powering mobility - electrovaya · ///december 2002 begins commercial shipments of its scribbler™...

POWERING MOBILITY // / / / / / / / / / /

2 0 0 4 A N N U A L R E P O R T

FINANCIAL HIGHLIGHTS / / / / / / / / / / / / / / / / / / / / / / / / / / /Years ended September 30 (Expressed in thousands of U.S. dollars, except per share amounts)

2004 2003 2002 2001 2000

Revenue $ 6,369 $ 4,323 $ 2,967 $ 1,017 $ 152

R&D investment $ 2,843 $ 2,656 $ 1,845 $ 1,759 $ 1,029

Percentage of revenue $ 45% $ 61% $ 62% $ 173% $ 677%

Net loss $ (8,463) $ (9,876) $ (9,991) $ (7,169) $ (1,518)

Per share (0.12) (0.14) (0.14) (0.11) (0.03)

Cash, cash equivalent & short-term investments $ 13,612 $ 17,593 $ 20,618 $ 31,132 $ 19,337

Working capital $ 15,965 $ 20,346 $ 24,096 $ 32,990 $ 19,081

Capital assets $ 9,203 $ 12,024 $ 14,256 $ 15,501 $ 8,143

Total assets $ 26,682 $ 34,136 $ 39,614 $ 49,638 $ 30,895

Shareholders’ equity $ 25,168 $ 32,370 $ 38,352 $ 48,491 $ 29,063

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CORPORATE SNAPSHOT

MESSAGE TO SHAREHOLDERS

TECHNOLOGY

SALES AND MARKETING

MANAGEMENT’S DISCUSSION AND ANALYSIS

MANAGEMENT RESPONSIBILITY FOR CONSOLIDATED FINANCIAL STATEMENTS

AUDITORS’ REPORT TO THE SHAREHOLDERS

CONSOLIDATED FINANCIAL STATEMENTS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

E L E C T R O V A Y A 2 0 0 4 A N N U A L R E P O R T 1

///November 2000 Completion of a C$50 million initial public offering and trading commenced on the

Toronto Stock Exchange under the symbol EFL.

///October 2002 PowerPad® line expanded to PowerPad® 160, 120 and 80.

///December 2002 Begins commercial shipments of its Scribbler™ Tablet PC.

///April 2003 Technology Partnership Canada approves funds of up to C$9.9 million for further development

of Electrovaya’s high rate batteries.

///May 2003 Electrovaya’s zero-emission vehicle “Maya-100” undergoes initial series of road tests.

///October 2003 Electrovaya awarded $3M prime contract by NASA to supply mission-critical astronaut

power supply (EMU) for operations outside of space shuttle/station.

///November 2003 Launch of the Scribbler™ SC 2000 Series, a thin laptop/Tablet PC with Intel® Centrino

and 70WhSuperPolymer® battery, ///

Electrovaya’s ZEV Maya-100 exhibited at 20th International Electric

Vehicle Symposium, Long Beach, CA.

///February 2004 Launch of SC2100 Tablet PC, with increased processor power, greater wireless connectivity

range and battery life.

///June 2004 Electrovaya receives the “Technology Award” and the “Battery Electric Vehicle Award” at the

2004 Tour de Sol. Lithium Ion SuperPolymer® battery technology cited by Technical Committee chairperson

as having the greatest potential to succeed in search for clean auto mobile technology.

///September 2004 Battery pack for NASA’s EMU system under goes testing for operation in high vacuum.

///August 2004 Launch of SC 2100 Tablet PC, includes dual microphone and optional outdoor screen

technology.

CORPORATE SNAPSHOT / / / / / / / / / / / / / / / / / / / / / / / / / / /

E L E C T R O V A Y A 2 0 0 4 A N N U A L R E P O R T2

MESSAGE TO SHAREHOLDERS / / / / / / / / / / / / / / / / / / / / /In fiscal year 2004 Electrovaya continued to position itself as a leader in Lithium Ion SuperPolymer® mobile

power solutions by introducing new products, entering new markets and expanding its revenue generating

capabilities. Our strategy for continued growth is:

///Create multiple products using the Lithium Ion SuperPolymer® battery as the competitive advantage;

///Enhance sales and marketing through increased distribution and leverage of strategic partnerships with

Independent Software Vendors and Value-Added Resellers; ///

Investment in research and technology development;///

Profitability through increased sales, production efficiencies and a lower cost base.

In fiscal year 2004, Electrovaya’s revenues grew by 47% from $4.32 million to $6.37 million with cumulative

two-year growth of about 100%. Capability to develop new products and new markets will be the key for

further sustained growth and profitability of the company.

KEY AREAS OF PROGRESS

During fiscal year 2004, Electrovaya reached a number of critical milestones in the areas of new applications,

new products, new marketing and sales initiatives and revenues. The Electrovaya brand is gaining more rec-

ognition, while the Scribbler™ brand for the mobile Tablet PC market is also gathering momentum. We have

been receiving some great reviews on our products and opening up new markets. Some of the key areas of our

operation are given below:

BATTERY / / / From mobile computing to aerospace to the electric vehicle, most products at Electrovaya are

based on our expertise and competitive position on battery technology. Focusing on industries where battery

performance is critical, Electrovaya is achieving market penetration in key areas. Specialty battery systems are

being developed for major customers in aerospace and other sectors.

Electrovaya is conducting research and development on next generation battery materials technology, which

should further enhance its competitive position. Designed for the mobile computing market, the PowerPad® line

is being upgraded to meet the new requirements of the mobile computing business. Recently the new Power-

Pad® 300 was launched. This product has 300Wh and nearly doubles the capacity of the PowerPad® 160. The

Sankar Das Gupta, PhD

Chairman, President and Chief Executive Officer


PowerPad® 300 is specifically designed for the healthcare industry, where in hospitals and clinics, portable power

is necessary to operate the mobile computer in a wireless connectivity environment.

PowerPad® products have received high praise from both the media and appreciative users who value battery

life and mobility. The Editor of CNET called the PowerPad® 160 the ideal battery for long distance mobile com-

puting, saying “pound for pound, it’s the best external battery tested in CNET labs…the longest-lasting external

battery we’ve tested.”

The New York Public Radio used Electrovaya PowerPads® on the day of the Blackout 2003 in order to keep

news, broadcast and data operations ongoing while relocating to their alternate site.

Research into batteries continues at Electrovaya with assistance from the C$9.9 million in funding received

from Technology Partnerships Canada. As part of this work, Electrovaya is pleased to report collaborative

research with the National Research Council

in a program to develop next-generation

battery materials.

AEROSPACE / / / Electrovaya is aggressively

pursuing the implementation of its prime

contract with NASA. The original contract has

been increased by approximately US$0.235M

comprised of 5 additional lithium ion bat-

teries and three charge adapters for the

EMU-EVA program. Electrovaya received

a “Recognition of Excellence” award from

NASA Johnson Space Centre (JSC) Extravehic-

ular Activity Office for the innovativeness and

expertise brought to the project. Electrovaya

was also awarded a new contract from NASA

to develop a complete power system for the

AERCam (Autonomous Extravehicular Robotic

Camera), a free flying vehicle capable of per-

forming inspection missions to view parts of

the ISS and Space Shuttle not visible in other

ways. This marks an important step towards

the expansion of Electrovaya’s aerospace divi-

sion as it builds credibility and added industry

exposure.

The company has also entered into a con-

tract with the Canadian Space Agency (CSA)

to create a dedicated facility for aerospace

products, especially batteries. The facility will

encompass all aspects necessary to make

aerospace quality products, including docu-

mentation, testing, and version control. We

expect the aerospace sector to be a growth

area for Electrovaya’s power solution.

MOBILE COMPUTING / / / Mobile Computing is a high growth and high margin sector in the general computing

arena. Market size is expected to increase beyond $100 billion, and mobile computers are becoming ubiquitous.

The fundamental problem is battery life, which restricts the mobility. Electrovaya, with a development partner-

ship with Microsoft along with a Far East ODM, developed the Scribbler™, which is light, thin and the most

“...the only real choice for users who

need to be away from an outlet for

hours at a time”.

- Mobile Tech Buyer’s Guide


mobile

Tablet PC,

powered by Elect-

rovaya’s Superpoly-

mer® battery and operating

with an Intel® Centrino processor.

New products launched in FY2004 in-

cluded the Scribbler™ 2010 and Scribbler®

2100. The focus is now on revenue generation.

In addition to the general channel, online and direct

sales, Electrovaya is turning towards strategic partnerships

in certain vertical markets such as healthcare. These include

more widespread distribution channels, as well as furthering our rela-

tionships with Independent Software Vendor (ISV’s), Value-added Reseller

(VARs), Solution Providers and Microsoft. As the Tablet PC industry continues to

grow, so too will Electrovaya’s commitment to mobile computing. The latest Scrib-

bler® SC2200 will aggressively compete in the Tablet PC industry. It is a very powerful slate

Tablet PC with its 1.4Ghz Intel® Centrino processor, 802.11a/b/g wireless card and 2Meg L2

cache memory.

