Electrovaya Inc. Q3 FY2023 Earnings Call

Welcome to the Electrovaya Q3 2023 Financial Results Conference Call. Please note that this conference is being recorded. I will now hand it over to your host, John Gibson, CFO. You may begin.

Thank you. Good evening, everybody, and thank you for joining us today on the call to discuss Electrovaya's Q3 2023 financial results. Today's call is being hosted by Dr. Raj DasGupta, CEO of Electrovaya; and myself, John Gibson, CFO. Today, Electrovaya issued a press release concerning its business highlights and financial results for the three months period ended June 30, 2023. If you would like a copy of the release, you can access it on our website. If you want to view our financial statements and management discussion and analysis, you can access those documents on the new SEDAR+ website at www.sedarplus.ca or on the SEC EDGAR website at sec.gov/EDGAR. 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 market trends, including the size and potential for growth and our competitive position within our target markets. Although we believe that the expectations reflected in such forward-looking statements are reasonable, they do obviously 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 announced in the Q3 fiscal 2023 results and the most recent annual information form and management discussion and analysis under Risks and Uncertainties, as well as in other public disclosures filed with Canadian and U.S. security regulatory authorities. Also, please note that all the numbers discussed on the call are in U.S. dollars, unless otherwise stated. And now I'd like to turn the call over to Raj.

Thank you, John, and good evening, everyone. Electrovaya's fiscal third year quarter was another strong quarter and further demonstrated our focus on execution, profitability, and growth. There is a long list of milestones that we achieved over and since the quarter, and I'd like to reflect on a few of them on today's call. First of all, we made a second consecutive quarterly profit despite having increased legal and other costs associated with our recent NASDAQ listing. This was made possible through improved gross margins on our battery system sales. I expect us to continue to raise margins over the coming quarters. And as our top line revenue increases, our profitability and financial strength will continue to improve. Battery systems for material handling applications, especially those at large corporations, are responsible for the majority of our revenue. In the last quarter, we have continued to see revenue and order growth, including two new Fortune 100 pedestal customer orders. Overall, we have seen over 50% growth in our backlog compared to last year. With regards to our OEM partners, we are pursuing a number of new initiatives, including new product offerings, some of which will be launched in fiscal year 2024 and some in fiscal year 2025. We believe there is substantial untapped potential for our Infinity batteries in the material handling sector. I'd estimate our penetration for electrified vehicles with our main OEM partner to be under 10%. Market indications are that the lithium-ion penetration rate should increase to about 50% by 2027, which would be about five times our current production rate. While Electrovaya's low-voltage products may have been very successful in the material handling and robotic markets, we are now positioning the company to take a leadership position in other heavy-duty market segments. This includes electric buses, trucks, mining vehicles, and energy storage, which all require high-voltage battery systems. We have developed our high-voltage product line to take advantage of the core Infinity technology benefits with respect to safety and cycle life and also the strong systems capabilities relating to performance and reliability that we have demonstrated in the material handling market for years now. Since we announced the product line on July 20, we have had considerable interest and are expecting to start shipping preproduction packs starting in the first quarter fiscal 2024. We have received some initial orders for packs, which include heavy-duty vehicle applications and are actively pursuing large opportunities. These are mostly for startup production in 2025, which is in time for our Jamestown, New York operations to supply. That brings me to our overall expansion plans. The heavy-duty market needs our Infinity battery technology, and this is going to be an enormous market, which is just starting to be electrified. These are applications that need better safety due to the size and sensitivity of the applications as well as the higher duty cycle that they achieve. Furthermore, they operate with substantially higher duty cycles than automotive applications, and therefore, longevity and cycle life are going to be key selection parameters. Unfortunately, most of the nascent electrification of these applications are utilizing batteries where the technology is optimized for passenger vehicles, and the results have been poor. If you examine recent news, even just in the last few weeks, you will see a large number of the initial electrified bus and truck segments have had safety recalls all relating to the batteries. So given our continuing growth in the material handling sector combined with anticipated demand for our high-voltage batteries, we see the need to increase our production capacity significantly. Currently, we are in the late stages of securing the financing for the first phase of what should ultimately be a multi-gigawatt hour manufacturing footprint at our Jamestown, New York campus. A further benefit of these expansion plans is our ability to leverage the inflation reduction incentives, which will provide approximately $45 million in cash incentives for every gigawatt hour of output. We recently provided a brief update on the progress on our plans in our press release dated August 2. With that, I'd like to pass the discussion back to John, who will go over the financial results in more detail.

