questions. I'll get back in the queue. Thank you. Thanks, Arjun. 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. Yes. Thanks for listening in and have a great day. And look forward to speaking with you when our fiscal second quarter results comes out. Thanks. Bye.