Electrovaya Inc. (ELVA) Q2 2020 Earnings Report, Transcript and Summary

Greetings, and welcome to the Electrovaya Second Quarter 2020 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Richard Halka, Executive Vice President and Chief Financial Officer for Electrovaya. Thank you. You may begin.

Thank you, Melissa. Good morning, everyone, and thank you for joining us on today's conference call to discuss Electrovaya's fiscal 2020 second quarter financial results. Today's call is being hosted by Dr. Sankar Das Gupta, CEO of Electrovaya; and myself, Richard Halka, Executive Vice President and CFO. On May 15, 2020, Electrovaya issued a press release concerning its business highlights and financial results for the three and six months period ended March 31, 2020. If you would like a copy of the release, you can access it on our website. If you want to view the financial statements and MD&A, 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 related to forward-looking information. We will provide information relating to our current views regarding trends in our markets, including their size, potential for growth, and our competitive position in our target markets. Although we believe that the 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 fiscal 2020 second quarter results and the most recent annual information form and management discussion and analysis under Risks and Uncertainties as well as another public disclosure documents filed with the Canadian Securities Regulatory Authority. Also, please note, all numbers discussed in this call are in U.S. dollars unless otherwise noted. And now I'd like to turn the call over to Sankar.

Thank you, Richard, and good morning, everyone. I hope all the Canadians joining us this morning enjoyed the Victoria Day holiday yesterday, although many of us are in an extended leave. Your company had a very interesting quarter. COVID-19 has changed many things. Electrovaya is deemed a critically important industry and is powering many e-commerce sites, groceries, medicines, goods and important supply chain. For example, one of our client's distribution centers supports much of the groceries and e-commerce goods in Western Canada. So we had to stay open, and our supportive and passionate staff came to work every day and kept the deliveries going. In spite of the dislocations from our supply chain and from dislocations as we moved location and had to build a necessary infrastructure in our new operation. I would say our courageous and dedicated staffs followed all of the guidelines and regulations relating to social distancing, frequent hand washing, wearing of masks, sanitization, ultraviolet-C radiation, fans with HEPA filters and so on. We all admire their courage and dedication and their attention to details in complying to the COVID-19 guidelines. They are keeping the groceries and many vital goods moving in warehouses, cold storages and in e-commerce distribution. We also had a virtual annual meeting in March, and we appreciate all of you who took part in it. I am pleased to say that we overcame some significant operational challenges in the quarter as well. As you probably know, we moved into our head office and manufacturing facility last December, about four, five months ago. Our team worked hard to transfer and reorganize infrastructure to resume production at our new facility and did an excellent job. The new facility is running well and positions us to further scale up production as demand increases. We missed our target to be EBITDA breakeven in the March quarter mainly because of the COVID and supply chain disruption. Yet, we doubled our revenue from the sequential December quarter. Another important milestone was our C$15 million of debt due at the end of the quarter. We had a very supportive debt lender who allowed us to pay $2 million in cash and $2 million in shares now, and another $2 million at the end of September, and allowed us to fulfill the C$15 million debt with the $6 million payment. We are extremely grateful to them. We are all working hard such that their $2 million of shares can gain enough traction to compensate them for their support to us. In spite of COVID and relocation, we generated solid performance in the second quarter. Revenue more than doubled to C$2.7 million compared to the fiscal first quarter, a good sequential growth. We expect another doubling in revenues in the present quarter. This sequential and exponential growth is due to the demand for our batteries. We are delighted that after much testing, the largest OEM in the world in this field is selling our products through their distribution as is the largest company in the world started to use us in upgrading their distribution centers. We are now in 31 locations in North America, about four in Canada, 24, 25 in the U.S., one in Mexico at a car assembly manufacturing plant. Our OEM partner or the world's largest company have access to all technology across the world. And we are humbled that they chose Electrovaya, and now rather rapidly, we are in these 31 locations. We must be providing exceptional technology in terms of cycle life, safety, energy, power, and fast charging otherwise they would not have chosen us. Before we came to this market, the general consensus was that lithium ion could not deliver the needed 12x to 20x more work capability than the normal lithium ion in, say, an electric car uses, plus there was worries always about the safety of such batteries. Hence these major customers kept using three lead acid batteries per truck and swapping batteries every shift or use hydrogen fuel cells. A normal lithium ion battery in an electric car is guaranteed for, say, 150,000 kilometers over five to eight years of operations. Our materials handling customers instead wants 2 million to 3 million kilometers of operation, a 12x to 20x more. They need a remarkable battery, which we are delivering. Similar performances of cycle life and safety are needed for all intensive use applications, such as electric buses, electric trucks, electric taxis, automated guided vehicles and so on. I will now turn the call over to Richard to review our fiscal second quarter results in greater detail. Richard?