Thanks, Raj. Revenue for Q3 fiscal year 2023 was $10.5 million compared to $4.3 million in the third quarter ended June 30, 2022, an increase of 145%. We continue to improve output within the facility. Our weekly run rate surpassed $1 million per week in the quarter, and we're looking to build on this momentum and continue into the final quarter of the fiscal year. We ended Q3 with a strong backlog, which was up approximately 50% from the prior year. And we believe that this puts us in a strong position going into the final quarter of 2023 and into fiscal year 2024. We remain on track to meet our 2023 guidance of $42 million. This quarter saw the first real positive movement in gross margin for the fiscal year. Overall gross margin was 28.1%, an increase of almost three percentage points over the prior year and the prior quarter ended March 31, 2023. When looking at revenue streams individually, the numbers increase even more. Battery Systems gross margin came in at 30.3% for the quarter. This improvement was driven by locking in prices from key suppliers for 2023 deliveries, taking advantage of volume discounts where available and operational efficiencies. We expect to see an increase in gross margin in the rest of calendar 2023. Adjusted EBITDA for the quarter was $1.1 million compared to a loss of $1.5 million in the prior year. Furthermore, for the second quarter in a row, we recorded a net profit, showing $0.1 million in the quarter compared to a loss of $1.5 million in the quarter ended June 30, 2022. This is despite being negatively impacted by the one-time costs that Raj mentioned relating to the NASDAQ listing. We anticipate the company maintaining a positive adjusted EBITDA position for the remainder of fiscal year 2023 with an overall positive figure for the full fiscal year. The company generated a positive cash flow of $0.1 million for the nine months ended June 30, 2023, compared to a cash burn of $3.2 million in the nine months ended June 30, 2022, a significant milestone. At June 30, total debt was $16.6 million compared to $16.5 million in the prior year. The company is actively managing its cash to reduce its interest charges. The company believes its available liquidity, along with the collection of $10.1 million of its current receivable, conversion of $5.9 million of inventory into salable finished goods as well as receiving an additional $6.2 million of inventory in process for which deposits have been recorded and prepaid expenses is adequate working capital to support our anticipated growth for the remainder of fiscal year 2023 and into fiscal year 2024. That concludes the financial overview. I'll now turn the call over to Raj for concluding remarks.

Thank you, John. I'd like to start my concluding remarks by reiterating the enormous opportunity that Electrovaya has with respect to the Infinity technology platform. I believe that the timing for our scale-up for this technology couldn't come at a better time. Just as the electrification movement is reaching some level of maturity with respect to battery requirements with a renewed focus on safety and life cycle cost, our technology is being scaled up. As demonstrated by our internal testing and third-party testing at DNV's labs in Rochester, New York, our Infinity cell technology is in a league of its own. There are no competitors that I know of who come close to the cycle life with similar performance metrics. This type of performance combined with our superior safety is getting noticed as these markets mature. We are seeing interest not just in our Battery Systems, but also from very large potential OEM customers where there's potential for cell-level sales as well. Moreover, the Infinity technology platform is ultimately a platform technology that is agnostic to chemistry. As a result, Electrovaya can continue to improve in metrics like energy density or use lower cost cathode materials like lithium-ion phosphate or lithium manganese oxide and still maintain a competitive edge with respect to longevity and safety. As part of our scale-up efforts, we will also be reshoring the separator production and we'll be working closely with our Japanese partners to ensure a seamless integration. As I've mentioned in prior calls, technology is in our DNA, and we are continuing efforts to stay at the forefront. We are adding more talent to our engineering team with a significant planned expansion over the next six months. We've recently filed four patent applications for battery system technology. Our team at Electrovaya Labs is making steady progress with respect to our solid-state battery technology and ceramics development. I expect all these efforts to benefit us in the long term. That concludes our remarks this evening. John and I would now be pleased to hold a question-and-answer session. John, please feel free to open the line for questions.

The first question comes from Eric Stine with Craig Hallum.

