Andy Ganapathy - Vice President of Sales Sankar Das Gupta - Chairman, Chief Executive Officer and Co-Founder

Greetings and welcome to the Electrovaya Completes Transformational Acquisition of Litarion, Global Rights to a Ceramic Separator and Reports Second Quarter Fiscal Year 2015 Results 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. It is now my pleasure to introduce your host, Andy Ganapathy, Vice President of Sales. Please go ahead, sir.

Thank you, operator. Good morning, everyone, and thank you for joining us on today’s conference call to discuss Electrovaya’s transformational acquisition of Litarion, global rights to an ultra-safe ceramic separator and also the second quarter fiscal 2015 financial results. Today’s call is being hosted by Dr. Sankar Das Gupta, CEO; and myself, Andy Ganapathy, Vice President of Sales. Yesterday evening, Electrovaya issued a press release concerning its acquisition and financial results for the second quarter of fiscal 2015 of the quarter ending March 31, 2015. If you like to get a copy of the release you can access it on our website. If you would also like a copy of our financial statement and Management Discussion and Analysis, you can access it 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 the size and 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 than about materials factors or assumptions applied in making forward-looking statements may be found in the company’s most recent annual and interim management’s discussion and analysis, under Risks and Uncertainties, as well as in other public disclosure documents filed with Canadian securities regulatory authorities. And now, let me turn the call over to Dr. Sankar Das Gupta, CEO of Electrovaya.

Thank you, Andy. Good morning and thank you for taking the time to discuss our second quarter fiscal 2015 results and more importantly the acquisition we carried out in Europe about two weeks ago. I will review our financials and give some color to our acquisition, which we think is really transformative for Electrovaya. Andy will discuss our sales pipeline, and thereafter, I will conclude on how we are merging the great technologies from both Germany and North America. Our CFO, Paul Hart, is travelling, hence, I will discuss the financial results and will really focus more on discussing the business opportunities and directions. So as we mentioned earlier, our financial release was sent out yesterday, at which time the financial statements, MD&A and press release were filed on SEDAR. For the quarter, revenue was CAD 703,000 or USD 573,000, a 100% or 105% increase over the quarter ending December 31, 2014. Gross margin remained at 23.9% similar to 28.6% in Q2. USD 759,000 of net proceeds were raised through the sale of equity in a brokered placement during the quarter. Our cash and cash equivalents at CAD 721,000 as of March 31, compared to CAD 1.7 million of December 31, 2014, decreased from the prior quarter as we invested in the acquisition process, the working capital required to complete and ship products during the quarter for which the cash was not yet collected. We did complete the delivery of a large unit to Glencore and expect the balance of the payments next quarter. Our current sales pipeline is strong and growing, and Andy will discuss this with you later. The acquisition of Litarion allows us the delivery now from a very large 500 megawatt size factory, which is operational today. With that said, I will focus on our acquisition.…

Thank you, Sankar. The current revenue strategy for the merged company is to focus and deliver products in key target segments. Utility scale energy storage system, industrial and automotives are key segments for the system sales, followed by revenue derived from sales of separators and electrodes. And I’m going to go one-by-one. We’re expecting significant revenue growth in the utility energy storage market and currently have established a sales pipeline to some of the leading utilities and independent power producers in North America. This current pipeline includes a potential of delivering over CAD 45 million in the utility energy storage sector alone in the next 12 months. The demand in the industrial sector is massive. They typically use lower voltage systems, in the range of 24 volts to 80 volts. This will be a priority sector for Electrovaya in both Europe and North America. The current sales pipeline is over CAD 80 million dollars with multiple key Fortune 100 customers. Next two months for us will be very crucial as we complete production design and fleet trials with various customers. Litarion supplies to Daimler’s electric vehicle program have built a great reputation in this field, making automotive sector a key focus segment. As the non-NMP process drives down the manufacturing cost of electrode, our cells will be more competitive against Asian competition. The merged company will also tap into the high-end battery separator market, which is expected to grow by 24% per year until 2020 reaching over CAD 3 billion. Significant safety improvements are found when cells use the Litarion separators versus regular lithium-ion separator materials. Up until now, the Litarion separator has only been available to Daimler. However, the company is starting to sample the material to other leading battery manufacturers worldwide. We expect revenue from the separator materials to increase to many millions in next year. The Litarion facility will also be able to sell electrodes to other customers as well. The group has begun sampling electrodes to various companies in Asia with positive results, due to the very high-quality performance and cycle-life properties of the Litarion separator, we expect certain customers who desire this high standard to use our solution. We have already secured a contract with a leading cell making company in Germany, Leclanché, and may have downstream assembly plants in India and Middle East. With majority of the electrodes shipments from Litarion being utilized by Electrovaya system requirements, total sales in the next 12 months are expected to be large. Overall, we have a pipeline of over CAD 150 million. At this point, I will hand over the call to Sankar.

