Email to JohnThe plan was to wait until I got (hopefully) the response back from John and then post the email I sent with the response but I thought might be worthwhile posting to get some thoughts.
The object for me was to get a handle on the Re:Build deal AND develop and ongoing rapport with John. I will give it a certain amount of time for the response but I will be all over him if he puts me on ignore. I don't foresee that based on my interaction with him at the meeting but......
Anyway, to boil down the deal as I see it:
Typically, in a parternship arragement, each partner bring something to the table - no brainer. Often, but not always, the initial contributions from each partner are reasonably aligned in terms of the value contributed. If it is agreed that the value brought to table is relatively equal, you will find that the profit split will also be reasonably equal although it can also be impacted by who does the most work toward the project. I'm sure everybody knows that.
So as I worked through this I came to the following conclusion as far as the initial contribution is concerned.
Exro
-------
Provides the PCB's embedded with the Cell driver technology which of course is worth millions of dollars both intrinsically and from a flat dollars expended to develop standpoint.
Exro also grants the 5 year manufactuing exclusivity.
Re:Build
------------
Funds all the costs other than the costs associated with the PCB's which of course is Exro's responsiblity. This is obviously a big number (Re:Builds that is)
Re:Build will build the Cell Driver, manage the manufacturing process, start to finish.
Again, some of you out there might have figured this out and I could be wrong but I had to have a starting point to get the conversation going with John.
I would have like to have delved into the channel disribution issues but the email was getting long and there is always the risk that the reader just tunes out. I hope I struck a balance there.
I have to admit, the more I thought this out, the better the deal looked. My only concern, and it's a big one, is how big is our slice of the profit pie. Very difficult to get a bead on that at this point. My hope is that by starting the conversation, we can at least maintain an open dialogue and perhaps delve into that a bit more.
Happy reading, please feel free to question, critique, burn or otherwise disregard the email content.
Do you ever re-ead an email after you sent and think "Damn, why didn't I include this or that or c**p, that reads weid. Ahh, it is what it is.
Good afternoon John,
I trust you enjoyed the Canada Day long weekend.
It was great meeting you at the AGM and your suggestion to contact you directly with any further questions I might have, was very much appreciated.
Not one to take a pass on the opportunity, I do have questions/clarifications to run by you relating to the Exro/Re:Build arrangement if you wouldn't mind. The objective here is for me to gain a better understanding of the overall nature of the Partnership.
My comments below are based on the limited information contained in the May 8, 2023 News Release. Admittedly, I have attempted to "fill in the gaps" so to speak based solely on my professional experience as a CPA and a certain amount of conjecture. Not my preferred methodology John, but given the limited amount of information available, I have to start somewhere.
Having said that, I will dig in.
Assumptions and definitions
-------------------------------------
- I am assuming that the operations will be accounted for in a new entity and, given the current information available, it makes sense to me that it will be in the form of a LP or LLP as opposed to a corporate structure. As such, I expect there is, or will be, a Partnership Agreement in place detailing among other terms and conditions; the partner contributions, partner responsibilities, and the profit sharing arrangement. All further comments below are based on this premise.
- The news release states "under the partnership, Exro will provide Re:Build the battery control system power electronics...". I am definitely not a power electronics tech guy so I sought input from fellow shareholders who have knowledge in this area. My understanding is that this represents PCB's embedded with Exro's software technology related to the cell driver, and that these PCB's, along with the 5 year manufacturing exclusivity provision, would essentially represent Exro's initial partner contribution.
Operations
----------------
- As indicated above, it would seem that Exro's responsibility in the manufacturing process is limited to providing the PCB's to Re:Build.
- The batteries will be sourced and contracted out to a third party by Exro and/or in consultation with Re:Build.
- Re:Build's responsibility in the manufacturing process will be to "build" the cell drivers incorporating the PCB's, batteries and other components required (cabinet enclosure etc.).
- It is expected that Re:Build's supply chain connections combined with its manufacturing expertise generally, will enable a higher margin than would otherwise be expected had Exro elected to go it alone in the manufacturing of the cell drivers, notwithstanding the initial capital outlay and operational cash flow considerations.
Cash Flow
--------------
- From a cash flow perspective, Exro will be responsible for manufacturing the PCBs. Period.
- Re:Build will be responsible for all additional cash outlays including but not limited to:
Cost of the batteries
labour and materials associated with the assembly of the cell drivers
Initial Capex outlay
All other operational costs going forward up to the point that the partnership is self-sustaining from a cash flow standpoint
The seeming inequity when considering the initial partner contributions from a straight cash flow perspective does not, of course, factor in the fact that Exro has expended "X" number of millions of dollars on developing the tech that is not reflected on the balance sheet of Exro (expensed over the years in accordance with IFRS GAAP). Factoring this into the equation adds to my understanding of the nuts and bolts of the deal.
Reporting considerations
---------------------------------
- Somewhat of a minor point from my perspective John as the bottom line will be the same either way. Given my assumptions with respect to the entity structure and acknowledging that this is driven somewhat by the provisions contained in the partnership agreement, the LP or LLP will be either consolidated in Exro's financial statements or there will be a line item equity pick-up reported. I ask this question simply from a revenue disclosure (or not) standpoint.
Getting a bit ahead of the game here I know, and it will become apparent when and if the partnership agreement finds its way to Sedar. Do you have a sense of when that might be John?
and last but not least.
Profit Sharing
--------------------
- As you recall, I posed a question around the revenue model at the AGM. The purpose of the question, of course, was to gain an understanding of the revenue stream(s) coming Exro's way from this partnership. Based on the response from Sue and to a lesser extent yourself, it is my understanding that, at the end of the day, the revenue coming our way will be "50% of any savings created by the manufacturing process". Period. Please confirm that my understanding is correct.
I have done some research, and I noted that while this type of revenue model is not uncommon, on the flip side, I would not describe it as being common either. Having said that, my sense is that this number is not easily identifiable let alone quantifiable without having access to specifics as to base-line measurements for the cost of a cell driver unit (i.e. a standard cost of sorts) versus the actual manufacturing cost thereby providing a means to establish the "savings created by the manufacturing process".
I know this type of information will not come my way anytime soon John and I wouldn't presume to even request it. I will however ask you this.
Correct me if I'm wrong, but I believe you mentioned at the meeting that we are "sacrificing some margin on this deal" or words to that effect. Honestly, I would expect that given the nature of the revenue stream. I am going to assume that, as I mentioned above, the margins we can expect from the decision to partner up with Re:Build to manufacture the cell drivers will be higher than if Exro had decided to "go it alone" again, notwithstanding the cash flow considerations described above. Is that a reasonable statement?
John, once again, I do appreciate the opportunity to run a few questions by you and I can assure you, this email aside, I am not in the habit of bombarding you and anybody else with a plethora of email questions. You and the team are busy working on the shareholders' behalf and believe me I recognize that. I will say that my experience in receiving a response to previous emails sent to IR has been abysmal. As I say, I am not one to fire off emails at the drop of a hat but not once have I received a response to what I would consider a fairly straight forward question. Unacceptable, why invite the question on the website to begin with?
I appreciate you taking the time to review this email and look forward to your response John.
Best regards,