ZERO EMISSION VEHICLE - MAYA 100 / / / 2004 continued to be an important year in Electrovaya’s electric

vehicle development. It was also a year that saw further demand for clean transportation driven by energy secu-

rity, the environment, the Kyoto Protocol, consumer expectations and demands, and the growing health burden

due to air quality.

In the summer of 2004 the MAYA -100 received top honors winning the “Best Technology Award” and “Bat-

tery Electric Vehicle Award” at the 2004 Tour de Sol, an alternative transportation rally. In September, Electro-

vaya increased exposure and important industry contacts at the EDTA (Electric Drive Transportation Association)

Conference and Exposition in Orlando, and also at the Better Transportation Expo in Toronto. Electrovaya contin-

ues to file patents and build its intellectual property in this area. We believe the demand for clean zero emission

vehicles is immense.

“Quite possibly the best thing to

happen to mobile professionals

since the notebook...The PowerPad

120 are indispensable for travelers

who want to work and play for

more than a couple of hours”.

- Mobile PC


LOOKING FORWARD

Revenue growth is crucial for Electrovaya as it strives for greater market share and profitability. The company’s

efforts will be focused on the following:

///Increase sales from the PowerPad® family of battery products, through sales channels, distributors and OEMs;

///Build the aerospace business through the present NASA contracts and expand into other clients. The power

necessary in aerospace applications keeps increasing with more complexity and functionality of demand;///

Greater penetration of the mobile computer business with the Scribbler™ line of Tablet PCs. The Tablet PC

portion of the mobile computer business is estimated to grow quickly into a multi-billion dollar industry.

Revenue growth will be driven by increased relationships with distributors, resellers and other channel

partners as well as development of new products;///

Increase visibility and commercial acceptance of Electrovaya’s zero emission vehicle, which continues to

undergo road tests and participate in electric vehicle exhibitions;///

Continue research and development in areas of battery technology, power electronics and new materials;///

Increase efforts in developing new products in mobile computing, aerospace and other markets.

THANKS TO STAKEHOLDERS

The key to Electrovaya’s success is the talent and vision of its team in all levels of the company. The expertise and

commitment of our people drives us forward and fuels our growth.

We would also like to express our appreciation to our customers and distributors for their ongoing trust and

support for our products and services.

Finally, we would like to thank you, our shareholders, for your confidence in the future and your patience as

we execute our strategy in our goal to be the leading mobile energy company.

“Fast enough to keep up

with your digital scribbles yet

light and thin enough to tuck

under your arm...you could

get in a good day’s work with

this Tablet”.

- LAPTOP Magazine


TECHNOLOGY / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / /With amongst the highest energy density of any commercial rechargeable battery, Electrovaya’s patented

Lithium Ion SuperPolymer® battery continues to be the basis for new markets and products. Electrovaya contin-

ues to make significant investments in R&D to ensure that there is continued fundamental development of basic

technology, while capacity development in important fields like aerospace leads to new products and applica-

tions. The company’s technology is protected with a growing number of worldwide patents, currently at 159

issued and pending.

Electrovaya has entered an intensive research program with

the National Research Council and the University of Toronto to

develop new materials that may significantly increase the energy

density. The company is also conducting research into new

battery technology that would incorporate either lithium iron

phosphate or lithium cobalt oxide chemistry. Other areas of inves-

tigation include varying the shape and size of battery cells so that

they may form a part of the physical structure of a device. This innovation could significantly reduce the weight

of a system.

Electrovaya has signed a contract with NASA Johnson Space Center to supply the power system for the Pri-

mary Life Support System on the spacesuits worn by astronauts while conducting space walks outside the Space

Shuttle and International Space Station. With support from the Canadian Space Agency (CSA), Electrovaya has

undertaken developments to expand the company’s aerospace capacities and ensure the necessary facilities are

in place for building battery systems for space-grade technology. These batteries must meet rigorous standards

of reliability, safety and repeatability, while proving workable under extreme temperature and pressure environ-

ments. Electrovaya is putting in place the certification process and quality control systems necessary to achieve

those goals.

The company has the capacity to provide complete customer solutions through design engineering capabili-

ties that include a 14,000 square foot machine building division. This division has extensive experience in unique

process technology and manufacturing. With integrated engineering, R&D, manufacturing and quality control

James K. Jacobs, PhD

Chief Technology Officer

“Electrovaya’s machine building division

integrates manufacturing, engineering

and consulting departments, offering

customers a complete solution”.


departments, the facility manufactures equipment for battery systems, aerospace, and various other industries.

The facility is capable of fast prototyping at highly competitive prices. Electrovaya is able to use its design engi-

neering capabilities to create products with tolerances and verification that meet the requirements for qualifying

parts as flight grade and is using this ability in building equipment for our NASA contract.

Electrovaya continues to undertake research in large battery systems and ultra-high efficiency DC/DC convert-

ers to ensure concurrent growth of its power electronics capacities. The company has brought DC/DC conversion

efficiency to over 98%. This technology breakthrough could produce smaller power electronics and improve

mobility of devices. Several patents have been filed related to this key technology.

R&D investment in energy density continues to fuel the evolution of our mobile computing product lines. The

thin and light SC2200, the newest member of the Scribbler™ Tablet PC family, contains a fast Intel® Centrino 1.4

GHz Dothan processor. We believe it to be the most powerful and mobile Tablet PC on the market. The Pow-

erPad® 300 has joined Electrovaya’s PowerPad® family of external batteries for the laptops and Tablet PC. This

newest product nearly doubles the run time of the former leader in the PowerPad® series.

Electrovaya continues development of new technologies for the Maya-100 zero-emission vehicle. This includes

a novel and proprietary design for surge power, such as acceleration and hill climbing, while maintaining good

thermal management and safety parameters. Other system patents cover control circuitry and effective handling

of high voltage cells in series, specifically as it relates to the problem of locating and adjusting for the failure of a

single cell in the battery pack. These developments are applicable to other electric drive markets such as fuel cell

and hybrid transportation applications.

“The critical search for the next generation of clean automobile is

accelerating. Amongst emerging technologies, which include

hydrogen fuel cell and hybrid electric gasoline cars, Electrovaya’s

Lithium Ion SuperPolymer® battery technology has the greatest

potential to succeed”.

- Chairperson of Technical Committee,

Tour de Sol 2004

Maya-100 zero-emission vehicle.


SALES AND MARKETING / / / / / / / / / / / / / / / / / / / / / / / / / / /There has been a significant increase in the demand for mobile technologies and the power requirements for

mobile devices in the past few years. Electrovaya has targeted those industries where lightweight high energy

density solutions are required and responded by introducing new products, including the Scribbler™ 2000 series

and the PowerPad® 300.

Our multi-pronged sales and marketing strategy includes the following:

PARTNERSHIPS

Electrovaya is committed to developing our strategic partnerships. We firmly believe that these relationships,

with integral partners from the markets in which we compete, are the primary means of achieving great success

in this competitive market. New for this year, Electrovaya has launched an Independent Software Vendor (ISV)

Program. Electrovaya proudly collaborates with these software vendors, ultimately enabling our Scribbler™ Tab-

let PC to provide clients with a better solution.

CHANNEL STRATEGY

We currently work with North American distributors including Ingram

Micro, D and H Distributing Co., and others, as well as over 50 resellers.

Our relationships with a number of key resellers across North America are

growing significantly. Focused on the vertical markets where we are experi-

encing growth, these resellers provide both sales and increased exposure of

Electrovaya’s products.

Maintaining our multi-pronged sales approach, Electrovaya is confident

that the future holds significant promise for our outstanding product line.

Our major distributors and wide web of resellers continue to support our product line. In addition, our direct

team and online efforts provide additional support to our growing client base.

DIRECT SALES/WEB-BASED INITIATIVES

During the year we re-organized our sales team for greater effectiveness. Under the leadership of the Director

of Sales we believe this initiative will enhance our ability to generate revenue. In addition, we launched a new

website and continued to make improvements to it to drive sales.

OTHER

We continue to participate in the industry’s major trade shows, such as Consumer Electronics Show, as well as

targeted events that focus on the vertical markets that deploy Tablet PCs (healthcare, insurance, education etc.).

This vertical focus has also allowed us to develop concentrated advertising strategies – primarily print and online

activities. We are confident that this targeted approach provides greater return on our marketing expenditures.

Electrovaya recognizes that increasing our brand awareness is of the utmost importance. Greater recognition

ultimately grants Electrovaya greater access to the many markets where our products play a significant role.

PRODUCTS

Electrovaya’s commitment to deliver high quality products is reflected in our continuous new product develop-

ments. The evolving information technology market also necessitates continuous innovations in Electrovaya’s

sales and marketing strategies.

“With its full day runtime, I use the Scribbler

daily for all my work”.

- Dr. Steven Thorpe, Vice Dean, Faculty of Engineering

University of Toronto


As the Tablet PC market continues to evolve,

Electrovaya’s unique and powerful Scribbler™

Tablet PC has achieved significant market aware-

ness and industry applause. The demand for Tablet

PCs is growing and promises to become a $10 billion

dollar business in the next few years. Electrovaya’s Su-

perPolymer® Lithium Ion battery technology powers the

Scribbler™, enabling Electrovaya to play a significant role

in this challenging market, ultimately resulting in greater market

share for the Scribbler™ in the Tablet PC industry.