Thanks, Andy. Now that we have a large production capacity along with the merge and complementary technology base, we plan to become the leader in this emerging industry of energy storage. So Electrovaya and Litarion together have the needed breakthrough-technology and now have over 500 patents to make lithium-ion batteries the industry standard. We have no toxic chemicals, no birth defects in our production process unlike all our conventional manufacturers. We have a green technology which customers are looking for. We are reducing costs dramatically when you have no toxic chemicals to manage. We have unparalleled safety. Anecdotally, most electric car companies have safety incidents except for our client. They had many tens of thousands of electric cars operating and yet with zero safety incidents. Lithium-ion has a safety challenge and we have the solution with our unique ceramic embedded separator. The cycle-life of our technology is brilliant. Using the same graphite and lithium NMC anodes we get 9,000 cycles, where others are maxed out at 3,000 to 5,000 cycles. Again, this cycle-life gain is due to our proprietary materials chemistry. We have extensive experience. We have built systems for aerospace, for automotive both here and in Asia, built the first all-electric ferry boat running in Norway, large megawatt energy storage systems, complex systems for utilities in UK’s largest smart city project and for many industrial applications. This acquisition gives us immediately a 500 megawatt hour operational plant to continue to support, not only their present automotive customer, but more importantly to branch out to many of the high margin applications we have designed and developed over the last few years. This concludes our prepared remarks. Jesse, we are now ready to open the call to questions.

Thank you. Ladies and gentlemen, at this time we will be conducting a question-and-answer session. [Operator Instructions] Our first question is coming from the line of [Omrish Karnada] [ph] with Euro Pacific Capital. Please proceed with your question.

Good morning, gentlemen. Thank you for taking my question. You’re bringing material production capacity with this acquisition. Can you tell us about where this capacity will be deployed in the near-term and market-wise? I know you touched a little bit upon that and maybe you can follow that up with where it currently stands, what markets are being served and specifically end-market expansion in the near-term? What future markets you might want to apply this capacity to?

Omrish, thank you and good morning. Some of the capacity has to continue to our present buyer, which is the large German automotive company. And we’ll keep on supplying them with the product, but the rest of the production process as we ramp up will go to in our opinion higher margin areas. And we are seeing high margins coming out of the energy storage business, industrial business, and multi-sectors, also marine transportation, as well as some critical areas where we are replacing diesel and also energy storage with solar and wind.

Thank you for that. My second question is on the licensing agreement. Can you offer a bit more color about what that entails and what exclusivity is included in the agreement? Are you the exclusive distributor and how would that all work?

Yes, this breakthrough technology, which is a ceramic embedded composite separator, was invented and I think there is about couple of hundred patents supporting this technology. And we are picking up exclusive license for all lithium-ion battery applications. Any non-lithium-ion battery applications such as membranes, Evonik is keeping the rights to that. So Electrovaya will have complete global rights for lithium-ion battery applications and these rights extend to expanding our German production, as well as building other plants as demand grows.

Great. Maybe if you can offer some color on this €3 million payment that you expect to receive from the seller. What is that related to and maybe timing on that?

These are - the seller - we essentially purchased the plant with our technology. So although it looks like as if the seller is paying us to take over the plant, that’s not correct. We essentially putting - our technology is going in, but the seller has been very, very gracious in making sure that they put in enough cash to keep the plant running. This CAD 3 million are from calculations which is happening as we speak, because it was not - the closing was not at a quarter’s end, the closing was on April 30, and there were some financial changes. So we are expecting another €3 million to come in and over the next weeks or maybe two or three months.

Great, great, thank you for that. That’s very helpful. Maybe if you can talk a bit about the feedback you are receiving from your current customers and potential customers you’re currently in discussions with about this acquisition, specifically on the separator technology. What are there some of - what are some of the emerging thoughts behind this and how do they respond to your move?