Could you provide an overview of the initial orders for the high-voltage product since its launch and break it down by end market? I know you've been collaborating with the bus OEM and also addressing a large RFP in energy storage, as well as exploring opportunities with materials handling customers. A comprehensive update would be appreciated.

Yes, Eric, you're right. There's a lot going on in our high-voltage business development right now. We've received some small initial orders from various heavy-duty vehicle applications. These orders are initial, as the customers want to evaluate how our battery systems perform before committing to larger orders. We're also competing for some significant opportunities in electric buses and other areas like energy storage. The advantage is that all these applications utilize essentially the same battery pack design, allowing us to use the same system across different applications. This commonality will make it easier for us to pursue more opportunities.

And so when you talked about these initial orders and that these would really be fiscal '25 opportunities, I mean, is that basically because that's how long you think it will take just to get through this qualification period with these various parties?

Yes, that's correct. Any advanced OEM typically requires about a year to begin startup production with a new system. That's what we expect. We anticipate that fiscal '24 will still be primarily driven by significant material handling revenue, which is encouraging. We are continuing to grow in that area. The high-voltage systems are expected to start generating meaningful revenue in fiscal '25, and they will contribute to revenue in fiscal '24 as well, but...

Maybe just turning to materials handling. You mentioned the two new customers. I'm curious if you can share some characteristics compared to your current customers.

Yes. So last quarter, I think we announced that we had ten Fortune 100 customers using our battery systems, and this brings it up to about twelve. Now the list up until now has been more dominated by the retail sector. These two additions are in the food distribution space, put it that way.

That's interesting. I've heard in the past that there are sometimes concerns about battery usage in refrigerated environments and temperature changes. I'm curious how the Infinity performs in those different applications. It seems to be doing quite well since you have these two new customers.

Absolutely. We are currently assessing our batteries, but we are already operating in several cold storage warehouses. A good example is Ben & Jerry's ice cream, which I enjoy. It's reassuring to know that they are using vehicles powered by our batteries in their freezers. We have a significant number of cold storage warehouses, and I anticipate this number will continue to grow.

Next question comes from Sameer Joshi with H.C. Wainwright.

Raj, just was wondering how the gross margins have improved quarter-over-quarter despite the top line staying the same? And then part B is, should we expect even more gross margin improvement in the fourth quarter?

So this is John, and I'll address this question. The gross margin improved this quarter due to a combination of factors. As we scale, we are able to take advantage of lower pricing from some of our suppliers. Additionally, we have been very efficient with our production schedule and processing everything through the plant. We are also reviewing designs with our engineering team for optimization. Product mix is also significant; the historically low gross margin orders have been completed, and there were none in this quarter. Moving forward, we anticipate steady and improving gross margin, and that is the trajectory we foresee.

Is the debt facility you are negotiating dependent on your engineering studies and plans being ready? How does that work? A chart of progress on that front would be helpful.

Nothing is contingent. It's just regular due diligence; all the engineering work we had already carried out. It's just a case of getting it reviewed again by a third party to make sure there's no bias in there. So that is more like a formality than a restrictive covenant on the debt.

Yes. Sameer, are you referring to the Jamestown financing or our existing debt refinance?

Sorry, I should have said that. Yes, Jamestown. For the Jamestown.

Yes. As John mentioned, we are in the final stages. It's largely about legal matters and other aspects of the due diligence process. However, we have completed the primary engineering due diligence.

In terms of proving out the 52-amp power technology with these newer customers, are these customers asking for, like, independent clarification? Or are they good with the DSM studies and results?

Well, we actually have already completed third-party validation testing on the 52-amp power cell. So it's already been UL-listed. We have quite a bit of performance data on it as well. So it's fairly well understood. Our plan is to introduce the 52-amp power cell first in our high-voltage products, which, of course, are being scaled up in 2025. And they'll also be introduced on our material high link products at some point in mid-2024.

But for these bus and trucks and mining customers, you don't expect additional testing from these potential customers.

We expect on the sophisticated ones to want to test cells and/or battery systems. That will be part of the engineering process for them, like sophisticated OEMs generally do that.

It's interesting to note that R&D costs and sales and marketing costs have decreased. Should we anticipate these levels to remain, or should we expect an increase in costs as activity in New York picks up and sales of high-voltage products grow? How should we define our expectations for the next six quarters?