The Scribbler™ Tablet PC has an attractive, lightweight design and outstanding battery capabilities. In addi-

tion, the Scribbler™ is made up of the highest quality components. Together, these qualities make the Scrib-

bler™ a superior computing device. As discussed above, Electrovaya is poised with a strategic marketing strategy

that brings the Tablet PC to the key markets that demand such a mobile tool.

The Scribbler™ Tablet PC has experienced significant success in the healthcare, education, and field force au-

tomation markets. As a result, a significant portion of our marketing efforts have been dedicated to this market.

The PowerPad®, our successful external notebook battery, continues to forge new ground in the mobile arena.

Much like the Scribbler™ Tablet PC, the Powerpad® has enjoyed great success in the healthcare market. Our

product development continues to improve the efficiency of the PowerPad® and its compatibility with many

notebooks. Our clients look forward to new PowerPad® products that provide even greater battery capacity in

the near future.

Electrovaya has continued its penetration into the aerospace market. This has included an extended contract

with NASA for more batteries, and a separate contract to develop the power system for their AERCam free flying

vehicle. The successful partnership with NASA has opened the door for other opportunities in the aerospace sec-

tor for Electrovaya’s battery products. The Canadian Space Agency has partnered with us in funding a facility to

build aerospace-qualified products.

The Maya-100 Zero Emission Vehicle (ZEV) was showcased at the 2004 Tour de Sol where it won the “Battery

Electric Vehicle Award” as well as the “Technology Award”. The vehicle was also exhibited at the 2004 Better

Transportation Expo in Toronto, Canada. Those in attendance were greatly impressed at the increased driving

range of up to 230 miles (360 km) and by the prospects for ZEV’s to help solve environmental and health con-

cerns. There is a growing understanding that fuel cell technology will not be viable for many years and that its

success is much less certain.

Specialty battery demands have grown from a number of sectors including OEM’s, aerospace, defense, solar

cars and others. We believe this will continue to lead to new products and markets for Electrovaya.

“The Scribbler is a fine piece

of equipment. The ease of use and

maintainability were bar-none the

best enountered. The word is out in

our company and is spreading”.

- Dr. Richard Przybylski, Senior Systems

Engineer, Lockheed Martin

E L E C T R O V A Y A 2 0 0 4 A N N U A L R E P O R T1 0

MANAGEMENT’S DISCUSSION & ANALYSIS / / / / / / / /The following management’s discussion and analysis (MD&A) of Electrovaya Inc.’s (“Electrovaya”; the “Com-

pany”) financial condition and results of operations for the fiscal years ended September 30, 2004 and 2003

includes comments that management believes are relevant to an assessment of and understanding of the

Company’s consolidated results of operations and financial condition. The financial information herein is pre-

sented in thousands of US dollars in accordance with Canadian generally accepted accounting principles and

should be read in conjunction with the Company’s financial statements and related notes. This MD&A is dated

as of December 9, 2004.

Additional information about the Company, including Electrovaya’s current annual information form, can be

found on the SEDAR website for Canadian regulatory filings at www.sedar.com.

FORWARD-LOOKING STATEMENTS This MD&A may contain forward-looking statements that involve a number of risks and uncertainties,

including statements regarding the outlook for the Company’s business and results of operations. By nature,

these risks and uncertainties could cause actual results to differ materially from those indicated. Such risks and

uncertainties include, without limitation, the various factors set forth in the Risks and Uncertainties section of

the MD&A provided below, and are also discussed in public disclosure documents filed with Canadian regula-

tory authorities. No assurance can be given that results, performance or achievement expressed in, or implied by,

forward-looking statements within this disclosure will occur, or if they do, that any benefits may be derived from

them. Electrovaya disclaims any intention or obligation to update or revise any forward-looking statements,

whether as a result of new information, future events or otherwise.

OVERVIEW OF THE BUSINESS Electrovaya is a leader in rechargeable lithium ion SuperPolymer® battery technology. It has developed and

acquired patents and patent applications with respect to the technology, and has manufacturing and research

and development facilities to produce and develop products for numerous industries. Electrovaya is a growing,

innovative group of interrelated businesses whose products include:

///The PowerPad® 80, 120 and 160 series of batteries, a source of power and longer run times for notebook

computers; ///

The Scribbler™ series of Tablet PCs, mobile computers with the longest run-times in the industry; ///

The Lithium laptop computer with Electrovaya’s patented lithium ion SuperPolymer® battery, making it one of

the most mobile computers in the industry; ///

Batteries for aerospace and defence, including NASA, and certain defence industries; ///

Precision machine building for third parties, including companies in the robotics, food and other industries; ///

A prototype electric car designed for emission-free low cost urban transportation.

The PowerPad® battery product line has continued to address the growing demand for mobility by providing

longer run-times for notebook computer users.

The Scribbler™ Tablet PC continues to receive numerous awards, with our newest version of the Scribbler™,

our SC2100, featuring Microsoft’s Tablet PC operating system, long battery life and excellent mobility. In Novem-

ber, 2004, the Company launched the Lithium laptop, equipped with Microsoft’s operating system and Electro-

vaya’s lithium ion Superpolymer® battery.

In October, 2003 the Company was awarded a US $2.95 million contract by NASA (National Aeronautics and

Space Administration - Johnson Space Center) to provide high-energy lithium ion SuperPolymer® power systems

as a power source for Extra-Vehicular Mobility Units (EMUs).

A key part of the company’s strategy is research and development. This important performance driver will fuel

new product development, improve existing products and enable the company to maintain its presence in

E L E C T R O V A Y A 2 0 0 4 A N N U A L R E P O R T 1 1

MANAGEMENT’S DISCUSSION & ANALYSIS

existing markets and gain access to new markets. The Company is continuing to work on an emission-free pro-

totype electric vehicle and is aggressively exploring markets for this car.

STRATEGIC PLAN OBJECTIVES The Company’s business strategy involves the following key elements:

///Establish additional channels to market by creating new global relationships with OEM computer makers,

distributors and value-added resellers for our PowerPad® and mobile computing products; ///

Increase production in line with sales at the current manufacturing facility and investigate further expansion

opportunities and further automate production processes to lower product costs and increase quality; ///

Establish strategic relationships in order to broaden the market potential of Electrovaya products; ///

Continue our investment in research and development initiatives to be a leader in the industry; ///

Develop new products which use Electrovaya high energy density batteries to give a competitive advantage; ///

Achieve profitability through increased sales and production efficiencies.

(a)Potential long-term financial liabilities are described below (See Financial Condition - TPC Contribution Agreement)

The Company has not paid a dividend since inception.

Revenue has increased during the three year period due to the addition of new products (e.g.: December

2002 – Scribbler™ Tablet PC, October 2002-Powerpad® 80), increased service revenues in 2004 from NASA and

a gradual increase in machine building revenues.

Losses have declined as the Company added more profitable product lines (e.g.: Scribbler™) and increased

the amount of service revenue. Concurrently, control over manufacturing activities and increased utilization has

resulted in improved margins.

The Company has also carefully managed operating expenses for maximum efficiency and in a manner that

supports its business objectives.

USE OF ESTIMATES / / / In preparing the financial statements in conformity with generally accepted accounting

principles, management makes estimates and assumptions that affect the reported amounts of sales returns,

bad debt reserves and warranty accruals at the date of the financial statements.

The Company’s existing policy allows for sales returns ranging from 15 days for direct sales to end users to

longer periods for sales to key distributors. Sales returns are estimated at the time of delivery based on past

experience and customer specific factors.

The Company reviews its outstanding accounts receivable on a regular basis. Bad debts are determined based

on the ageing of accounts receivable where such amounts are not insured and considered uncollectible.

Warranty accruals are based on the actual warranty experience rate for the past year for each product group

and sales during the most recent warranty period. These amounts are reviewed quarterly.

RESULTS OF OPERATIONS

($ thousands) 2004 2003 2002

Revenue $ 6,369 $ 4,323 $ 2,976

Revenue, Less Direct Manufacturing Costs 847 (1,008) (1,665)

Loss Before Interest Taxes and Amortization 5,415 6,891 8,062

Net Loss 8,463 9,876 9,991

Basic and Diluted Loss per Share 0.12 0.14 0.14

Cash & Cash Equivalents 13,612 17,593 20,618

Total Assets 26,682 34,136 39,897

Total Long Term Liabilities(a) - - -



REVENUE / / / Revenues are derived from the sale of PowerPad® and Scribbler™ Tablet PC products as well as

from machines built for third parties and from services provided for research and development activities. Rev-

enue increased by 47.3% to $6.4 million for the year ended September 30, 2004 from $4.3 million for the year

ended September 30, 2003. The year over year increase in revenue primarily resulted from work for NASA, as

well as growth in sales of the Scribbler™ Tablet PC.

Electrovaya recognizes revenue from: (i) its PowerPad® and Scribbler™ products at the time the units are

shipped to customers, net of a provision for expected returns; (ii) machines on a completed contract basis; and

(iii) providing services as each contractual milestone is achieved and accepted by the customer.

