Axion Power International, Inc. (NASDAQ:AXPW)
Q2 2013 Earnings Conference Call
August 15, 2013 11:00 am ET
Thomas Granville - Chairman, Chief Executive Officer
Rudy Barrio - Allen & Caron, Inc., Investor Relations
Charles Mackall - Avenir Corp
Good day and welcome to the Axion Power Second Quarter 2013 Earnings Conference Call. All participants will be in a listen-only mode. (Operator Instructions) After today’s presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note this event is being recorded.
I’d now like to turn the conference over to Rudy Barrio of Allen & Caron, Investor Relations. Please go ahead.
Thank you, Laura. Hello, everyone and good morning. Thank you for joining us today. The purpose of this conference call is a supplement to the information provided in Axion Power press release announcing the company's financial results for the second quarter of 2013, which was disseminated earlier this morning. Many of you received a copy of the press release. If you did not receive a copy of the press release, it is posted on Axion Power’s website at www.axionpower.com and in the Clients section of our website at www.allencaron.com. It is also posted on Yahoo Finance and most financial sites. You may also call our office in New York at 212-691-8087 and we will email it to you.
Speaking on today’s call is Chairman and CEO, Thomas Granville.
Before we begin, I’d like to remind you that certain statements made during this call, may constitute forward-looking statements. These forward-looking statements and all other statements made on this call that are not historical facts are subject to a number of risks and uncertainties that may cause actual results to differ materially. Any forward-looking statements made on this call today, speak as of today and Axion Power does not undertake any obligation to update any such statement to reflect events or circumstances occurring after today.
Please refer to today’s press release, the company’s Annual Report on Form 10-K for the year ended December 31, 2012 and subsequent SEC filings for a description of factors that could cause forward-looking statements to differ materially from actual results. As a reminder, today’s call is also available as a webcast and can be accessed from Axion Power’s website by clicking on the Investor tab. A replay of the webcast will be available shortly after the call and will continue for 30 days.
I’d now like to introduce Axion Power, Chairman and CEO, Thomas Granville. Good morning, Tom.
Good morning Rudy and good morning ladies and gentlemen.
At the beginning of our last quarterly call on May 16, I mentioned the success of our plan to reduce spending and conserve cash. In our financial report, I gave as of the end of April was promising and now the final numbers for the quarter are in alignment with those promising early results. This is attributed to the plan, Chuck Trego, recently retried CFO put in place and executed with the help of Phil Baker, our Chief Operating Officer.
I said retired but Chuck really isn’t retiring. He accepted our offer to remain with the company as a consultant to the Finance Department and for special projects. His duties will include assisting with the interview process as we seek our new CFO and assisting with the transition of the new CFO. Chuck put together an excellent financial department staff in his three plus years at Axion and actually hired a new plant controller earlier this month before his CFO role ended.
In addition, Chuck hired and mentored our current Corporate Controller, Daniel Baker and the two will continue to collaborate for the next six weeks. In the six weeks out is our Annual meeting. Some of you may have already know from our filings but for those of you that don’t, we have nominated Chuck for the Board. And he will stand for election to a three-year term at the Annual Meeting on September 26.
We know many of you on the call regularly attend the Annual Meeting. The numbers have grown each year. For those of you who on the call that have not been able to make a past Annual Meeting, we would encourage you to do so if possible. These events will include plant tours of both facilities and an early evening reception where shareholders have a chance to meet and converse with some of our top employees.
At this point in the meeting, I normally turn it over to Chuck for the financial story, but today, I will be giving that report.
So, financial review comments for Q2 2013. Yesterday August 14, 2013, we filed our Form 10-Q for the second quarter of 2013 with the SEC and we encourage everyone to read it as it discloses relevant investor information about Axion Power International.
I’m now going to comment on some of the key drivers of our operating results and cash flow for 2013 compared with 2012 and our liquidity situation as of June 30, 2013.
Operating results, net sales; net sales for the three months ended June 30, 2013 were $2.7 million compared to $2.8 million for the same period in 2012. Net sales for the six months ended June 30, 2013 were $4.9 million compared to $4.5 million for the same period in 2012.
We have one customer that accounted for approximately 88% of net sales respectively for the three and six months ended June 30, 2013 as compared to 88% and 82% of net sales for the three and six months ended June 30, 2012. The increase in net sales is due to series of orders for ungranted flooded lead-acid batteries with the purchaser sharing the cost of inventory and providing the raw materials for production.
Cost of sales; cost of sales for the three months ended June 30, 2013 were $2.3 million compared to $2.4 million in 2012. Cost of sales for the six months ended June 30, 2013 were $4.3 million compared to $4 million for the same period in 2012. The increase in cost of sales is commensurate with the increase in net sales.
