why Redflow is in trouble

While the company hasn't announced it via the asx yet, there is obviously another delay occuring regarding the roll out of the first Zcells (according to the july announcement, the so-called 'soft roll out' of Zcells to select customers was supposed to begin in early Sept- it hasn't. Indeed, going back a few announcements, Zcell's were orignally supposed to be ready for sale in july/august). Hackett said on social media on Friday Sept 9, that the first shipment of Zcells were "still on the water", and wouldn't be arriving for another couple of weeks. So, it looks like the first shipment won't be arriving until late Sept.

However, even when the first shipment finally arrives, I doubt the Zcells will be immediately ready for sale. Connecting some dots, I suspect that the current delay is also in part caused by an emergency redesign of the Zcell to deal with the low temperature problems I discussed in earlier posts on hotcopper (i.e., Zcells tend to shut down below 10C, thus rendering them useless in southern Australian winters). My guess is that RFX has finally decided to add a heater to the Zcell. After all, if they don't install a heater, the Zcell is virtually guaranteed to fail. This heater, since it consumes energy, will dramatically reduce the efficiency of the Zcell; the Zcell is already far less efficient than Li Ion, and the new heater will only make this efficiency deficit worse and thus even less competitive. But the heater will at least allow the Zcell to work reliably at night through winter. This heater needs to be sourced from a new supplier and tested. With new housing, new BMS and new heater all to be tested for the first time, my guess is that it is going to be at least 3-4 months after the Zcells arrive in the country before they are actually available for retail sale (and that assumes the testing goes without a hitch). Again, while I'm not privy to any inside information, my best guess is that installers and a couple of enthusiastic shareholders will get their first 'test model Zcells' before Christmas this year, but most general retail consumers probably won't be able to ring up an installer an have a Zcell installed until Q1 next year (CY2017) at the earliest. Judging by his social media posts, Hackett seems to be handling each Zcell customer personally (exchanging emails etc); that gives you an idea of how many actual deposit paying Zcell customers there are at present (maybe 10 or 15?). I acknowledge that I'm connecting a lot of dots here, but at the moment I have no reason to think these dates and projections are far off the mark. Even if we bring forward dates by a month, it doesn't make much difference to what I'm saying.

The margin for RFX on the sale of each Zcell is confidential, but it couldn't be much more than $5 or $6k. (If it was more than this, they are charging too much. The wholesale price of a powerwall is around $8k in Aust, which suggests that the Tesla margin is around $4k in Aust). If a $5k margin is in the ballpark, RFX need to sell around 200 Zcell's/month just to break even. Keep in mind that the tiny volume of Zcell manufacturing means that there is presently no economies of scale that will allow for a price drop without eating into RFX margin.

Over the last 12 months, there have been approximately 2000 sales of grid-connected home energy storage systems across all of Australia. The bulk of these sales have been dominated by LG Chem and Tesla. Assuming a 25% growth rate, we can expect around 2500 grid connected energy storage systems to sell in Australia over the next 12 months across all brands. So, in order just to break even, Redflow will suddenly need to capture effectively 100% of the Australian grid connected market when (and if) the Zcell finally becomes available. In other words, in order to just break even, the Zcell will need to be so good that no one will look at any of the li Ion competition.

This isn't going to happen. I think Redflow will be extremely lucky if it sells 120 Zcells this FY (almost all of these sales will go to RFX shareholders and installers; the general public will continue to choose the more affordable LG Chem and Tesla options). So the RFX sales revenue for FY17 is likely to be similar to sales revenue from FY16 (keeping in mind that Hackett's personal purchases of large scale RFX batteries and his home battery systems constituted around 60% of RFX's FY16 sales revenue). On this basis, and in broad terms, I think the FY16 net loss of around $14mill is likely to be repeated in FY17.

RFX have ordered one container load of Zcells for the Australian market initially. By my rough calcs of shipping container size and zcell dimensions, only 60 Zcells will fit into a single shipping container; that gives you an idea of how many Zcells RFX expect to sell initially. I think RFX will be lucky to sell two shipping containers during FY17, hence my forecast of 120 sales. RFX have had expressions of interest from 1200 people (mostly shareholders hoping to get some non-asx info). So I'm projecting that around 10% of these expressions of interest will translate into actual sales.

Assuming the new heater fixes the low temperature problem, the Zcell is just too big, noisy, clunky, and gasseous to compete with the likes of LG Chem and Tesla. Many people don't realise that the Zcell occasionally releases small quantities of highly toxic bromine gas and highly explosive hydrogen. For this reason, the Zcell will probably need to be fitted with a warning label stating that inhalation of small quantities of bromine gas can be lethal. This wont help sales. Who wants to have a battery system that occasionally emits bromine gas attached to the ground level of their house when non-gass Li Ion options are available? Google bromine gas dangers if you don't believe me. The tech-heads/engineers at RFX obviously haven't put themselves in the shoes of parents. If you are a parent of young children, you simply don't purchase products attached to your home at ground level that emit even small quantities of highly toxic bromine gas (and have the risk of rupturing, emitting larger/lethal quantities of toxic gas). End of story.

Consumers also know (because installers are telling them) that LG Chem, powerwall, and other Li Ion battery options are going to significantly fall in price next year (because of new larger scale Li Ion manufacturing plants coming on line). Measured by upfront costs, the Zcell is already by far the most expensive option on the market (or nearly on the market); and it is only going to become more expensive relative to the competition over time. This won't help sales either.

By my rough calcs, RFX will have around $4mill in cash when the Zcell finally hits the retail market next year, and RFX management will need to use the 'good news' of finally having Zcells available for retail sale to immediately announce another emergency $12mill+ capital raising. So shareholders should prepare themselves for another year of hefty losses, hefty cash burn, and another year of hefty dilution (will the next raising be done at 10c?). Looking ahead 12 months, RFX's survival depends largely on the deep pockets of Hackett. If he decides to stop financing the company (he will probably have to underwrite the next capital raising if it is to be successful), it will go into administration pretty quickly IMO. Will low Zcell sales/demand prompt Hackett to cut his losses and pull the plug?

I admire and respect Hackett and what he is trying to do. There is no doubt in my mind that advances in energy storage tech will help to limit global warming to livable levels and dramatically reduce particulate pollution over coming decades. I just think he has chosen the wrong technology platform to make a mark on the on-grid energy storage market.