Electrovaya Inc.

Greetings and welcome to the Electra VIA third 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. 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, Mr. Richard Holka. Thank you. You may begin.

Thank you, Melissa. Good morning, everyone, and thank you for joining us on today's conference call to discuss Electrovia's fiscal 2020 third quarter financial results. Today's call is being hosted by Dr. Shankar Dasgupta, CEO of Electrovia, and myself, Richard Halka, Executive Vice President and CFO. Yesterday, Electrovia issued a press release concerning its business highlights and financial results for the three and nine-month periods ended June 30, 2020. If you would like a copy of the release, you can access it on our website. If you want to view our financials, financial statements, and 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 related to forward-looking information. We'll provide information relating to our views regarding trends in our markets, including their size and potential for growth, and our competitive position in our target markets. Although we believe 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 third quarter results and the most recent annual information form and management discussion and analysis under risk uncertainties as as well as in other public disclosure documents filed with the Canadian Securities Regulatory authorities also please note that the numbers discussed on this call are in US dollars unless otherwise noted now I'd like to turn the call over to Shankar Thank You Richard and good morning everyone we are pleased with

Ladies and gentlemen, please stand by.

Gentlemen, you're still connected. Please go ahead.

Okay. I'm sorry. Where did I get cut off?

Dr. Dasgupta just began. Okay. Thank you very much.

All right. Sorry about that, with that technical hitch, I guess. So our momentum now is translating into stronger financial performance. Our present third quarter revenue of about Canadian $6.5 million shows good sequential growth quarter by quarter. Our Q3 fiscal year 2020 revenue of Canadian $6.5 million doubled their 2.7 million revenues in Q2, while Q2 revenues itself doubled over Q1 2020, hence representing a fourfold increase on a sequential basis over three quarters. We are also pleased to report a positive Q3 EBITDA of about $700,000 Canadian. We believe there is good growth possibility in this market and as we reported yesterday, we are expecting revenue for the 2020 fiscal year to exceed Canadian 16 million and the revenue for 2020 calendar year ending 31st December 2020 to exceed about 21 million Canadian. These represent significant increases and they're based on our expectation of continued strong revenue performance over the rest of the calendar year. It is good to see our revenue rise as we deliver on orders. As we noted in our last quarter, some of our deliveries to customers were delayed because of supply chain disruptions related to the coronavirus outbreak These disruptions are gradually improving, and we are completing deliveries and collecting revenues as anticipated. Our operations are performing well. We are now fully settled in our new head office and manufacturing facility in Mississauga, and it is enabling us to effectively scale up production in order to meet demand. and with the support of our lender, we are continuing to maintain the liquidity we need to deliver on the customer orders. I'm also pleased to say that our new health and safety protocols are working, and although none of our employees have contracted COVID-19, we need to be extra vigilant as people may be getting tired of the safety protocols and as Ontario and the greater Toronto area moves from phase two to phase three. Overall, with our strong operating performance and rising demand from our customers, we believe we are well positioned for continued business growth and improved financial performance. I would like to now turn the call over to Richard to discuss our QC financial results in more detail.