Gross profit; gross profit for the three months ended June 30, 2013 was $0.4 million compared to $0.3 million for the same period in 2012. Gross profit margin was 14.8% in the three months ended June 30, 2013, compared to 11.6% for the same period in 2012. Gross profit for the six months ended June 30, 2013, was $0.6 million compared to $0.5 million for the same period in 2012. Gross profit margin for the six months ended June 30, 2013 was 13.1% compared to 11.4% for the same period in 2012.
Operating expenses for the three months ended June 30, 2013 and 2012 were $2.3 million in both periods. Operating expenses for the six months ended June 30, 2013 were $4.6 million compared to $4.7 million for the same period in 2012.
Non-operating income items include expenses, gains and losses related primarily to the issuance on May 8, 2013 of private placement senior convertible notes and warrants as disclosed in footnote 6 to the consolidated condensed financial statements. The increase in non-operating income for both the second quarter and the first half of 2013 compared to the periods in 2012 related primarily to the accounting for the private placement senior notes and warrants and added almost entirely non-cash impact on our operating results and cash flow for the second quarter of 2013.
Liquidity and capital resources, our primary source of liquidity has historically been cash generated from issuances of our equity securities. From inception through June 30, 2013, we had generated revenue from operations that was not significant enough to produce an operating profit. On May 8, 2013, we consummated the sale of our senior convertible notes and warrants issued by the company with gross proceeds of $9 million to us. At closing, we received cash proceeds of $3 million and had deposited an additional $6 million into a series of control accounts in our name.
We are permitted to withdraw funds from our control accounts in connection with certain conversions of the senior notes, or otherwise as follows; $500,000 on each 30 day anniversary of the effective date of the registration statement on Form S-1 filed pursuant to the requirements of this $9 million financing, commencing on the 60th day after the effective date until there are no more funds in the control accounts. The senior notes bear interest at 8% per annum and are convertible into shares of our common stock at an initial per share conversion price of $0.264 subject to certain adjustments. The senior warrants entitled the holders to purchase in aggregate, 17,281,107 shares of our common stock. A five year senior warrants are exercisable at a price equal to $0.302. We received approximately $2.76 million in net proceeds at the May 8, 2013 closing after deducting our placement agent fee of $240,000.
Other offering expenses other than our placement agent fee were approximately $100,000 and were paid out of the proceeds at closing. At each $500,000 funds released, we will receive approximately $460,000 in net proceeds after deducting our placement agent fee of 8% equivalent to $40,000. Simultaneous with the closing of the $9 million financing transaction, company sold $1 million principal amount of subordinated convertible notes to investors that consisted of management and directors of the company and one accredited individual investor.
Sale of the subordinated convertible notes will not carry any additional fees and expenses, so the entire $1 million investment is netted to the company. Subordinated convertible notes are subordinated in right of repayment to the senior notes to the company and mature 91 days subsequent to the maturity date of the senior notes. Subordinated convertible notes bear interest at the rate of 8% per annum which shall accrue.
Once two-thirds of the senior notes have been repaid and the subordinated convertible notes maybe converted and/or prepaid in cash so long as there is no event of default with respect to the senior notes and all applicable equity conditions of the senior notes are met. The conversion price for the subordinated notes is $0.264 per share. Holders of the subordinated convertible notes were issued five-year warrants to purchase 1,920,123 shares of the company common stock, each warrant as an exercised price of $0.302 per share.
We believe that the currently available funds at June 30, 2013 and including net proceeds from May 8, 2013 issue of $9 million in senior convertible notes and $1 million in subordinated convertible notes and internally generated funds from net sales will provide sufficient financial resources to fund our current operations, working capital and capital expenditures beyond the second quarter of 2014.
Subsequent sources of outside funding might be required to fund the company’s working capital, capital expenditures and current operations beyond the third quarter of 2014. No assurances can be given that the company will be successful in complying with certain of the terms and conditions of the senior notes or subordinated convertible notes or arranging further funding if needed.
To continue the execution of its business plan including the development and commercialization of new products are successful on (more) terms. Value to obtain such funding will require our management to potentially curtail if not cease operations which will result in a material adverse effect on the financial position and results of operations of the company. That finishes the risk factors.
Cash, cash equivalents and working capital; cash and cash equivalents at June 30, 2013 was $2.8 million compared to $2 million at December 31, 2012. Cash equivalents consist of short-term liquid investments with original maturities of no more than 6 months that are readily convertible into cash. Restricted cash at June 30, 2013 was $6 million compared to $0 at December 31, 2012. There is a note that effect, its note number 6 to the condensed consolidated financial statements on our filing.