Thank you, Sankar. Revenue for the three months ended March 31, 2020 was $1.9 million, an increase of 55% over $1.3 million in the second quarter last year. But more significantly, it represents a doubling of our Q1 December 31, 2019 revenue of $900,000. The strong sequential growth is a trend we anticipate to continue as we move through 2020. This was driven by our high order volume, the scaling up of manufacturing and other operations at our new facility in Mississauga. We are striving to continue to be efficient in our supply chain management and production methods. Net loss was $1.1 million in the quarter compared to a net loss of $1.9 million in Q2 last year. The reduced loss is primarily due to higher revenue, gross profit and foreign exchange gain. Total operating expenses were $2.3 million in Q2 2020, a slight increase from $2.2 million in Q2 last year. Operating expenses for Q2 2020 included one-time cost related to relocating operations and adding infrastructure as well as cost resulting from the impact of COVID-19. Cost containment continues to be a major focus for us. We have also provided some targets for the fiscal third quarter ending June 30, 2020. We have good visibility on revenue as orders in hand remained strong at C$14 million and our production and shipping have been growing week-by-week. We foresee strong sequential growth continuing in third and fourth quarters of fiscal 2020. Now turning to our balance sheet. We continue to manage our working capital carefully. Our trade receivables and inventory have increased consistent with our sequential sales growth and production. Inventory increased to $2.5 million at March 31, 2020, which is approximately double the December 31, 2019 balance of $1.2 million. Similarly, our accounts receivable doubled to $1.4 million at March 31, 2020 from $700,000 at December 31, 2019. We continue to take steps to strengthen our balance sheet subsequent to Q2 2020 and on April 8, we announced that we amended the terms of our C$15 million convertible debentures with a 9% coupon. As Sankar mentioned, we paid the lender C$2 million cash, issued C$2 million worth of common shares of Electrovaya and agreed to a further C$2 million cash payment on or before September 29, 2020 to satisfy all obligations under the debenture, including accrued, but unpaid interest. Sankar, our CEO made personal financial guarantees that helped us finalize this agreement. And as myself, the Board and everyone in Electrovaya would like to thank Sankar for his strong contribution in that regard, and also to thank our lender for investing in the future of Electrovaya and having faith in our ability to deliver. In addition, on April 22, we announced the closing of a secured C$4.5 million credit facility with a Canadian financial institution, which increased our overall credit facility limit with this institution to C$11.5 million. The additional capital enables us to accelerate deliveries to customers continue our strong growth. We are pleased with the continued support we have received from this institution, which highlights the strength of Electrovaya's products and our customer base. Overall, we continue to focus on expanding sales, managing our cost and strengthening our balance sheet, while working to access essential financial resources to grow our business. I would now like to turn the call back to Sankar to wrap up.