Yes, you should expect some fluctuations. R&D expenses can vary since they include salaries for engineers and the materials used in their projects. There may be quarters where less material is purchased, but salaries will remain constant, leading to those changes. As for sales and marketing, you can anticipate an increase in costs as our high-voltage offerings gain more traction and reach more customers.

Yes. Overall, we expect revenue to continue to increase. Any changes in costs are likely to be relatively small compared to overall growth. John and I are focused on maintaining profitability consistently. We're not planning to fall back into losses at any point. We've made significant progress, and we prefer being profitable. Life is better when we are in the black.

Certainly. I understand that you see operating leverage moving forward, which is good to see.

Yes. We definitely won't shy away from making investments where needed. Now if you may have noticed, our sales and marketing costs are relatively low and they've continued to come down. Some of that is due to our focus on partnerships, right? So we have a very small sales team because the OEMs want the product, so we don't really have to sell it too hard. Our sales team is very small, and it doesn't need to be large. We can maintain relatively low costs with respect to sales and marketing. We also don't spend a lot of money on trade shows, etc. So we are cognizant of keeping things tight.

The next question comes from Pavel Molchanov with Raymond James.

I realize we're not quite yet at the end of the fiscal year, but as we look ahead to 2024, maybe just talk in general terms how you're thinking about top line, and you mentioned that EBITDA should remain in positive territory.

Yes. For 2024, we don't want to make any commitments right now. We're almost halfway through August. We'll probably make an announcement on planned 2024 revenue after the end of the fiscal year. But we aim to achieve a higher revenue than what we're planning for this year.

Yes. So Pavel, overall, you can expect pretty strong growth. We've grown and are currently growing 100% year-over-year. Will we be able to maintain that? Probably not, but we are looking at significant growth, over 50%. So it's somewhere between 50% and 100% at this point. That's a broad range for now, and we'll narrow it down as we get closer to announcing our fiscal year results.

In that context, when we think about the margin profile on the high-voltage products for the buses, trucks, and storage, directionally, should that be higher or lower versus the base material handling business?

Well, I'll take a step back. The reason we focus so and we rightly focused on material handling first. We could have focused on high-voltage systems earlier. Just two years ago, I would say if we had done that, our margins would have been extremely tight because there was a lot of competition in the sector, and companies were quite happily selling battery systems at a loss in order to gain contracts and market share. Those companies that were doing that, of course, you know a few of them. One of them recently declared Chapter 11, and the other one was bought out by another group who is also struggling. So I think the opportunity for us now, especially post high-profile recalls in the electric bus and other sectors, put us in a position where we don't have to sacrifice margin in these applications. That said, this is a new product. It takes time to optimize it for cost. We're not planning to lose our opportunities just because we want to maintain a 30% margin. But in the long run, I think the margins can be similar to what we're seeing in the material handling segment.

Last question. We have seen in the last 100 days battery prices come down at a pretty steep rate across the board, EVs, etc. Are you kind of observing that in the market? And what do you think explains that decline?

I think there's always going to be quite sharp cyclability with respect to the commodities used in lithium-ion battery production. We generally sort of hedge ourselves. We secured supply of some key materials for roughly, what, a 12-month period. We did take advantage of some cost reduction. But let's say next month, you see a big drop in lithium carbonate pricing; we're not going to be able to take advantage of that. It's sort of on an annual basis for us. I think as the industry steadies itself and gets up to scale, you'll start seeing some more stability with respect to those prices. Lastly, we're almost in a bit of a league of our own. Again, we're selling a premium battery system for a specialized heavy-duty market, which isn't as cost sensitive as the other markets. So passenger EVs, these make a very big difference for those markets. For us, we're definitely less sensitive.

The next question comes from Tom Curran with Seaport Research.

I'd love to hear an update on your solid-state battery platform. Any points of progress that you would highlight from the quarter? And do you still believe you're on track for first commercialization in 2025?

So research, of course, is a bit of a roller coaster. So things change on a dime. That said, the team there is very confident; they're making good progress. We're also starting, as of a few months ago, to produce the ceramic materials in-house. So that's aiding our development process. But I'd say it's too early to say at this point in time when this technology is commercializable.

Are you aware of any other development efforts occurring in parallel with yours around the anode-free concept? Or do you believe this is an only in-class innovation that you're advancing?