Omrish, a very good question. Our present suppliers are absolutely are delighted, because they like our product. They are always been wondering how we can supply this massive demand which is coming up. So they are really, really happy to see that we have got such a highly automated very - almost a new plant in Germany to supply them, so that. And the second thing is on separator side, the world knew that this was the most fabulous separator, because anecdotally electric car companies have safety incidents and this is the only major electric car company with zero incidents, and the separator was unavailable to anybody else. So once we started negotiating to take over this company, we started also to supplying these separators to certain critical clients and they are ecstatic over the safety improvements they see of this separator over any other separator in the market today, so they’re really very pleased that the transaction has gone through and that they will have a capability of accessing this separator. And our aim, Omrish, and again from a technical reason, our aim is to make this ceramic composite separator an industry-standard. And this will remove the challenge lithium-ion batteries have in people’s mind saying, oh, is it unsafe, because of the Boeing 787 incidents and other incidents. So we want to remove that worry, that no here you have a ceramic separator which gives you this most incredible amount of safety.

Yes, sounds like a significant competitive edge at least for the automotives market where you participate. And maybe if you can - having said that, maybe if you can give us a little bit more color in terms of the current customer that the plant that you just acquired is supplying? Can you tell us a little bit about this contract that you acquired via this acquisition and maybe what the potential contribution to your sales would be over the near term?

Omrish, one of the reasons this plant became on-sale, was the auto-companies, they like performance but they like price as well. And this plant was not competitive to the Asian manufacturers on prices. That was the main problem. And with its toxic chemical production in Germany, the regulations were so tough that the cost of running a plant with these toxic chemicals were so high that they could not compete on price with Asian competitors. So that was the reason why the Germany auto-companies had said that cost has to come down. So we are expecting the plant to keep supplying the auto-company for the next few months and because we have announced that they are switching over to a much lower price, cells from an Asian competitor. But we find there is enough demand coming up from Europe and elsewhere for products from this plant. So yes, we’ll keep supplying the present client for a few months before they switchover.

All right. It sounds like there is going to be a conversion of the existing production lines at the plant in question at the Litarion plant to your non-NMP proprietary production process. Can you speak about the timeline of this phase-out and potential benefits to you on the back of the asset disposal, of the legacy asset disposal that they currently have there?

Presently, they’ve got multiple NMP lines. It’s a fairly large plant. I think they got about four or five NMP lines. So what we are going to do is do a staged conversion, so that we will keep some of the NMP lines running, while the other lines will be taken off and the Electrovaya lines will be installed. So there would not be any interruption in supplies to both our present clients or to any future clients. Now, for our lines to come on line, it will be a staged process. We are looking at sort of 9 months to 12 months.

Right, that’s helpful. Maybe a couple of final ones, the Litarion subsidiary entered into a strategic agreement. I think you mentioned that at the top of your call with a leading cell manufacturer. Can you tell us a little bit about how that will impact your operations from the strategic point-of-view and if there are any impact on the financials in the near-term?

Well, now that we have purchased Litarion, we are open to selling its products to everybody. It’s no longer a captive plant for just one customer. So what we envisage is that Litarion is going to be like the mother-ship pouring out electrodes and separators, and there will be lot of cell assembly people downstream. We are looking at joint ventures in India, Middle East, as well as elsewhere, so these downstream people will put together, assemble the cells and put together systems. So we had announced Leclanché to be one of our first customers. This is a Swiss-German company and they have cell assemblies, they are looking for electrodes and so on. So they are one of our - going to be our first customers outside the present automotive company Litarion is supplying to.

Great. That’s very helpful. And maybe a final one from me related to your results. You talked about a robust pipeline in North America, could you tell us a bit about what you’re seeing in this market and sort of what traction you’re getting, and maybe the environment for lithium-ion batteries in North America?

We are seeing very high, large traction. Almost every day we get inbound calls looking for quotations and request for quotations. And this is something we have never seen in the last few years. So I think the growing need for lithium-ion batteries is growing very, very quickly. And at the same time we’re seeing constriction of supply. We are seeing some major, major companies who have shutdown or gone into Chapter 11 and so on. So we are - in that sense, we think the market is at the cost, it’s now changing. And I think a lot of the analysts who’ve been talking about hundreds of billions of dollars going into the energy storage industry, I think they’re correct.

Great. Thank you for taking my questions, gentlemen, and congratulations on your acquisition.

Thanks, Omrish.

Thank you. [Operator Instructions] Our next question is coming from the line of [Rohit Shah] [ph] with TCW Group. Please proceed with your question.

Yes, hi, Sankar. A few questions, first on the German takeover, you said it will take 9 to 12 months to replace the NMP technology with your toxic-free technology. So what will be the impact on sales and production from Litarion?