Thank you Shankar. I'd just like to point out that I'm going to be using Canadian dollars when I speak about the figures, as I note that most of our listeners today are Canadian. Revenue for the three months ended June 30th, 2020 was 6.5 million Canadian. As Shankar noted, this was a four-fold increase compared to the 1.6 Canadian we reported in the third quarter last year. It was almost more than double the 2.7 Canadian we reported in the fiscal second quarter year ended March 31st, 2020. The revenue increase reflects strong demand from customers and the scaling up of our battery production at our facility in Mississauga. Gross profit for Q3 2020 was 2.3 million Canadian. That's a margin of 35% of revenue compared to 0.5 million Canadian or 35% of revenue in Q3 last year. We had a positive EBITDA of approximately 700,000 Canadian for the quarter. To calculate EBITDA, we take the loss from operations of $50,000, add back the finance costs of approximately 700,000 Canadian, and add stock-based compensation of approximately 20,000 Canadian. Net profit for the quarter was approximately 6.5 million Canadian, compared to our net loss of 1.2 million U.S., in the third quarter last year. The net profit this year was primarily due to a gain of Canadian $7.1 million on the amendment of the convertible debentures and strong revenue growth. Total operating expenses were Canadian $2.3 million in Q3 2020 compared to Canadian $2 million in Q3 last year. The increase primarily reflects higher R&D spending as we continue to focus on growing our IP and also controlling our costs. I will now briefly review our results for the nine months ended June 30, 2020. Revenue was Canadian $10.3 million, an increase of 73% compared to Canadian $6 million, in the same period last year. Gross profit was 3.8 million Canadian, or 37% of revenue, compared to 2.2 million Canadian, or 36% of revenue last year. And we had a net profit of 2.4 million Canadian compared to a net loss of 500,000 Canadian in the prior year. The net profit this year was primarily due to the gain on the amendment of the debentures that I just mentioned. We also provided some revenue guidance that reflects our order-backed dog and continued strong customer demand. We're currently expecting revenue for the fiscal year ended September 30th, 2020 to exceed 16 million Canadian, barring unforeseen circumstances. and that compares to 6.7 million Canadian last year. For the calendar year ending December 31st, 2019, sorry, 2020, we expect revenue to exceed 21 million Canadian, a major increase from 5.2 million last year, again, barring unforeseen circumstances. Turning now to our balance sheet, We had 500,000 Canadian of cash and cash equivalents as at June 30, 2020, compared to 400,000 Canadian at September 30, 2019, which was our fiscal year end. Inventory was 3.7 million Canadian at June 30, compared to 1.4 million Canadian at September 30. We used a total of 1.6 million of cash in operating activities during the third quarter, compared to 2.3 million Canadian in Q3 2019. We continue to manage our working capital and our costs carefully. I would also like to review some important recent developments related to our balance sheet. In April 2020, we announced that we amended the terms of our 15 million Canadian convertible debentures. with a 9% coupon. We paid the lender $2 million in cash and issued $2 million of common shares of Electra Via and agreed to a further $2 million cash payment on or before September 29th to satisfy all obligations under the debenture, including accrued but unpaid interest. Also in April, we announced the closing of a secured $4.5 million Canadian credit facility arrangement with a Canadian financial institution. And in July, subsequent to the end of the quarter, we announced an agreement with the financial institution to increase a revolving credit facility from 1.5 million Canadian to 4.5 million. These measures increased our overall credit capacity limit with this institution to 14.5 million Canadian dollars. As of today, we have repaid 4.4 million from the facility. The facility has helped us scale up production to meet demand, and we are pleased at the continued strong show of support that we have received from our financial partner. Overall, we remain focused on expanding sales, carefully managing costs while working to access financial resources, and to continue growing our business. I'd now like to turn the call back to Shankar to wrap up.

Thank you, Richard. You can see from our third quarter results and from our guidance for the rest of the calendar year that ElectroVaya is in the midst of a strong growth. Finally, we are often technology pioneers and ahead of the market. When we were developing interesting batteries for the emerging electric vehicle market in Europe, the market did not develop. Hence our pivot from the electric car and similar stuff in Europe to the commercial lift trucks in North America where that market needed exceptional technology but did not need us to create the market. So the market for electric lift trucks were there awaiting an exceptional battery and needed a very high cycle life, ability to operate 24-7, which translates into millions of kilometers over its life. The battery to operate at thousands of cycles, fast charging, must give exceptional safety, and at the same time, give excellent power and energy. So we pivoted and built over the last few years interesting battery and then spent quite a bit of time validating it. Validation takes years in this mission critical market. I'm often asked three questions. How good is your battery? How big is the addressable market for electric lift trucks? And where else does your battery fit for other applications? On how good is your battery, I believe our battery technology must be pretty good, as otherwise why would so many Fortune 500 companies repeatedly start purchasing from us for their mission-critical application of moving goods efficiently? Similarly, we get some assurance that the major OEM in North America is our sales channel partner. We have now delivered over 700 batteries which is powering 700 electric lift trucks, and we have supplied over 1,000 batteries for automated guided vehicles, mainly supplying to large, sophisticated Fortune 500 companies. How big is this addressable market? I really do not know and can only guess. I'm told there are several million lift trucks operating in North America. a market big enough for us. How do we reach this massive market? We are reaching this market through direct sales and through the OEM channel. We are partnered with a major OEM. The market is both for new electric lift trucks as well as for the upgrade. Once you get used to lithium-ion batteries, it is addictive. Nothing else comes near it. imagine powering your mobile phones or laptop computers with lead acid batteries or hydrogen fuel cells or propane or diesel the addictive transformation to lithium ion is happening and we feed that addiction the third question is what other markets what other markets needs exceptional long cycle life battery with outstanding safety. Maybe electric buses, electric trucks, electric taxis, solar energy storage, and other plausible markets come to our mind. But our focus is firmly on the electric lift trucks. Although we have a variation of our battery, getting ready for electric buses and electric trucks whenever that market opens up. We look forward to the future with enthusiasm, with its exponential growth possibility. Our EBITDA positive milestone, as Richard mentioned, was important to us. It allows lower cost of working capital and allows for phenomenal growth. But equally important to us and our team is that we are eliminating greenhouse gases at a great pace. One electric lift truck operates 10 to 15 times longer than a regular electric car. Hence, it removes greenhouse gases in a corresponding multiplier. So our evangelical days are over. And we now look forward to potential exponential growth and, importantly, profitable bottom lines. That concludes our remark this morning. Richard and I would now be pleased to hold a question and answer session. Operator, Melissa.

Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd 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 key. Our first question comes from the line of Ashok Kumar with ThinkEquity. Please proceed with your question.

Good morning, and Richard, Shankar, and Jason, congratulations. This is a three-part question. One is you mentioned profitability, gross margins in the mid-30s. Do they represent your profitability level at scale? And the timeline, we're on a cash flow basis and the revenue level that you reach sustainable profitability. To Shankar, you'd mentioned about supply chain normalizing. What timeline do you see that you're at pre-pandemic levels? And the last question, just some additional granularity on top-line drivers for the remainder of You know, calendar 20 and 21, you talked about OEM versus direct and continued, you know, market opportunity, given that it's very nascent both in, you know, AGV as well as, you know, lift trucks. Just, you know, some what are you seeing in the pipeline, you know, the next six, you know, quarters, right, that gives you confidence that you can maintain the revenue momentum. Thank you once again, and congratulations.

Thank you, Ashok. It's Richard here. I'll take the first question and then pass it over to Shankar for the second and third. With regards to our gross margins, I think you'll see that when you look back, we've been very consistent around that 35% mark. So we have a great deal of confidence going forward. There are two sort of counter movements of that. One, of course, is pricing pressure, which would tend to push that margin down. But we've been able to offset that with both efficiency gains in terms of cost efficiency, economies of scale, et cetera, but also technology gains in terms of improving our cells and all aspects of the battery. So we would see that being very sustainable moving forward. As far as the positive EBITDA is concerned, I think you can see and we've demonstrated we've crossed over that break-even point. And we feel at this level and moving forward at even a greater level of revenue, we should be able to maintain and increase our positive EBITDA. So I think we feel pretty much that we've come around the bend here and are very well positioned for some good growth going into 2020, concluding 2020 and going into 2021. So I'll turn it over to Shankar for the second and third.

Good to hear from you, Ashok. The two questions, one was a supply chain normalizing. Yes. The supply chain has normalized now pretty much for us. However, it was a little bit of a wake-up call, so we are looking at multiple suppliers in North America as against depending so much into Europe or Asia. So we are validating certain supplies in North America. On the top line drivers, presently I would say direct sales and OEM channels, these two channels are more or less at a 50-50% basis, but our pipeline through the OEM is much stronger. This particular OEM has got tremendous reach into the market, and so going forward, we see OEM-driven sales through the OEM channel will become larger. Although we had started from top down, we went after the very large companies on a direct sales basis. they have very large pulling power as well. So hard to say, but we see that pipeline to be very, very strong over the next little while.

Ashok, have we answered your questions or do you have any further clarification?

Yes, thank you very much. Thank you, Ashok.

Thank you. Once again, ladies and gentlemen, if you'd like to ask a question, please press star 1 on your telephone keypad. We'll pause a moment to allow for questions. Thank you. Our next question comes from the line of Bob McWhorter with Selective Asset Management. Please proceed with your questions.