Quarterly revenue for the last three years is as follows:

Revenues were up $2.0 million or 47.3% in 2004 compared to 2003 predominantly due to an increase in

Scribbler and aerospace related revenues. Of the $2.0 million, $1.4 million was due to NASA, with the balance

comprised of increases in Scribbler™ and machine building sales.

Fourth quarter revenue of $1,636 was up 26.0% or $338 compared to $1,298 for the fourth quarter of

fiscal 2003. This was due to higher revenues from R&D services, primarily NASA, and an increase in Scribbler™

revenues.

EXPENSES / / / Direct Manufacturing Costs − Direct Manufacturing Costs is comprised of the material, labour

and manufacturing overhead, excluding amortization, associated with the production of SuperPolymer® batter-

ies and the Scribbler™ Tablet PC, machine building for third parties and research service revenues. For the year

ending September 30, 2004, direct manufacturing costs increased by 3.6% to $5.5 million from $5.3 million for

the year ending September 30, 2003.

Revenue less Direct Manufacturing Costs was $0.8 million for the year, or 13.3% of Revenue compared to

negative ($1.0 million) in fiscal 2003. This 184.0% improvement from the prior year was due to changes in the

product mix to increased volumes of Scribblers™ and increases in service revenue. This trend was especially evi-

dent during the fourth quarter of fiscal 2004, as a significant amount of work was completed for NASA.

Research and Development − Research and development expenses consist primarily of compensation and prem-

ises costs for research and development personnel, including independent contractors and consultants, direct

materials and allocated overhead.

Research and development expenses, net of investment tax credits, increased by approximately $0.2 million or

7.0% to $2.8 million for the year ended September 30, 2004 from $2.7 million in 2003. In fiscal 2003, the com-

pany received grants under Technology Partnerships Canada of $1.1 million for research work performed since

January, 2002 related to high rate batteries and the electric car. The Company received $0.7 million in grants for

work performed in fiscal 2004.

In the fourth quarter, research and development expenses increased by $0.5 million or 106.7% from the

fourth quarter of fiscal 2003 as the Company focused on R&D initiatives related to new technology, including

researching new materials for the next generation SuperPolmer® technology. To assist with these efforts, the

Company has formed strategic alliances with government laboratories, such as the National Research Council,

and universities to increase the energy density of its new generation products and has developed low tempera-

ture operational capability.

The Company is also active with the development of the Zero Emission Vehicle (Electric Car). Electrovaya is

working with NASA, developing high-energy systems which can work in zero gravity and high vacuum condi-

tions in the Space Shuttle and International Space Station.

($ thousands) Q4 Q3 Q2 Q1

2004 $ 1,636 1,559 $ 1,593 $ 1,581

2003 1,298 778 1,364 883

2002 661 640 1,160 515



Sales and Marketing − Sales and marketing expenses are comprised of the salaries and benefits of sales and

marketing personnel, marketing activities, warranty provisions, advertising and other costs associated with the

sales of the PowerPad® and Scribbler product lines.

During the year, the Company added new sales personnel in the United States, but reduced its advertising

expenditures by focusing on initiatives with a higher return-on-investment and through more partnerships at key

trade shows. These expenses decreased to $1.6 million for fiscal 2004 from $2.4 million for fiscal 2003.

Sales and marketing expenses declined by $0.3 million or 57.7% in the fourth quarter of fiscal 2004 com-

pared to the same period in the prior year due primarily to a decrease in estimated warranty expenses as a

result of improved quality control and a reversal of warranty reserves related to software upgrades in previous

quarters.

General and Administrative − General and administrative expenses include salaries and benefits for corporate

personnel, insurance, professional fees, reserves for bad debts and facilities expenses. The Company’s corporate

administrative staff includes its executive officers and employees engaged in business development, financial

planning and control, legal affairs, human resources and information technology.

General and administrative expenses increased by $0.5 million to $2.4 million for the year ended Septem-

ber 30, 2004 from $1.9 million for the previous year. The increase primarily reflects an increase in salaries and

benefits to support the growing business, as well as increased provisions for bad debts and increased insurance

premiums.

Compared to the fourth quarter of fiscal 2003, general and administration expenses remained relatively un-

changed in the fourth quarter of fiscal 2004.

Net Income − Quarterly net losses for the last three years are as follows:

Quarterly net losses per share for the last three years are as follows:

Loss for fiscal 2004 has improved over fiscal 2003 by 14.0% from $9.8 million to $8.5 million. This is largely due

to increased service revenue and sales of scribblers, resulting in a positive gross profit of $0.8 million.

LIQUIDITY AND CAPITAL RESOURCES As of September 30, 2004, the Company had $13.6 million in cash, cash equivalents and short-term invest-

ments.

Cash used in operating activities was $5.0 million for the year ended September 30, 2004 and $6.4 million

for the year ended September 30, 2003. Net cash used in operating activities for fiscal 2004 reflects the operat-

ing loss of $8.5 million offset by amortization of $3.1 million and an increase in non-cash operating working

capital of $0.4 million.

Cash provided by investing activities was $0.3 million for the year ended September 30, 2004 comprised of a

reduction in short-term investments of $0.5 million offset by capital expenditures of $0.2 million. Cash used in

investing activities in fiscal 2003 of $6.4 million reflected $0.2 million of spending on capital expenditures and


2004 $ 2,114 $ 2,085 $ 1,861 $ 2,402

2003 1,475 3,122 2,379 2,901

2002 2,406 3,925 2,251 1,367


2004 $ 0.03 $ 0.06 $ 0.03 $ 0.02

2003 0.02 0.04 0.03 0.04

2002 0.03 0.03 0.03 0.03



Liquidity and capital resources (continued)

$6.7 million of net reductions in short-term securities.

The Company intends to continue to focus on more profitable lines of business to improve gross profit and

reduce its cash burn.

The Company’s future minimum lease payments under operating leases for the years ending September 30

are as follows:

The Company is currently reviewing its requirements for additional capital resources and no commitments exist

at the present time.

The authorized and issued capital stock of the Company consists of an unlimited number of Common shares

as follows:

The following table reflects the number of options outstanding as at September 30, 2004:

TRANSACTIONS WITH RELATED PARTIES The Company leased its Hanna Avenue premises in Toronto, Ontario, from a company owned by its control-

ling shareholders for $209 per year plus GST and business tax. The lease was renewed from January 1, 2003 to

December 31, 2003. In June 2003, the Company secured an additional 11,800 square feet at $80 per year plus

GST and business tax until December, 2003, with one rent-free month. Beginning in January 2004, the Company

occupied these premises on a monthly basis. In April 2004, the premises were sold by the controlling sharehold-

ers to an independent third party for consideration that included a vendor-take back mortgage.

The Company is constantly exploring new materials for making its batteries and recognizes that some of these

technologies may be developed by other companies. Electrovaya has invested $0.1 million in a private company

unrelated to the Company’s controlling shareholders engaged in the business of producing and evaluating new

battery materials; in return for its investment, it has received 6% of the Class A and 21% of the Class B shares

of this private company. Additionally, Electrovaya has provided research and development services and received

30% of the outstanding non-voting, participating Class B shares as consideration for such services. The Class B

shares are convertible into Class A voting, participating shares in the event the company becomes registered on

a stock exchange. This investment has been valued at Nil as at the end of September 30, 2004.

2005 21

2006 7

2007 2

Total 30

NumberAmount

( US $ ‘000)

Balance, September 30, 2002 & 2003 69,539,109 63,729

Stock options exercised 36,333 16

Balance, September 30, 2004 69,575,442 63,745

Outstanding, September 30, 2003 1,594,933

Granted 475,000

Cancelled or expired (32,666)

Exercised (36,333)

Outstanding, September 30, 2004 2,000,934



FINANCIAL CONDITIONCURRENT ASSETS / / / Cash and cash equivalents consist of investments with maturities of less than 90 days.

Short-term investments include banker acceptances, commercial paper and term deposits with maturities of up

to 90 days. Inventories include raw materials, semi-finished and finished goods.

Cash and short-term investments decreased by $4.0 million from September 30, 2003 to September 30,

2004 due to continued losses from operations

CAPITAL ASSETS / / / Approximately $0.2 million of patent and technology capital assets were acquired during

the year.

CURRENT LIABILITIES / / / Accounts payable and accrued liabilities were $1.5 million on September 30, 2004

and $1.8 million on September 30, 2003.

TPC CONTRIBUTION AGREEMENT / / / On March 31, 2003 the Company entered into an agreement with the

Technology Partnerships Canada (“TPC”) initiative of Industry Canada, whereby TPC agreed to fund up to 29.7%

of eligible costs related to the Company’s research and development efforts in fast batteries and electric vehicles,

up to a maximum amount of $6.7 million during the work period beginning in January, 2002 and ending by

September, 2007. Under the terms of the agreement, an amount up to a maximum of $31.1 million is to be

repaid by royalties charged on new revenue created from products developed commencing in 2007 through to

2013, with payment to be deferred or reduced if certain revenue thresholds are not achieved. During the quarter

ending September, 2003 the Company received $1.1 million related to eligible research and development ex-

penses for the period from January 1, 2002 to March 31, 2003. Additional claims for $0.7 million were received

in fiscal 2004.