We are trying to - Rohit, good to talk to you. We are trying to have zero-impact. So we’re going to do is - the plant is producing as we speak and the plant has clients. So we’re not going to disturb the production process. So they have I think four or five lines of NMP. So we’ll keep some of the NMP lines running, while in parallel, we’re going to take one or two lines of the NMP out and start putting our Electrovaya’s process in. And so you’ll have seamless change as the Electrovaya process comes on stream and the NMP process goes off stream. So for the customers they should not see any change, except they will see a see a better electrode coming out, because fundamentally the Electrovaya process produces better electrodes than the NMP process and that’s due to all kinds of technical reasons I don’t want to get into.

Okay. What will be the net financial impact of changing the NMP machinery to the non-NMP machinery? And I’m assuming you will be selling off the NMP processing equipment.

Rohit, the net impact at Germany in - first of all, you’ll have a very large the lowering of energy costs. In Germany, energy cost is quite high, higher than in North America. So when you drop their energy cost by 70%, 80% that will be quite spectacular drop in their production costs. And then they don’t have to do all those NMP handling and those millions of gallons and liters of air which has to be cooled, and so that - and they even use liquid nitrogen to get the last drop of NMP out, so all those process changes and cost will go down. So we are estimating a very large drop in the cost. The Oak Ridge National Lab paper is estimating almost USD 50 per kilowatt hour drop in cost if you can get rid of the NMP. So if you think a cell cost is - I’m just throwing a number, USD 200 per kilowatt hour. So we will be USD 50 lower than any producer.

Right and what will you do with the equipment, the NMP?

Rohit, we have not decided yet. We’ve just sort of taken over the plant. There is a terrific - I should tell you that the technology team in Litarion is fantastic. Almost everybody I meet has a PhD, but it’s something which we are looking at.

Okay. So the key question, I guess, for investors is how much money do you need going forward in the next six months in particular, given that your cash numbers are pretty low. So can you give us some idea about how you’re going to deal with that issue?

When you look at the German operation, they are actually a profitable operation. And not only it’s a profitable operation, it’s a complete debt-free operation. Anecdotally, and don’t hold me to these numbers, but anecdotally I’m told, they have spent over €500 million, which is what, CAD 700 million behind that operation. So it’s a complete debt-free operation. It’s a profitable operation. And more importantly, they left quite a bit of cash there, so that we can run very, very nicely. And Electrovaya is adding its processing operation and it’s adding its systems side. So we are not looking for any major cash investment needed. Now, to put the Electrovaya process in there, there is a large amount of interest in Germany to - from the government to support that process, to go to a non-toxic process, so we have access to large amounts of funds to finance the conversion. And we don’t expect shareholders to pay for that, hope not.

Okay. So clearly Litarion doesn’t need any money. But what about the parent company over there?

The parent company also has got lot of - as Andy said, we have a huge, huge sales pipeline and our problem was we were throttled down on the delivery side. So I think we see both Litarion and Electrovaya to be very profitable going forward.

So Electrovaya doesn’t need any working capital, I mean, do you - given that you’re down here in terms of cash, you don’t expect to raise money through an equity issuance?

Rohit, unfortunately, Paul Hart is travelling, but basically we are looking at - on the working capital side, we are hoping - we are looking at banks and groups like EDC, Export Development Canada, et cetera who should be able to meet our working capital requirements.

I see, okay. So let’s go back to Litarion. Now, obviously this is a much bigger company than Electrovaya, at least in terms of employees and definitely in terms of size and sales and what have you. So there is always - when you have two companies merging there’s always a question of culture clash and there is a question of acceptance by the company that’s been acquired about the new parent company. So can you give us a sense of what the German employees of Litarion or how do they view this takeover? And secondly, given that Litarion’s fate was so uncertain for the last several months and years, I’m assuming they had issues with getting sales contracts, right? I mean, why would you enter a sales contract with a company that you might believe is going out of business? So how much of a pent-up demand could come back to Litarion, now that the deal has been consummated?

Rohit, two very good questions, one is the cultural clash. Litarion has a tremendous technical team and really its business management team was very low, because it was a captive supplier to a German. So what is happening is we have been working and we are also a very technology intensive group, but with a strong business development team here. So we are finding that we really are very, very complementary in skills. They are bringing in lot of very good technologies. We are bringing in lot of very good technologies and these are merging very nicely. So I think on a cultural basis it’s working out very well so far I can tell you. And on the pent-up demand, yes, there was a massive pent-up demand. That’s a very good point. Europe is probably a leader in the alternative energy space. Germany is shutting down all its nuclear plants. I was talking to one CEO of distribution - utility operation in Germany, and he is talking about something like 80 gigawatt hours worth of storage, and most of it has to come from these lithium-ion batteries. So the pent-up demand is very high, and really Litarion - and now that we have taken it over I think customers are very happy that we can supply. And on the cultural aspects also, if we did not take it over, that plant was - could not really function in environmental regulatory conditions like Germany. So the people are very happy, the workers, as well as the technical team that we now have saved together, we have saved the plant. So we got a very good dedicated technical group there and I think the pent-up demand in Europe is just spectacular. And really this is the largest plant in Europe. Europe has very few lithium-ion battery plants. And it’s almost in a, as I said, near-monopoly situation there.