Can you run me through the kind of guidance towards sales in the coming quarters? You basically said the 12 months ended September will be $16 million Canadian, and if I work the kind of previous three quarters of U.S. numbers, convert them back, I get a number of sales expected, and then I've done the same thing for December, and I just wondered if you could end up making it so that You can say, okay, it's pulling all the numbers out from the 16, sorry, yeah, the 16 Canadian and the 21 Canadian. What are the actual numbers for Q3 and Q4 implied on those estimates? Sorry, Q4 and Q1.

Yeah, Bob, we haven't, it's Richard here. Bob, I think, you know, I'll leave it with you and the reader. We haven't gone into specific quarter-by-quarter analysis, but I think as you look at it, it's pretty clear to see that what we've established in this quarter, we certainly see that continuing.

Okay, so let me come at it a different way. You'll understand why I'm scratching my head. If we take basically the coming quarter, in other words, the most recent quarter you had, sorry, a year ago, you had sales of a half million bucks U.S., $90.9 million U.S., 1.9 million U.S., most recent quarter, 4.8. We'll all add up together and you end up saying, okay, we've got, if I understand correctly, $11.5 million on trailing 12-month sales. I look forward to see, okay, what's the insight with regards to September, I take the 0.9 U.S., 1.9 U.S., most recent quarter, 4.8, and I get $10.5 million Canadian. Subtract your 16 as far as the total number, and 16 minus 10.5 gives me $5.5 million worth of sales. And I'm scratching my head because the most recent quarter was $6.5 million Canadian equivalent. And yet you suggested overall, geez, our business is getting brisk and getting brisker. And that's why I'm struggling with the, okay, if I've done my numbers right, the coming quarter will be $5.5 million worth of sales. And then if I do the same thing for Q1 slash the December calendar quarter, I end up with 1.9 U.S., 4.8 U.S., the estimate that I've just done in Canadian, and I end up with a guesstimate of $6.6 million for, effectively, Q1. And relative to the 6.5 Canadian that you just reported, that doesn't seem to be an awful lot of growth. That's why I'm scratching my head and figuring, okay, clearly you've got all the numbers in front of you, and so I'm trying to figure out and say, okay, given the overall number is back out of the original, or the quarter-by-quarter number for September or December, That would be helpful.

I follow you now, Bob. I think the operative word in there is exceed. It was not a precise character. In other words, we did not say we expect the quarter to be or the year to be X. We said we expect to exceed that. So you could say that that would be where we've set the low point on the bar. We expect to come in over that. We feel a very high degree of confidence that that number is certainly more than achievable. So I think probably, Bob, you could accuse us of being a little too conservative for the next two quarters. And I think it's a little understandable as we move through the calendar year, move through the impacts that we've seen on the world from the pandemic. We feel confident in these numbers and in exceeding these numbers. So I think you're attributing a level of precision to that calculation of the number, which is is not there. This would be sort of where we would see coming over.

Does that answer your question? Yes, that keeps me happy. And most recently, Walmart Canada suggested they were going to invest some huge amount of billions of dollars, $3.5 billion over the next five years in Canada. And obviously they've got a... portion of WebBase, and they described in their press release they're going to be building two new distribution centers. I'm assuming that the logic is, since they are one of your large customers, that a fair amount of that Walmart business for the two new distribution centers would fall your way as well. Is that a reasonable guess?

Bob, I wouldn't want to speculate on specific customers and where they are. I guess the call is really to look back at our third quarter results. We certainly have a lot of drivers in there and a lot of growth potential. And obviously we're operating in three warehouses for Walmart right now. So I think there's certainly

the potential there but i wouldn't want to go any farther than that on this call okay thank you very much thank you ladies and gentlemen a final time we'll pause for any more questions if you have any please press star one at this time Thank you, ladies and gentlemen. That is the time that we have for questions. I'll turn the floor back to Dr. Dasgupta for any final comments.

Well, thank you, Melissa. That concludes our call. Thank you for listening in this morning. We look forward to speaking with you again after we report our fiscal fourth quarter results later this year. We wish you all good health and hope you enjoy the rest of the summer. Thank you.

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