Working capital at June 30, 2013 was $6.8 million compared to $4.8 million at December 31, 2012. Cash flows from operating activities, net cash used in operations for the first six months of 2013 was $2.6 million compared to $3.8 million for the same period in 2012. This represents a decrease in net cash used in operations of $1.2 million or 31% primarily due to a decrease in net loss. Net cash used by investing activities for the first six months 2013 was $0.1 million compared to $0.5 million for the same period in 2012. This represents a decrease in cash used by investing activities of $0.4 million or 80% primarily due to lower capital expenditures.
Cash flows from financing activities. Net cash provided by financing activities for the first six months of 2013 was $3.5 million compared to net cash provided of $8.6 million in 2012.
Cash flow summary; for the first six months of 2013 compared to the same period in 2012, excluding the cash provided by financing activities of $3.5 million in 2013 and $8.6 million in 2012. Our cash flow used by operating and investing activities was $2.7 million in 2013 compared to $4.3 million in 2012, a reduction in net cash burn of $1.6 million or in effect a reduction of 37%. Rather significant reduction in net cash burn is in alignment with the plans we initiated beginning in 2012 and continuing in 2013. These plans to improve our liquidity while continuing to focus on those activities, critical to the initial commercialization of our PbC technology continue in full force. That concludes the financial report and so I guess, I can turn the call back over to myself to move forward with my comments.
I certainly expect a new voice would be making the financial report for the third quarter. A search is well underway and we have narrowed the search down to approximately 10 candidates that goes with all of the skills we feel, we need in a CFO. Here we have excellent choices on our remaining list, so now it’s up to us to identify the best choice/bid for Axion.
Candidates we have spoken with the course are interested in a number of facts regarding their new potential employer. But high on that list is the status of potential customers for our product. And this is an overview of what we’ve told, will tell basically all of them. Our large lead-acid battery customer, we have spoken of this in the past it’s in our filings and most of you know the story so there is no reason to be (labor) it further except to say that this partnership is going very smoothly. Our deliveries remain 100% on time, the return of products is totally negligible and from what we’ve been told expect the relationship to continue deep into 2014 and beyond.
On the locomotive front with Norfolk Southern, as most of you know we’ve already shipped all batteries some 800 plus to Norfolk Southern, for their NS-999 all electric switcher. Ball is in their court and in the court of their suppliers as far as putting that locomotive on the road in this quarter.
String testing and refinement continues at Penn State for both the all electric yard switcher and the hybrid road locomotive. The road unit will employ roughly twice the number of batteries that the yard switcher requires. We’re very encouraged to read the Norfolk Southern sustainability report that came out last month.
In that report, Norfolk Southern confirmed their commitment to reducing emissions and saving on diesel fuel. It also confirmed their plan with respect to their locomotive program. “In 2013, we planned to rollout the next generation NS-999 outfitted with the bank of more technologically advanced hybrid lead-carbon batteries developed by industry partner Axion Power International. In addition to the NS-999, we are continuing work on a prototype battery powered road locomotive that would move freight over long distances. We are optimistic about our latest efforts et cetera.”
So these efforts include a three-way testing that is taking place with Penn State, Norfolk Southern and ourselves. Initiative has gone slower than we would have liked, certainly slower than anticipated. But it is great to see Norfolk Southern issue this report, confirming the program.
In the past, (Gerald Telan) was a prime mover in this initiative and he retired early this year. To see Norfolk Southern, reconfirm his program, their program is really a great thing for us to see and we look forward to taking advantage of it in the future.
So, next up we told our potential candidates about several initiatives in the passenger and freight vehicle markets. We explained the advantages of our PbC batteries in this market whether it’d be stop/start or providing power to converted hybrid engine trucks. The same advantages apply to both. Our battery has a high charge acceptance, fast recharge ability, stability and large string applications, ability to operate in temperature extremes without loss of function. We have a product with a proven safety record and a product that’s easily recycled in the hasp scrap value at the end of life. We have and will continue to tell the story of the potential hybrid engine conversion market especially for Class B vehicles.