PRESENT STATUS

Although Electrovaya has recorded a net loss in every year since its inception, Revenue less Direct Manufactur-

ing costs has improved by approximately $1.9 million during the year ending September 30, 2004. Electrovaya

intends to continue to focus on the most profitable areas of its business and is constantly reviewing the perfor-

mance for underperforming products. In the current and future quarters, the Company expects research and

development expenses to increase as it continues to develop its Scribbler™ Tablet PC and mobile computer bat-

tery product lines and explore other potential applications for its technology. Electrovaya also expects its sales

and marketing expenses to increase as it rolls out a marketing programme with an extensive advertising compo-

nent for the Tablet PC. It also expects to grow its research and development expenses as revenues from research

and development activities, such as the development of batteries for NASA, increase.

Although the Company believes that the cash on hand will be sufficient to meet its requirements, financing

needs in future periods will depend principally on its ability to generate sales from its products and services and

the extent and timing of future acquisitions and joint ventures.

RECENT ACCOUNTING PRONOUNCEMENTS Prior to October 1, 2003, the Company applied the fair value based method of accounting prescribed by CICA

Handbook Section 3870, Stock-based Compensation and Other Stock-based Payments, only to employee stock

appreciation rights, and applied the settlement method of accounting to employee stock options. Under the

settlement method, any consideration paid by employees on the exercise of stock options or purchase of stock is

credited to share capital and no compensation expense was recognized.

Effective October 1, 2003, in accordance with one of the transitional options permitted under amended Sec-

tion 3870, the Company has prospectively applied the fair value based method to all employee stock options

granted on or after October 1, 2003. Under the fair value based method, compensation cost is measured at fair

value at the date of grant and is expensed over the award’s vesting period. During the year, due to the effect of

prospectively adopting the fair value based method, there was an increase in stock based compensation expense

of $43, with a negligible impact on loss per share.



QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT RISKS AND UNCERTAINTIESINTEREST RATE RISK / / / As of September 30, 2004, the Company had cash and short-term investments total-

ing $13.6 million. As a result of their short-term maturities, the Company does not believe these investments are

subject to significant interest rate risk.

FOREIGN CURRENCY EXCHANGE RATE RISK / / / In the year ended September 30, 2004, approximately 80%

of the Company’s revenue was derived from U.S. customers in U.S. dollars. The Company expects that the ma-

jority of its sales will, in the future, be made in U.S. dollars and that in the short term, the majority of its expens-

es will be denominated in Canadian dollars. As of September 30, 2004, $3.6 million of cash, cash equivalents

and short-term investments were denominated in U.S. dollars. Fluctuations in the exchange rate between the

Canadian dollar and the U.S. dollar may therefore have a material effect on results of operations. The Company

does not currently engage in currency hedging activities.

CREDIT RISK / / / The Company manages its credit risk with respect to accounts receivable by establishing and

implementing credit limits and approval policies, as well as dealing primarily with large creditworthy customers.

It has also insured a majority of its accounts receivable.

OTHER RISKS AND UNCERTAINTIES / / / Electrovaya is an early-stage commercial company facing correspond-

ing risks, expenses and difficulties that may affect its outlook and eventual results of its business and commer-

cialization plan.

Electrovaya may not be able to establish anticipated levels of high-volume production on a timely, cost-effec-

tive basis or at all. It has never manufactured batteries in substantially large quantities and it may not be able to

maintain future commercial production at planned levels. Additionally, if it is unable to maintain an adequate

supply of raw materials or components, its costs could increase or its production could be limited.

Electrovaya has taken a number of steps to offset these risks:

///Its manufacturing process is modular and flexible.

///Its high-volume facility utilizes machinery and equipment that is similar to the machinery and equipment that

it has already designed, built and used in its pilot production plant. Since the introduction of its PowerPad®

in 1999 it has successfully produced finished products in its pilot and commercial plants, resulting in increas-

ing levels of sales. ///

It has formalized supply arrangements with suppliers to ensure that raw materials required for high-volume

production are available at a reasonable cost and on a timely basis. ///

It has more than one supplier for critical raw materials and components.

Until the establishment of multiple plants, Electrovaya’s dependence upon the operation of a single manufactur-

ing facility and accidents or other operational problems at this facility, or at neighbouring facilities operated by

other businesses, could affect its ability to deliver product to its customers and therefore its ability to generate

revenues. In addition, it may be subject to environmental liabilities at its facilities, which could result in material

expense and adversely affect its ability to sell or finance its facilities.

Electrovaya has addressed these risks by designing and building its high-volume facility with worker safety in

mind. In addition, it has adopted a formal environmental policy that requires compliance with environmental

legislation and an ongoing program of monitoring its environmental compliance.

Electrovaya relies upon manufacturers in Taiwan to produce the Scribbler® Tablet PC and has no long-term

supply contracts with them.

There are numerous suppliers in Taiwan and throughout Asia capable of producing a Tablet PC and it is

possible to arrange alternative sources of manufacturing, if required.



Other risks and uncertainties (continued)

Electrovaya does not have a collaborative partner to assist it in the development of its batteries, which may limit

its ability to develop and commercialize its products on a timely basis. Furthermore, it will continue to incur

significant costs and invest considerable resources designing and testing batteries for use with, or incorporation

into, specific products. Significant revenue from these investments may not be achieved for a number of years, if

at all. Moreover, these batteries may never be profitable and even if they are profitable, operating margins may

be low.

The development by the Company of new applications for its rechargeable batteries is a complex and time-

consuming process. New battery designs and enhancements to existing battery models can require long devel-

opment and testing periods. Significant delays in new product releases or significant problems in creating new

products could negatively impact the Company’s revenues.

Electrovaya believes that the formation of strategic partnerships will be critical for the Company to meet its

business objectives. It will continue to seek arrangements with potential partners to mitigate development and

commercialization risks going forward, balanced by its objective to maximize market share and penetration by

not entering into exclusivity arrangements with a single partner. In addition, it is reviewing options to work with

multiple partners on OEM programs for internally designed applications, sales and distribution arrangements,

outsourcing parts of its manufacturing process, and for development of specialized applications in industry seg-

ments other than portable computers.

Electrovaya may not be able to compete effectively with other manufacturers of compact rechargeable batter-

ies. There is also the possibility its competitors may develop portable power technologies that match or outper-

form the SuperPolymer® technology, which may diminish the demand for the Company’s products. In addition,

innovations in the design of portable computers and other wireless devices may reduce the need for its batteries.

The market for rechargeable batteries is competitive and fragmented. Electrovaya believes it is well positioned

to compete in the market for compact rechargeable batteries, which is already very large and growing rapidly.

There are currently five to seven principal competitors, primarily well capitalized companies based in Japan and

Korea, which have in aggregate a dominant market position in the lithium ion and lithium ion polymer battery

sector. By continuing to leverage the Company’s technological advantage, move quickly to penetrate the market,

target the underserved aftermarket, and emphasize its higher energy density to create brand differentiation,

Electrovaya expects to increase revenue in the near term. Additionally, the Company believes that design innova-

tions in the wireless sector will either not materially extend the run time of existing battery technologies or will

be more than offset by the addition of new, enhanced, “power-hungry” features, which will increase the energy

requirements of these wireless devices. Finally, miniature fuel cells present potential future competition to batter-

ies in the portable and mobile power applications. However, they are expensive and still have technical hurdles

to overcome, thus mitigating the threat to Electrovaya’s products in the electronics markets that it targets.

Electrovaya will continue to invest in research and development to utilize latest generation advanced materi-

als and improve the process and design of its batteries to maintain or widen the technological gap between its

technology and that of its closest competitors. However, the Company has limited knowledge of its competitors’

activities in this area.

Electrovaya is exposed to certain risks as a result of being in an industry that manufactures devices or prod-

ucts containing energy. All lithium ion polymer batteries can become hazardous under some circumstances. In

the event of a short circuit or other physical, electrical or thermal damage to these batteries, chemical reactions

may occur that release excess heat or gases, which could create dangerous situations, including fire, explosions

and releases of toxic fumes. The Company’s batteries may emit smoke, catch fire or emit gas, any of which may

expose Electrovaya to product liability litigation. In addition, these batteries incorporate potentially hazardous

materials, which may require special handling, and safety problems may develop in the future. Product failure or

improper use of lithium ion polymer battery products, such as the improper management of the charging/dis-

charging system, may also result in dangerous situations. The raising of any health or safety issues could affect

the Company’s reputation and sales. Moreover, changes in environmental or other regulations affecting



Other risks and uncertainties (continued)

the manufacture, transportation or sale of Electrovaya’s products could adversely affect the Company’s ability

to manufacture or sell its products or result in increased costs or liability. Finally, Electrovaya may be required to

devote significant financial and management resources to processing and remedying warranty claims. If product

liability issues arise, the Company could incur significant expenses and suffer damage to its reputation and the

market acceptance of its products.

To mitigate these risks of product liability, Electrovaya undertakes extensive internal and external product and

safety testing. Unlike certain competing technologies, its products do not contain cadmium or lithium metal,

which are considered hazardous materials for purposes of disposal or transportation. The Company believes that

there are currently no regulations in North America that would prevent it from the manufacture or sale of its

batteries, and Electrovaya is fully committed to ensuring its products are environmentally friendly. In certain situ-

ations or applications, battery power may be a more attractive environmental solution than other energy sources

utilizing fossil fuels or creating emissions.