Thank you, Richard. In conclusion, our last quarter has been very distinct and I believe transformative for Electrovaya. We are operational as a critical and important industry in spite of COVID-19. Our customers are having banner sales in e-commerce, warehousing, groceries, logistics, and hiring thousands of people. Their demand for high-performance lithium ion batteries are increasing. It is a mission-critical application. Many of the major blue-chip companies are our customers, repeat customers. These are Fortune 100 companies and we have quickly grown to 31 locations. We are marketing via the OEM channel. Our sales agreement with Raymond Corporation, the largest OEM in this field has been significantly increased the reach of our products. We expect OEM sales will be a major growth driver for us in the 2021 fiscal year. We are also selling to the direct channel, where the largest company in the world is converting multiple distribution centers to be powered by Electrovaya lithium ion batteries. We are in an exponential growth phase, sequentially we doubled and we are on target to double again in this quarter. We have negotiated a win-win terms for our C$15 million in debenture debt. We have a working capital credit line to support our deliveries against the firm purchase orders. Finally, our exceptional technology of long cycle life, safety, energy and power is applicable to many other mission-critical applications, such as automated guided vehicles, electric buses, and electric trucks. We believe our competitive position is strong and we are poised for much stronger financial performance in the fiscal third quarter. And we are taking important steps to address our balance sheet and compete customer deliveries as Richard outlined earlier. While there is still a lot of hard work ahead, I believe the future is very bright for Electrovaya. That is why I made personal financial guarantees last month in order to satisfy the company's obligations under the convertible debentures. I am confident that our sales will continue to grow and that our strategy will deliver significant value to our shareholders. This concludes our remarks this morning. Richard and I will now be pleased to hold a question-and-answer session. Melissa, please open the line for questions.

Thank you, gentlemen. [Operator Instructions] Our first question comes from the line of Rob McWhirter with Selective Asset Management. Please proceed with your question.

Good morning. Congratulations on a strong quarter. You talked about $2 million worth of the loan being converted into shares. Can you tell me either the price of the shares or the number of shares received, so I can figure out the proper share count for the effect of the debt swap for the $2 million portion?

Rob, this is $0.18 a share and slightly more than 11 million shares, 11.1 million.

Okay. On the working capital side, you talked about accounts receivables doubling from $1.4 million – or to $1.4 million versus $1.7 million. Can you talk about kind of days sales outstanding as to how quickly your clients are paying it?

As Sankar has mentioned, we have a very, very good client list. They're Fortune 500 companies, very strong financially. And they pay basically quite often mail checks. We’re getting payment promptly 30 to – at the maximum 45 days.

Okay. So then DSOs are less than 45 days?

Yes.

You talked about one-time expenses in the quarter, one related to your move and two related to COVID. Can you give us some more color on what you estimate those one-time expenses were in Q2?

It's somewhat difficult to quantify Rob, because when we relocated, you have the hard cost associated with the transportation, et cetera. But you also have the soft cost of – it takes a while to get the production line up again. So basically your overhead isn't being borne by your production. So there's that. As far as COVID-19, we have some major suppliers overseas that were impacted by the virus very early on. This cause some early disruptions in our supply chain, which took a little while for us to smooth out. As well associated with those disruptions, we then expedited delivery using air freight instead of shipping containers, et cetera. So that increased our costs. Again, it's difficult to compartmentalize all these things. I would say that we're probably looking at – probably about a 15% to 20% of our overheads were subject to this.

And then there was a lot of infrastructure costs, adding a lot of electricals, end-of-line testings, various infrastructure facilities which needed to be added. Again, those are all one-time cost.

You rounded as roughly $200,000, somewhere in the $200,000 to $300,000 range.

Yes. It's more than that, but I really wouldn't want to quantify it. What I would say is that we are anticipating that we should see a decrease in our overheads going forward. And I think if you look back over the last couple of quarters, you'll see a clear trend where we've been bringing our overheads down and this quarter is the exception. We would expect to return down to those normalized levels over the next quarter or so.

I'm just going to add that we are hoping to double our revenues this quarter and be EBITDA positive with both the costs going down, and of course, the revenue is going up.

Okay. And you talked about the kind of the new facility can handle the increased demand as well as kind of future demand. Can you talk about the kind of current capacity as far as dollar value of sales that the existing plant as it is currently constructed could handle?