As you know, we have been dealing with ePower for some time about three years. ePower has identified a proprietary method for saving fuel in truck applications. So these Class 8 trucks are the largest gas consumers in the U.S. truck market, some 19 billion gallons annually. That was the area of focus for ePower.
ePower tried different battery technologies but according to them and I quote “Axion’s batteries, Axion PbC batteries were the only ones that allowed their technology to work.” The proprietary product ex-gas consumption at a steady rate and an additional power is needed for passing another vehicle on hill climbs et cetera. The extra power required comes from the battery. Battery is recharged when that power is no longer required, recently on 1100 mile test trip; ePower reported that the charge in the battery was the same at the start at the halfway point in the trip and at the end of the trip. This is amazing especially when you consider that the lead-acid batteries that they had used in the past required charging after only a few hours of service. In order to charge the trucks had to be pulled off of the road and this was an obvious loss of freight time to the fleet owners.
So ePower ordered a set of 56 batteries found that they worked and ordered another set and then followed that with an order for 10 more sets, 560 batteries. Our engineering team has been working closely together as ePower moves to the next level.
So what is the market, they get to play in? Well, that’s the risk of sounding like I live on Fantasy Island. Let me outline the opportunity.
Of the nearly 3 million Class 8A and 8B trucks on the road approximately 1.1 million have been identified as the current market potential since they are 6 to 11 years old. They will be coming in for rebuilds which means new engines, new drive trains, new gensets, new motor et cetera. Since this is the same or similar equipment that ePower would replace on a retrofit, this becomes the ideal time to do the work and incorporate new controller battery system DMS with the new basic rebuild equipment.
Doing it in this fashion saves some 50% of the cost of the system. Fuel savings estimated by ePower to be in the 30% plus range, provide a return on investment of less than two years. And the size of the market, well, we only take 1% of the potential market. It equates to more than $200 million worth of batteries that’s 1%.
You can understand our excitement and this is just for the retrofit market. We have been working with OEMs, the OEM estimate for 2013 is new built trucks will amount to 252,000 per Class 8A and B and Class 7. Subtract 25% per Class 7 a very buyable market for the hybrid conversion by the way and its still 190,000 new trucks annually, another staggering market, another opportunity for PbC batteries.
Stationary PowerCube opportunities are numerous. Our impressive onsite queue has allowed us to obtain valuable information in conjunction with our daily participation in the PJM network. It has allowed us to look at opportunities in the islands, opportunities for charging stations for electric vehicles or back-up power for single and multi-family homes and numerous other initiatives.
It has allowed us to add on to our Washington Naval Yard project and approach the DoD or several projects that we are currently working on. Again, it’s a smaller version of the cube that will be utilized in these projects.
The other opportunities that we have spoken about in the past remain solid, I don’t want to take up time on the call this morning reiterating those projects. But, I have spoken non-stop for some 25 minutes now. I think its time for question-and-answer period.
At this time we will begin the question-and-answer session. (Operator Instructions) And our first question is from Charles Mackall of Avenir Corp.
Charles Mackall - Avenir Corp
Good morning. Had a question, just wondered if you could update us what was going on with your work with BMW. I saw where they were sort of coming out with a new hybrid and I was hoping to see something about Axion Power in that, I didn’t, just maybe an update would be useful.
Sure. Yes, they are developing a number of different initiatives in a number of different markets. We continue our work with them; we continue our work with another supplier. I think I may have mentioned in the quarterly reports that we proven of that, a product can be manufactured offsite by a third-party supplier. So we are continuing that testing and application.
And we continue to have our meeting with BMW on a regular biweekly basis, with the meeting thrown in there in between on as needed basis. As we have reported a number of times before, that market will happen when it happens. We have taken it off the table as far as looking at our breakeven points and projecting what our sales will be for the next year or so. When that comes, it will be an addition to what our projections show, those projections for some of the markets that I have already spoken about.
Charles Mackall - Avenir Corp
All right. Thank you very much. And it’s very helpful.
(Operator Instructions) And next we have a question from (Steve Stefanmaroni). Please go ahead.
Good morning. Thanks for taking my call, the questions.
My first question I guess has to deal with kind of with the last question had to deal with just general car testing programs in general. Over the years, we got a number of statements in the 10-Qs and what’s now stated in the different numerous testing programs. And it appears that you guys have put it off kind of often to the future now and I know you guys can’t predict as to when somebody might adopt. But it appears that you in the last investor presentation that you kind of backed off the numerous testing programs.
And I was just kind of curious as to, how many testing programs do you guys have out there, is BMW the only one left, or I mean are there some better beginning middle and advanced stages, last year you had mentioned the Asian automaker and that one hasn’t been mentioned for quite a while now. So, if you could just give some more color to this general area.
Sure. Yes. There is more than one out there. Let me put it this way. We are concentrating now on sales with the products that we have we are concentrating on getting a product out into the marketplace. That’s where we are concentrating on some of the lower hanging fruit here. And we are not spending and devoting all of our time, not that we ever devoted all of our time, but we certainly gave the BMWs of the world a good portion of our time.