Electrovaya may not be able to successfully market its battery technology and products, and because its Su-

perPolymer® technology is relatively new, these batteries may not perform as well as anticipated. The Company

expects to continue to sell its products directly to corporate customers and through value-added resellers and

distributors. But if these parties do not purchase these products or purchase them in lower quantities or over

longer time periods than expected, Electrovaya’s revenue profile and cash flows may be severely affected. The

Company continues to rely upon a limited number of customers for a significant portion of its sales and the loss

of any customer could have a material adverse effect on its sales and operating results and make it more difficult

to attract and retain other customers.

If overall market demand for laptop computers and other portable electronic devices declines significantly,

and consumer and corporate spending for such products declines, Electrovaya’s revenue growth will be ad-

versely affected. Additionally, the Company’s revenues would be unfavorably impacted if customers reduce their

purchases of new products or upgrades to the Company’s existing product lineup if such new offerings are not

perceived to add significant new functionality or other value to prospective purchasers.

The PowerPad® 80, 120 and 160 products and our Scribbler™ Tablet series of products have undergone

extensive user testing and have now been sold commercially to well-established corporate users, distributors

and value added resellers with positive early results. Electrovaya has an aggressive marketing program in place,

including trade show participation and advertising campaigns. The Company has a dedicated sales team to ag-

gressively market and sell its products in the United States and Canada. Electrovaya has adopted a multi-channel

distribution strategy to reduce its reliance on a single customer or distributor. The Company is targeting different

types of users, applications and industries to mitigate the risk if its products do not achieve acceptance in a

single market and to ensure it minimizes reliance on any one customer.

If the Company fails to manage growth successfully, it could experience delays, cost overruns or other prob-

lems. Similarly, if it is unable to hire or retain qualified, key personnel, its business may be jeopardized.

Electrovaya will continue to monitor its staffing requirements for its manufacturing facility and its needs at

the senior management levels and for specialized personnel in various disciplines or areas of expertise.

If Electrovaya fails to protect its proprietary technology, it may lose any competitive advantage it provides.

Others may claim that the Company’s products infringe on their intellectual property rights, which could result

in significant expenses for litigation, developing new technology or licensing existing technologies from third

parties. If Electrovaya is unable to maintain registration of its trademarks, or if its trademarks or trade name are

found to violate the rights of others, the Company may have to change its trademarks or name and lose the

goodwill created in them.

Electrovaya will continue to file patent applications and register patents resulting from ongoing research and

development activity, acquire or license patents from third parties if appropriate and further develop the trade

secrets related to its manufacturing process and the design and operation of the equipment used to manufac-

ture its products.



OUTLOOK The Company continues to identify markets in need of portable power, mobility and alternative energy solutions.

In so doing, it continues to identify the most profitable opportunities, enhancing its lithium ion SuperPolymer®

rechargeable battery technology as required to ensure a sustainable lead in the marketplace. The Company is

also pursuing new potential strategic partnerships globally that offer exciting opportunities for growth.

As the business grows, the Company continues to review all aspects of the business for opportunities to

improve profitability and cash-flow. The Company has the capacity to grow sales without adding further over-

heads, and looks forward to increasing revenues as it strives toward profitability and positive cash-flow in the

coming year.


MANAGEMENT RESPONSIBILITY FOR CONSOLIDATED FINANCIAL STATEMENTS / / / / / / / / / /Management of Electrovaya Inc. is responsible for the integrity of the accompanying consolidated financial

statements and all other information in this Annual Report. The financial statements have been prepared by

management in accordance with accounting principles generally accepted in Canada. Their preparation neces-

sarily involves the use of estimates and careful judgment, particularly in those circumstances where transactions

affecting a current period are dependent upon future events. All financial information in the Annual Report is

consistent with the consolidated financial statements.

To discharge its responsibilities for financial reporting and safeguarding of assets, management believes that it

has established appropriate systems of internal accounting control which provides reasonable assurance that the

financial records are reliable and form a proper basis for the timely and accurate preparation of financial state-

ments. Consistent with the concept of reasonable assurance, the Company recognizes that the relative costs of

maintaining these controls should not exceed their expected benefits. Management further assures the quality of

the financial records through careful selection and training of personnel, and the adoption and communication

of financial and other relevant policies.

The Board of Directors discharges its responsibilities for the financial statements primarily through the activi-

ties of its Audit Committee, which is composed solely of directors who are neither officers nor employees of

the Company. This committee meets quarterly with management, and annually with the independent auditors,

to review performance and to discuss audit, internal control, accounting policy and financial reporting matters.

The consolidated financial statements were reviewed by the Audit Committee and approved by the Board of

Directors.

The financial statements have been audited by KPMG LLP. Their report is presented below.

Dr. Sankar Das Gupta, PhD P. L. Hart MBA, CA

Chairman, President, & Chief Executive Officer Chief Financial Officer


AUDITORS’ REPORT / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / /We have audited the consolidated balance sheets of Electrovaya Inc. as at September 30, 2004 and 2003 and

the consolidated statements of operations and deficit and cash flows for the years then ended. These financial

statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on

these financial statements based on our audits.

We conducted our audits in accordance with Canadian generally accepted auditing standards. Those stan-

dards require that we plan and perform an audit to obtain reasonable assurance whether the financial state-

ments are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the

amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles

used and significant estimates made by management, as well as evaluating the overall financial statement pre-

sentation.

In our opinion, these consolidated financial statements present fairly, in all material respects, the financial po-

sition of Electrovaya Inc. as at September 30, 2004 and 2003 and the results of its operations and its cash flows

for the years then ended in accordance with Canadian generally accepted accounting principles.

KPMG LLP

Chartered Accountants

Toronto, Canada

November 12, 2004


CONSOLIDATED BALANCE SHEETS / / / / / / / / / / / / / / / / /September 30, 2004 and 2003 (Expressed in thousands of U.S. dollars)

2004 2003

ASSETS

Current assets

Cash and cash equivalents $ 2,715 $ 6,178

Short-term investments 10,897 11,415

Accounts receivable 698 1,047

Investment tax credits recoverable 165 427

Goods and Services Tax receivable 66 55

Inventories [2] 2,886 2,852

Prepaid expenses and other 52 138

17,479 22,112

Capital assets [3] 9,203 12,024

26,682 34,136

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities

Accounts payable and accrued liabilities $ 1,514 1,760

Income taxes payable - 6

1,514 $ 1,766

Shareholders’ equity

Share capital [4]

Contributed Surplus $ 63,745 $ 63,729

Cumulative translation adjustment 43 -

Deficit 2,156 954

(40,776) (32,313)

25,168 32,370

Commitments [7]

Contingencies [1(h)]

26,682 34,136 See accompanying notes to consolidated financial statements. On behalf of the Board:

SANKAR DAS GUPTA GEORGE PATERSONDirector Director


CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / /Years ended September 30, 2004 and 2003 (Expressed in thousands of U.S. dollars, except per share amounts)

2004 2003

Revenue $ 6,369 $ 4,323

Direct manufacturing costs 5,522 5,331

847 (1,008)

Expenses 2,843 2,656

Research and development (666) (1,140)

Government assistance [1(h)] 1,640 2,439

Sales and marketing 2,445 1,928

General and administrative 6,262 5,883

Loss before the undernoted 5,415 6,891

Amortization 3,061 2,746

Loss from operations 8,476 9,637

Interest income (273) (445)

Loss from foreign exchange 260 652

(13) 207

Loss before income taxes 8,463 9,844

Income tax expense [9] - 32

Loss for the year 8,463 9,876

Deficit, beginning of year 32,313 22,437

Deficit, end of year $ 40,776 $ 32,313

Basic and diluted loss per common share [8] $ 0.12 $ 0.14

See accompanying notes to consolidated financial statements.


CONSOLIDATED STATEMENTS OF CASH FLOWS / / / / September 30, 2004 and 2003 (Expressed in thousands of U.S. dollars)

2004 2003

Cash provided by (used in):

Operating activities

Loss for the year $ (8,463) $ (9,876)

Amortization which does not involve cash 3,061 2,746

Stock compensation expense 43 -

Change in non-cash operating working capital [11] 400 725

(4,959) (6,405)

Investing activities

Reductions to short-term investments 518 6,674

Additions to capital assets (240) (231)

27 6,443

Financing activities

Issue of shares 16 -

Increase in cash and cash equivalents (4,665) 38

Effect of currency translation adjustments on cash & cash equivalents 1,202 3,611

Cash and cash equivalents beginning of year 6,178 2,529

Cash and cash equivalents end of year $ 2,715 6,178

Supplemental disclosure of cash flow information

Income taxes paid 50 80

Interest received 243 479

See accompanying notes to consolidated financial statements.


Electrovaya Inc. (the “Company”), incorporated in 1996 under the Business Corporations Act (Ontario), devel-

ops, manufactures and markets portable power technology products using its patented lithium ion SuperPoly-

mer® technology.