No, I think others are also focusing somewhat on the anode-free setup. I don't believe we're the only ones working on this. That being said, our advantage in solid-state battery development comes from our team, particularly the Electrovaya Labs led by Dr. Sankar Das Gupta, our Founder, who is an exceptional scientist. They are making significant progress. Additionally, we possess substantial expertise in producing and using ceramic separators. The Infinity battery technology platform is based on a ceramic separator, and solid-state batteries will likely require similar materials. I think this positions us well. However, it's still too early to determine if this will be a viable product.

The next question comes from Shawn Severson with Water Tower Research.

Raj, when you look at heavy-duty commercial applications, are you engaging with OEMs that already have a well-established fleet of EVs and are experiencing strong sales, or are you more focused on companies that are just beginning to launch their products in this sector?

Most of the companies we are engaging with already have existing product offerings, such as electric buses, and are now focused on developing the next generation of these vehicles. They are seeking improved battery solutions, which is advantageous for us. If a company has had a negative experience with its battery supplier, it makes it easier for us to present our solution, especially if we can resolve issues related to safety or longevity. Safety has become a significant concern in the industry, and this presents an opportunity for us. We also believe that some current offerings are not meeting performance expectations, which again benefits us. This is primarily what we are focusing on in our discussions with OEMs. For example, in the mining sector, I am directly communicating with some major mining companies that operate large fleets of vehicles. This sector is more interesting than we initially anticipated.

And I'm assuming that this has given you some of that confidence and growth into 2025 because you're looking at these customers; you're seeing volumes, right? So I'm assuming if they make the conversion and they're making the move, your adoption curve is going to be rapid inside the platform that you would become the dominant battery supplier for their platform. Is that a correct assumption to make?

I think so. We hope so. I can't speak for the OEMs. But if our product is fitting well in their application, no reason why we shouldn't be.

And is there an opportunity for retrofit there similar to material handling? Could you go back in and as the lithium-ion battery packs are wearing out on existing buses, prior generation, can you retrofit there as well?

I'm sure you can. Our focus, though, is that we're a premium product. Premium products are generally better suited for new equipment. So I would predict that retrofitting would be unlikely, perhaps more feasible in mining. However, for buses and trucks, it's difficult to say. My instinct suggests that new vehicles would comprise the vast majority.

And then my last question on that is, you had an ROI sale, and still do, of course, in the material handling side. In the commercial vehicle side and heavy-duty side, is this just more about safety and some of the other concerns you mentioned? Or is there an ROI calculator that you can look at that says, look, you use our batteries versus previous platforms, the economics are here?

I'd say it's both. We have a recall, which many of these OEMs experience, and that can be very costly. This definitely impacts return on investment over the long term. Additionally, due to the durability of our battery systems, we can potentially provide longer warranties. This is one way we enhance return on investment, particularly when OEMs or applications are considering upgrades on batteries. Many truck and bus applications typically operate within a six-year or eight-year refurbishment cycle, which can be avoided by using our batteries. That’s a significant advantage. There are benefits related to both safety and longevity that we provide. Thank you, Shawn.

The next question comes from Aaron Martin with AIGH Investment Partners.

Raj, John, congratulations on the progress. A lot of my questions have been answered. I'm not going to ask for a detailed forecast for the entire next year, but regarding seasonality, last year you had somewhat muted seasonality. How should we approach that as we start the new fiscal year?

So as I mentioned at the start, we have new customers, right, in segments like food distribution. These are large corporations. In previous years, we've been heavily dominated by retail companies, especially the e-commerce operator as well as a few others. They are very seasonal. However, when you take into account these other opportunities, which are expanding quickly, I would expect that seasonality still exists to some extent but is definitely muted going forward. So does that sort of answer your question?

Got it. I appreciate that. Regarding the gross margin, was the grant revenue a significant factor or was it not really one of the key components?

Grant revenue, we have essentially no margin on grant revenue.

Yes, there's a 0 margin on grant revenue.

That actually was a couple of percentage detractor.

Correct.

Yes.

We have no further questions in queue. I would like to turn the call back to management for any closing remarks.

We have no further remarks. John, thank you so much. That concludes our call. Thank you for listening. We look forward to speaking with you all again after we report our fiscal fourth quarter 2023 results. Have a wonderful evening.

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