We continue to work with them. We continue to work on a schedule. But, we also continued to work in the other areas; the hybrid truck for example, the new truck initiative stop/start program, our Q programs. Those are things that we see happening, we see the light at the end of the tunnel and there is a schedule for those things happening as opposed to the eventual schedule of the BMWs of the world.
Okay. Thanks for that. And in the last quarterly report you guys have mentioned in conjunction with the Phase 2 grant. And it looks like you didn’t get granted but potentially auto components suppliers that you are participating in that grant with you, is that something that’s moving forward despite, I mean, I don’t know, was the grant not awarded?
That’s correct. There was only one battery company that received an award it was disappointing to us but as I mentioned even before the last call I think maybe in the K, we are – we will be continuing that program anyway and that program does continue.
But, with a large partner.
Does the program that was a large making automaker that was part of your trans program, two years ago that wasn’t granted of the $10 million (inaudible) August 2011, is that still continuing today?
Not sure which one you are referring to on that.
Not the Phase 1, but the originally when you submitted with a large auto marker in another university and with the four person, four partner grant, so there were four people that – and I believe that was a large U.S. auto markers opposed to your opinion?
Oh, yes. That was two years ago. No, that we reported on that after a year or so ago. That program is – was a stop/start program. So, it was just to do the work we have actually completed the work without getting grant money before. But, we have actually completed the work that was part of that program.
Again, with these grants we look for opportunities to obtain grant funding for a thing want to do and probably, I wouldn’t want some of the grant officers to hear me say it. But, probably would do anyway without getting any help from the grant DoD offices.
And then our next question is from (Paul Grindal). Please go ahead.
This is in regard to the hybrid truck program. Truck is supposed to be run on diesel fuel but there is an emphasis to change them to natural gas. Do you foresee a big problem in working with natural gas – on natural gas powered truck and still using hybrid system for truck (inaudible)?
No, we don’t. We have actually looked into that as you might suspect, the ePower units actually and our batteries work with natural gas in much the same way as they work with diesel fuel operation.
Great. That’s the way I saw it. But there shouldn’t be any big problem, if there is a tiny bit of concern if they expect to save some 35% of the cost of the fuel by converting into natural gas, this would have an adverse effect on the – what to say the reason for switching to hybridization and that would take longer pay back period, does that enter into your thoughts?
Yes. It does. And of course, we have been told a lot of things that you see the price of natural gas beginning to creep up. The infrastructure required for natural gas certainly isn’t in place yet. I’m not trying to down play natural gas at all. But, some of these truckers and some of the fleet owners don’t have time to wait for the natural gas market to hit. They have to bring their trucks in anyway to have them rebuild. The engines will only last so long, the warranties for 100,000 mile, 500,000 mile warranties run out, the drive trains have to be replaced. This is a process that’s been going on for years and years and years. And so the fit of the ePower hybrid fit and the new – the OEM, new truck fit, it is just a natural for this.
And the next question is from (Albert Marshall). Please go ahead.
Thank you for taking my call. My question is about PbC sales, in the financial statements there is the flooded contract which is I believe 88% of revenue and then there is a second category which includes the PbC and I believe the antique batteries. On a quarter, year-over-year basis, the quarterly sales have been declining actually and even over from compared to 2011. I think in the press release it says the PbC sales are increasing.
Can you talk a little bit about how much PbC sales actually are in terms of that mix and how this increased in the RFP activity which is so dramatic how that will affect the actual PbC sales in the demonstration products.
Yes. So, some of the quarters have been skewed by when certain events have taken place or when we recorded them. For example, the Norfolk Southern was recorded in the last quarter of 2012 even though the order was booked earlier that year and some of the batteries were made in the third quarter as well as the fourth quarter.
Likewise, the sales orders that we have are from ePower for the hybrid trucks they have not been recorded. They will not be recorded until the product is made and shipped out the door that’s how we record the sales. But, you are talking about a couple of hundred thousand dollars in that quarter alone in PbC sales.
And this does conclude our question-and-answer session. I’d like to turn the conference back over to Thomas Granville for any closing remarks.
Thank you. And thanks again for taking the time to listen to the Axion story. We expect to have a new member of the team – an important member of the team in place on our next call. I never promised orders on a timetable basis before. But, I will predict that we will have significant orders to talk about on our next earning call.
We are looking forward to our Annual Meeting to our new CFO, to reporting new sales and to the growth and success of Axion Power. Thanks. You will be hearing from us soon.
The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.
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