1. SIGNIFICANT ACCOUNTING POLICIES

(a) Basis of presentation

The Company prepares its financial statements in accordance with Canadian generally accepted accounting

principles. These consolidated financial statements include the accounts of the Company and its wholly owned

subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

The Company has no operating assets located outside of Canada.

(b) Change in accounting policy

Prior to October 1, 2003, the Company applied the fair value based method of accounting prescribed by CICA

Handbook Section 3870, Stock-based Compensation and Other Stock-based Payments, only to employee stock

appreciation rights, and applied the settlement method of accounting to employee stock options. Under the

settlement method, any consideration paid by employees on the exercise of stock options or purchase of stock is

credited to share capital and no compensation expense was recognized.

Effective October 1, 2003, in accordance with one of the transitional options permitted under amended Sec-

tion 3870, the Company has prospectively applied the fair value based method to all employee stock options

granted on or after October 1, 2003. Under the fair value based method, compensation cost is measured at fair

value at the date of grant and is expensed over the award’s vesting period. During the year, due to the effect of

prospectively adopting the fair value based method, there was an increase in stock based compensation expense

of $43, with a negligible impact on loss per share.

(c) Cash and cash equivalents and short term investments

Cash and cash equivalents include temporary investments in marketable securities which are readily convert-

ible into cash and which have an original term to maturity of 90 days or less. Short term investments consist

of temporary investments in marketable securities with longer terms to maturity are recorded at cost, which is

equivalent to their market value.

(d) Capital assets

Capital assets are recorded at cost less related investment tax credits and accumulated amortization. Amortiza-

tion is provided on a straight-line basis over the estimated useful lives of the assets at the following annual rates:

(e) Impairment of long-lived assets

The Company reviews capital and intangible assets for impairment on a regular basis or whenever events or

changes in circumstances indicate that the carrying amount may not be recoverable. Recoverability is assessed by

comparing the carrying amount to the projected future net cash flows that the long-lived assets are expected to

generate.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended September 30, 2004 and 2003 (Expressed in thousands of U.S. dollars, except per share amounts)

Building 4%

Building improvements 4%

Production equipment 20%

Workshop equipment 20%

Patents and technology 20%

Office furniture and equipment 20%

Vehicles 20%


(f) Research and development costs

Research costs, net of related investment tax credits, are expensed in the period in which they are incurred.

Development costs, net of related investment tax credits, are expensed in the period incurred unless such costs

meet the criteria under Canadian generally accepted accounting principles for deferral and amortization. To

date, the Company has not deferred any development costs.

Certain costs related to the Company’s research and development efforts related to fast batteries and electric

vehicles are being funded by a repayable grant from Technology Partnerships Canada (see Note 1 (h)).

(g) Inventories

Inventories are comprised of raw materials, work in progress and finished goods. Raw materials and work in

progress are recorded at the lower of cost and replacement cost. Finished goods are recorded at the lower of

cost and net realizable value.

(h) Government assistance

The Company receives indirect financial assistance from the government by way of the investment tax credit pro-

gram. This program provides assistance, by way of direct payments and reductions in corporate income taxes,

for specially defined qualifying expenditures. Investment tax credits are credited against the related research and

development expenses, or capital assets.

The Company has been approved for funding under the Technology Partnerships Canada initiative of Industry

Canada. The funding is to support the Company’s research and development efforts in fast rate batteries and

electric vehicles. The Company will receive contributions of up to 29.7% of the specified costs of the devel-

opment project, to a maximum amount of $6,700. Under the terms of the agreement, an amount up to a

maximum of $31,075 is to be repaid by royalties, commencing in 2007 through to 2013, with payment to be

deferred or reduced if certain revenue thresholds are not achieved. The Company’s first claim for $1,140 was

received in September, 2003. Additional claims for $666 were received in fiscal 2004.

(i) Revenue recognition

Revenue is recognized when title to the goods transfers to customers and collection is reasonably assured.

Provision is made for potential sales returns at the time of shipment. Where an estimate of the potential sales

return cannot be made, the sale is not recorded until the distributor has sold the product. For services, revenue

is recognized as each milestone is achieved and accepted by the customer.

(j) Warranty costs

Warranty costs are provided for as revenues are earned.

(k) Use of estimates

The preparation of financial statements requires management to make estimates and assumptions that affect

the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date

of the financial statements and the reported amounts of revenue and expenses during the years. Actual results

may differ from the estimates. Sales returns are estimated at the time of delivery based on past experience and

customer specific factors. Bad debts are determined based on the ageing of accounts receivable where such

amounts are not insured and considered uncollectible.

Warranty accruals are based on the actual warranty experience rate for the past year and sales during the

most recent warranty period.

The Company operates in a competitive market subject to fast-paced technological changes. The Com-

pany has estimated the provisions for sales returns, warranty costs and obsolete inventory based on historical

patterns, communication with its distributors, industry trends and existing competitive pressures. Significant

changes in technology or competitors’ products could result in a material change in the rate of sales returns.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years ended September 30, 2004 and 2003 (Expressed in thousands of U.S. dollars, except per share amounts)


(l) Income taxes

The Company uses the asset and liability method of accounting for income taxes. Future tax assets and liabilities

are recognized for the future tax consequences attributable to differences between the financial statement car-

rying amounts of existing assets and liabilities and their respective tax bases and operating loss carryforwards.

Future tax assets and liabilities are measured using enacted or substantively enacted tax rates expected to apply

to taxable income in the years in which those temporary differences are expected to be recovered or settled. The

effect on future tax assets and liabilities of a change in tax rates is recognized in the income in the period that

includes the date of enactment or substantive enactment. A valuation allowance is recorded against any future

income tax asset if it is not more likely than not that the asset will be realized.

(m) Currency translation

Monetary assets and liabilities of the Company which are denominated in foreign currencies are translated into

Canadian dollars (which is considered to be the measurement currency) at the exchange rates prevailing at the

balance sheet date, and transactions denominated in foreign currencies which are included in operations are

translated at the average rates for the period. Exchange gains and losses resulting from the translation of these

amounts are reflected in the statement of operations in the period in which they occur.

As the Company’s reporting currency is the U.S. dollar, the Company translates assets and liabilities denomi-

nated in Canadian dollars into U.S. dollars at the exchange rate prevailing at the balance sheet date, and the

results of operations at the average rate for the period. Cumulative net translation adjustments are included as

a separate component of shareholders’ equity.

(n) Earnings per share

Basic earnings per share is calculated using the weighted average number of shares outstanding during the year.

Diluted earnings per share is computed using the weighted average number of common and potential common

shares outstanding during the year, if dilutive.

2. INVENTORIES

3. CAPITAL ASSETS


2004 2003

Raw materials $ 1,052 $ 1,095

Work in progress 1,725 1,703

Finished goods 109 54

$ 2,886 $ 2,852

September 30, 2004 CostAccumulated amortization Net book value

Land $ 1,991 $ - $ 1,991

Building 624 126 498

Building improvements 5,334 1,006 4,328

Production equipment 9,032 7,216 1,816

Workshop equipment 1,064 1,019 45

Patents and technology 1,245 859 386

Office furniture and equipment 488 354 134

Vehicles 34 29 5

$ 19,812 $ 10,609 $ 9,203



3. Capital assets (continued)

4. SHARE CAPITAL

(a) Authorized and issued capital stock

Authorized

Unlimited common shares

(b) Stock options

The Company has reserved up to 5,400,000 common shares for issuance under the stock option plan. Options

to purchase common shares of the Company under its stock option plan may be granted by the Board of Direc-

tors of the Company to certain full-time and part-time employees, directors and consultants of the Company

and its affiliates. Stock options are non-assignable and may be granted for terms of up to 10 years. Stock

options vest at various periods from zero to three years. To date, the Company has granted options to purchase

3,322,833 common shares and 2,000,934 remain outstanding (2003 - 1,594,933) at prices ranging from

$0.49 to $8.00 per share. These options have a weighted average remaining life of 6.63 years.

The following table reflects activity under the Plan from September 30, 2001 through September 30, 2004

and the weighted average exercise prices:

September 30, 2003 CostAccumulated amortization Net book value

Land $ 1,991 $ - $ 1,991

Building 624 96 528

Building improvements 5,334 716 4,618

Production equipment 9,031 5,138 3,883

Workshop equipment 1,064 765 299

Patents and technology 1,035 570 465

Office furniture and equipment 467 241 226

Vehicles 34 20 14

$ 19,570 $ 7,546 $ 12,024

Common Shares Special Warrants

Issued Number Amount Number Amount

Balance, September 30, 2002 & 2003 69,539,109 63,729

Stock options exercised 36,333 16

Balance, September 30, 2004 69,575,442 $ 63,745 - $ -

Number

Weighted average

exercise prices

Outstanding, September 30, 2002 1,847,599 $ 1.80

Granted 25,000 0.50

Cancelled or expired (277,666) 2.31

Outstanding, September 30, 2003 1,594,933 $ 1.91

Granted 475,000 0.81

Cancelled or expired (32,666) 1.35

Exercised (36,333) 0.46

Outstanding, September 30, 2004 2,000,934 1.75



(b) Stock options (continued)

During the year, the Company granted options to purchase shares of common stock to certain employees total-

ing 435,000 at a price of $0.87 per share as well as 40,000 options at $0.71.