Right, right. Just going back to your customers, the utilities in particular, they take a long time to pass acceptance or any new products, particularly something like energy storage. So can you give us a - you mentioned this in the passing that you’re close to finishing the trials for electric utilities. Can you give us some more meat on that, I mean, when do you expect the first few orders to start come? Further, let’s just go sequentially, when do you expect these trials to finish? When do you expect the final report and when do you expect to see actual sales materialize from these electric utilities that you’re trialing right now?

The utilities industry is conservative and they have been thinking about energy storage probably for about a decade now. And Rohit, I’m really, really pleased to say that finally they have all decided that energy storage with lithium-ion batteries is the way to go for. So now, these guys have all woken up. They are all saying give me lithium-ion batteries for energy storage. And you will not believe the amount of request for quotations we are now receiving over the last couple of the weeks or months. It’s just pouring in. And this is true for other lithium-ion battery suppliers, I’m sure. And you’ll see large announcements coming from the utility space. Now, previous to the acquisition, we really did have capability or capacity to deliver or bid on these large systems so people would ask us to bear and we would politely refuse, but now that we have this large asset join us, we are very happy to see that it’s coming through. Now, when will it get reflected in our numbers? I think 2016 is you will see the big upsurge starting in 2016.

Okay. So if we take you at your word, you have the safest battery technology, lithium ion battery technology; you have the longest lasting, in terms of deep recycle charges; and you have the cheapest technology based on the toxic-free technology. So effectively you become, what I would call, a platform technology, right? And you can literally take this technology and put it in every sort of application. My question is how do you prioritize that? Where do you expect to see, I guess, the most bang for your buck, the highest profitability? And secondly, can you comment on Tesla’s, this Powerwall sales pitch that they are putting up, and what do you think of the profitability of that kind of business?

Yes, Tesla is a magnificent company. We are very, very supportive of them. And they’re doing tremendous things for the community as a whole. They’re really putting energy storage in the maps. So we would like - and they’re getting a valuation. I think their valuation should be higher, because this is a - they’re playing in this hundreds of billions of dollars of emerging area. And so we really applaud their work. And so Tesla is terrific company. Now, going back to Electrovaya, again the market is so large, Rohit. It’s very - we are focusing on areas, which give us the highest margins. So auto is good, but we see lot of other areas which tend to give us a higher margin. Definitely, utilities give you higher margins. Industrials give you higher margins, lot of other sectors. And again, this market is emerging so our focus will be on high margin businesses.

Okay. So let me - since you said you don’t need - you said, you expect your working capital to be financed by, looks like debt, can we go back to the sales question that was asked earlier? When do you - well, what kind of numbers should we expect for this year and I’m assuming next year will be much better. But if you can give us the lay of the land for the next six months, that’d be one thing. The second thing is, as you scale up this company, are you adequately - do you have enough people at the top to take this company to the next level?

Two very good questions, so on the sales side, we are going through the number. This acquisition just took place and so we are doing lot of analysis and just now we are not giving any guidance to sales in 2016 and onwards. But things are looking good. On the second point, on the people point, you’re 100% right. This is now an execution thing. We have been adding lot of good people at - in Toronto. And even with the very short period of two weeks we have started adding people in Germany as well so that we have a - it’s all about execution and we are adding I think good folks both here as well as in Germany. And you will see some announcements as we add them.

Okay. So, congratulations, I think this is a phenomenal deal that you managed to strike against all odds and I hope you guys are doing a good job in executing for the next several months. Thank you.

Thanks.

Thank you. We have reached the end of our question-and-answer session. I would like to turn the floor back over to management for any additional concluding comments.

Thanks, everybody, to listening to this conference call. And have a wonderful day. And thanks, everybody. And look forward to speaking with you in the coming months. Thanks. Bye.

Thank you. Ladies and gentlemen, this does conclude today’s teleconference. We thank you for your participation and you may disconnect your lines at this time.