I think we're very excited about the scaling up we’re seeing. And where that upper limit is, I don't think we're going to see it in 2020 because we're seeing a sort of a week-on-week shipping more and completing more. And at the level we're at now, we can easily do that doubling of sales that Sankar suggested in the next quarter and with certain efficiencies put in place, doubling again into the final quarter. We're really not seeing a capacity limitation. We're working a single shift, five days a week, so we certainly have a lot more we could do to increase our capacity here.

Okay. So wet finger, if you take the most recent quarter, double it, you have $5.4 million, multiply that by 4, you got an annualized of $22 million, you expect further acceleration in the fourth quarter. So it sounds like an easy estimate is at least $39 worth of annualized capacity, is that a reasonable wet finger guess?

Yes. And then we should do much more – as Richard said, that's really running on a single shift basis.

Okay. And to be able to end up saying to go beyond $50 million other than a single shift, is that all that might be required to end up increasing capacity?

I don't think we'll need to double the shift to go to $50 million. When we are hitting the $100 million, we'll probably need to have a second shift.

I think, Rob, one of the things we're seeing and I can't emphasize it enough is how much more efficient we're getting week-on-week. We've set up a very efficient production line here. Our people have been now using it for a couple of months and the efficiencies and what they're able to put out is just increasing week-on-week. So I think we feel pretty comfortable that we're not going to see a – any kind of capacity constraint in 2020. But I think we'll look forward to 2021 and do our planning around what actions we can take to be even more efficient.

Great. And then turning to the largest market, which is the kind of cold storage market. There are five large providers that make up about 85% of the market in cold storage. You’re testing with one of those five, and I'm curious as to, as you've described, we've got kind of your customers having banner sales in e-commerce and grocery, warehousing as to how progress is going on securing sales into that one of the top five cold storage prospects?

We are shipping goods now. We have purchase orders from multiple cold storage people, and they're large folks both in Canada and the U.S. And I don't think cold storage is going to be our largest. Cold storage is a good business. But I think, we are seeing across the line in warehousing, in e-commerce, in distribution, in groceries, in manufacturing as well. For example, there's a car assembly plant, which runs triple shift. They are buying from us. We're seeing a lot of interest coming from manufacturing as well. So I think we are across the Board. So cold storage is a good area, but it's definitely not the number one area.

Okay. And within the kind of world of warehousing itself, there is a trend towards higher automization – or automation and robotics. Is it one where you end up saying, okay, if there's less people doing the picking of products, there would be more or less or no change in the amount of, effectively, forklifts used to move materials around a warehouse?

We think more because what is happening is the propane or fossil fuel-driven vehicles are much more difficult to automate. So automation definitely drives them for electrification, and electrification is always good with lithium ion batteries, whether they have people or not people. So for example, we must have supplied a few hundred automated guided vehicles. These are all robotic units without people in it. So I think the automation is a positive thing for us. At least, it's not a negative thing. And the other interesting thing, again, is we are very driven to climate change, and that's been an important aspect for us. And because these forklifts are running round-the-clock, 24 hours a day as against an electric car runs for an hour or two hours a day, we are removing carbon dioxide, carbon monoxide, all kinds of greenhouse gases, 15x more than as electric car does. And there's sort of nice studies from EPRI, showing that this is the sector which can give the highest value for greenhouse gas elimination.

That is if you end up replacing a propane-based forklift?

What we are seeing is this automation is happening and people are moving away from the fossil fuel to electric. I think the largest greenhouse gas reduction takes place when we are replacing propane-based forklift, but we also reduce and increase efficiencies when we replace lead acid battery forklifts as well as fuel cell-based forklifts.

That's it from me for the moment. Thank you.

Thanks.

Thanks very much, Rob.

Thank you. Ladies and gentlemen, this concludes our question-and-answer session. I'll turn the floor back to Dr. Gupta for any final comments.

Well, that concludes our call. Thank you for listening this morning. We look forward to speaking with you again after we report our fiscal third quarter results in the summer. In the meantime, we wish you all good health and stay safe. Thank you.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.