The compensation costs reflected in these amounts were calculated using the Black-Scholes option pricing

model assuming a risk-free interest rate of approximately 4.4%, a dividend yield of 0%, an expected volatility of

111% and expected lives of stock options of 10 years. The costs are amortized over the vesting period which is 3

years.

The weighted average grant date fair value of the 475,000 options issued during the year was $0.76.

5. FINANCIAL INSTRUMENTS

(a) Fair values

The reported values of the financial instruments, which consist of cash and cash equivalents, short-term invest-

ments, accounts receivable and accounts payable and accrued liabilities, approximate their fair values due to the

near-term maturity of those instruments.

(b) Foreign currency risk

The Company is exposed to foreign currency fluctuations to the extent that the Company is holding significant

cash and cash equivalent balances denominated in U.S. dollars. The Company does not hedge the risk related to

fluctuations of the exchange rate between U.S. and Canadian dollars.

(c) Credit risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of

trade accounts receivable. The Company performs periodic credit evaluations of the financial condition of its cus-

tomers and typically does not require collateral from them. Allowances are maintained for potential credit losses

consistent with the credit risk of specific customers, historical trends and other information. Credit losses have

been within management’s range of expectations. The company also insures some of its accounts receivable.

6. Related Party Transactions

The Company leased its Hanna Avenue premises in Toronto, Ontario, from a company owned by its control-

ling shareholders for $209 per year plus GST and business tax. The lease was renewed from January 1, 2003 to

December 31, 2003. In June 2003, the Company secured an additional 11,800 square feet at $80 per year plus

GST and business tax until December, 2003, with one rent-free month. Beginning in January 2004, the Company

occupied these premises on a monthly basis. In April 2004, the premises were sold by the controlling

Exercise Price $Number

outstanding

Weighted average

price

Weighted average

remaining life (years)

Number exercisable

Weighted average

exercise price

0.49 (Cdn$0.62) 253,668 $ 0.49 7.86 162,008 $ 0.49

0.54 (Cdn$0.68) 25,000 0.54 8.17 8,335 0.54

0.71 (Cdn$0.90) 40,000 0.71 9.86 - 0.71

0.87 (Cdn$1.10) 430,000 0.87 9.64 - 0.87

1.32 (Cdn$1.67) 908,100 1.32 4.89 908,100 1.32

2.37 (Cdn$3.00) 83,000 2.37 6.87 83,000 2.37

5.24 96,666 5.24 6.09 96,666 5.24

5.33 85,500 5.33 5.37 85,500 5.33

6.33 (Cdn$8.00) 19,000 6.33 6.09 19,000 6.33

8.00 60,000 8.00 5.95 60,000 8.00

2,000,934 1.75 6.63 1,422,609 2.13



6. Related Party Transactions (continued)

shareholders to an independent third party for consideration that included a vendor-take back mortgage.

Electrovaya has invested $115 in a private company engaged in the business of producing and evaluating

new materials in return for 6% of its Class A and 21% of its Class B shares, subsequently providing research

and development services totaling $153 in consideration of 30% of additional non-voting, participating Class

B shares. The Class B shares are convertible into Class A voting, participating shares in the event the company

becomes registered on a stock exchange. During the second quarter, Electrovaya provided a $38 loan to the

company to assist with the operation of a pilot plant. The original investment, additional shares and loan have

been valued at Nil as at the end of September 30, 2004.

7. COMMITMENTS

The Company’s future minimum lease payments under operating leases for the years ending September 30 are

as follows:

8. LOSS PER SHARE

The basic and diluted loss per share has been calculated using the weighted average number of common shares

outstanding during the periods, which are as follows:

Common share purchase options or other potential dilutive common share issuances were not considered in the

calculation of diluted loss per share for each of the periods presented since their effect would be anti-dilutive.

9. INCOME TAXES

The provision for income taxes differs from the amount computed by applying the combined federal and

provincial income tax rate of 36.23% ( 2003 – 37.1% ) to the loss before income tax recovery as a result of the

following:

2005 21

2006 7

2007 2

$ 30

September 30, 2004 69,553,913

September 30, 2003 69,539,109

Years ended September 30,

2004 2003

Loss before income taxes $ (8,463) $ (9,844)

Computed expected tax recovery (3,066) (3,652)

Reduction in income tax recovery resulting from:

Lower rate on manufacturing profits 70 192

Permanent differences (712) 191

Change in valuation allowance 5,314 3,101

Change in enacted tax rates (375) 139

Foreign operations taxed at a lower rate 2 29

Large corporations tax - 32

Benefit of previous unrecorded losses (1,233) -

Income tax expense $ - $ 32



9. Income taxes (continued)

(b) The tax effects of temporary differences that give rise to significant portions of the future tax assets and

future tax liabilities are as follows:

In addition to the above temporary differences, the Company has unrecorded non-refundable investment tax

credits (“ITCs”) amounting to approximately $2,042 which begin to expire in 2007.

As at September 30, 2004, the expiration dates of the Company’s tax losses carried forward are as follows:

In assessing the realizability of future tax assets, management considers whether it is more likely than not that

some portion or all of the future tax assets will not be realized. The ultimate realization of future tax assets

is dependent upon the generation of future taxable income during the periods in which those temporary

differences become deductible.

Management considers projected future taxable income, uncertainties related to the industry in which the

Company operates and tax planning strategies in making this assessment.

10. MAJOR CUSTOMERS

During 2004, three customers represented 48% (2003 - 58% ) of total revenue and 72% (2003 - 50%) of trade

accounts receivable.


2004 2003

Future tax assets

Non-capital losses carried forward $ 10,552 $ 6,744

Share issue costs 37 184

Capital assets 1,922 1,556

Non deductible reserves 109 102

Unclaimed research and development expenses 2,750 1,477

Capital losses carried forward 7 -

15,377 10,063

Less valuation allowance (15,377) (10,063)

Net future tax assets $ - $ -

2005 $ 581

2006 871

2007 1,032

2008 5,801

2009 7,543

2010 5,176

2011 3,024

2023 1,084

2024 106

$ 25,218



11. CHANGE IN NON-CASH OPERATING WORKING CAPITAL

12. SEGMENTED INFORMATION

The Company has reviewed its operations and determined that it operates in one business segment and has only

one reporting unit. The Company develops, manufactures and markets portable power technology products

using its patented lithium ion “SuperPolymer” technology.

(a) Revenues from major business activities were as follows:

(b) Revenues attributed to regions based on location of customer were as follows:


2004 2003

Accounts receivable $ 349 $ (285)

Investment tax credits

Recoverable 262 (49)

Goods and Services

Tax receivable (11) 108

Inventories (34) 472

Prepaid expenses and other 86 (25)

Accounts payable and accrued liabilities (246) 540

Income taxes payable (6) (36)

$ 400 $ 725

2004 2003

Aerospace $ 1,357 $ 10

Consumer electronics 4,481 3,774

Other 531 539

$ 6,369 $ 4,323

2004 2003

Canada $ 962 $ 1,026

United States & Others 5,407 3,297

$ 6,369 $ 4,323

SHAREHOLDER INFORMATION / / / / / / / / / / / / / / / / / / / / /

DIRECTORSSankar Das Gupta, PhD

Chairman President & Chief Executive Officer

Electrovaya Inc.

Bejoy Das Gupta, DPhil

Deputy Director, Asia Pacific Department

Institute of International Finance,

Washington, D.C.

Michael L. Gopikanth, PhD, MBA[1]

Consultant, Battery Technology


Chief Technology Officer

Electrovaya Inc.

Sydney R. McMorran, MBA[1,2]

Director

Pandit Patil, PhD[2]

Consultant in Energy & Advanced Transportation

George R. Paterson[1,2]

Director

[1]Audit Committee[2]Corporate Governance & Compensation Committee

OFFICERSSankar Das Gupta, PhD

President & Chief Executive Officer


Chief Technology Officer & Secretary

P. L. Hart, MBA, CA

Chief Financial Officer

AUDITORSKPMG LLP

Toronto, Ontario

LEGAL COUNSELFasken Martineau DuMoulin LLP

Toronto, Ontario

TRANSFER AGENT & REGISTRARCIBC Mellon Trust Company

Toronto, Ontario

T: 800-387-0825

[email protected]

STOCK LISTINGToronto Stock Exchange (TSX)

Symbol: EFL

ANNUAL MEETINGThe annual meeting of shareholders will be held at

4:00 pm EST on Tuesday March 29, 2005 at the TSX

Conference Centre. The Centre is located at ground

level in the Exchange Tower, 130 King Street West

(at York Street) in Toronto, Ontario.

CORPORATE OFFICES2645 Royal Windsor Drive

Mississauga, Ontario

L5J1K9

T: 905-822-6573

INVESTOR RELATIONSPlease visit our website at www.electrovaya.com for press

releases, presentations, fact sheets and other investor

information. For further information or

additional copies of this annual report:

T: 905-855-4610

[email protected]

SALES & CUSTOMER CARET: 1-800-388-2865

T: 905-855-4610

F: 905-822-7953

[email protected]

www.electrovaya.com

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