SUNation Energy Inc. (SUNE) Q1 2023 Earnings Report, Transcript and Summary

Good morning, and welcome to the Pineapple Energy First Quarter 2023 Conference Call. As a reminder, today's call is being recorded. All participants are in a listen-only mode. For opening remarks and introductions, I would now like to turn the call over to Gary Dvorchak of The Blueshirt Group. Mr. Dvorchak, please go ahead.

Thank you. Good morning, and welcome to Pineapple Energy's conference call to discuss results for the first quarter of 2023. With me today are Kyle Udseth, our Chief Executive Officer; and Eric Ingvaldson, our Chief Financial Officer. Our call this morning will include statements that speak to the company's expectations, outlook, and predictions of the future, which are considered forward-looking statements. These forward-looking statements are subject to risks and uncertainties, many of which are beyond our control, which may cause our actual results to differ materially from those expressed in or implied by these statements. We are not obliged to revise or update any forward-looking statements except as may be required by law. Please refer to our disclosures regarding risk factors and forward-looking statements in today's earnings release, and our other SEC filings. A copy of our press release has been posted to the Investor Relations page of our website for reference. The non-GAAP financial measures disclosed in this call are reconciled to the U.S. GAAP equivalent and can be found in the press release that we issued last night. With that, I'll turn the call over to our CEO, Kyle Udseth. Kyle, go ahead.

Thanks, Gary, and thanks to everyone for joining us on the call today. Our first full quarter with SUNation was highly successful with strong results company-wide coming in ahead of our own internal plan. SUNation continued its momentum while HEC delivered a very solid quarter demonstrating great resiliency to quickly and fully recover from the December permitting challenges we spoke about on the last call. We entered the second quarter with great momentum in an integrated national business that is poised to continue both organic growth and acquisitions. Let's start in Hawaii where we grew substantially versus both last year and last quarter on the key forward-looking metric of kilowatts sold. Installations declined sequentially, which is the normal seasonal pattern in Hawaii, but much more importantly, residential kilowatts installed in Q1 were up 14% versus Q1 of 2022, which is a great result that over delivered versus budget. Battery attach rate in Hawaii remained outstanding at 85%. Our team there has years of experience helping homeowners choose solar paired with battery storage. The regulatory framework and local incentives in Hawaii are different than New York and more conducive to batteries, yet upcoming changes in the Long Island market should soon favor battery attachment there as well. Transferring this knowledge to our SUNation team from the experts at HEC should pay dividends in the quarters ahead as we increased battery attach rate versus the current low single-digit rate. Turning now to our New York business, SUNation’s momentum was strong in the quarter as well. Kilowatts sold were up around 30% versus last year, outstanding growth that resulted from our strong value proposition for homeowners on Long Island and in New York City, combined with solid execution from our SUNation team. Despite the usual winter weather challenges, kilowatts install were up 65% versus last year, which was the biggest driver of our consolidated revenue growth. Notably, SUNation recently achieved a major milestone crossing 100 megawatts of lifetime solar installed. I'm grateful for the hard work of the team we have at SUNation. We are going to keep our foot on the gas to deliver strong growth throughout the year or I guess I should say, keep our foot on the accelerator of the electric vehicle. At the quarter-end, we have an estimated 38 million worth of pending installations giving us good visibility on revenue. That backlog, which should all be installed before year-end, is close to half of our 2023 revenue guidance. The strong performance in Q1 gives us even greater confidence in our stated full-year revenue range of 80 million to 85 million. With the over performance in Q1 versus our plan, we're now trending to the top of that range versus the midpoint. This revenue growth and better profitability enabled us to reach an important goal earlier than planned. On the last earnings call, we stated our objective to cross the positive cash flow from operations in the second half of 2023. In fact, we had positive operating cash flow from continuing operations this Q1. This is a really important achievement and it looks great on a spread sheet and in a press release, but to me personally, even more important is what it represents. We've been on this journey to sustainability as a company for almost 2.5 years now since I founded the business in November of 2020. And now we've gotten there ahead of schedule. It's something I think we all take pride in here and I'm grateful to all of our Pineapple employees for their hard work in getting us to this point. It's a destination, but also just the starting point for the next phase of the company's life. We are continuing to build on this momentum and we have tremendous optimism for the rest of the year and for the future of Pineapple. The financials are of course key, but our achievements in the quarter extended beyond the numbers as well. A key element of our strategy in the East is to penetrate the new build market and we got traction there with a contract to outfit homes and a subdivision being built by a leading local real estate developer Baiting Hollow. The initial deal is small at 25 homes, but is sophisticated because we will install full smart energy systems. This means rooftop solar, battery storage, other efficiency systems to smart light bulbs, and a home energy management control system. As Baiting sees initial success in sales, we anticipate selling more of these smart home energy packages to them and other developers both on Long Island and around the country. Even as SUNation manages its current rapid growth, we are thinking ahead especially in terms of workforce. In some parts of the country and for some solar companies, high growth from heavy customer demand is bumping up against shortages in skilled field labor. While we have not experienced these shortages ourselves, we always want to be proactive. A great example of this is Brian Karp, one of our leaders at SUNation who spearheaded a public private partnership with [several] [ph] Community College, train people for solar industry jobs. This joint training program will graduate people with the technical skills to succeed in our industry, ready to contribute on day one in various roles. This is a great example of how public private partnerships can drive economic growth and better the lives of our local community. Finally, I want to share a big win for our E-Gear subsidiary in Hawaii. We licensed our Energy Management Controller or EMC to Eguana who is a seasoned vendor of solar paired battery energy storage systems. Our EMC is a critical component and this deal holds the promise of high volume sales of our EMC. A key part of this deal is that it is capital light. We licensed the design to Eguana, but they will build it. We will collect royalty revenue on a per unit basis. This deal is a great starting point for us to gain traction on the devices side, which a high margin complement to our installation business. We are very excited about the prospects for this segment. With that, I'll now turn the call over to our CFO, Eric Ingvaldson, to walk through our financials. Eric, please go ahead.

Thank you, Kyle. And I would also like to express gratitude to our employees in New York and Hawaii and Minneapolis for all of their hard work that has led to the results that we are presenting here in the first quarter. I will very quickly review the GAAP financials as required by the SEC, then review some pro forma numbers that will give you a better sense of the performance of our business. The GAAP numbers are not insightful because Q1 results last year consisted of only three days of operations, post-merger with CSI. Let's start with the first quarter 2023 GAAP results, which includes a full contribution quarter from SUNation. Keep in mind that the legacy CSI businesses JDL and Ecessa are reported as discontinued operations. Revenue was 22 million in the quarter, up 28% from the fourth quarter. Gross profit was 8 million in the first quarter, up 60% from the fourth quarter. Operating expenses were 10.2 million, up 19% from the fourth quarter. A net loss from continuing operations was 2.6 million, which includes 1.3 million of amortization expense and an 825,000 unfavorable fair value remeasurement of earn-out consideration. Revenue in the first quarter of 2022 was de minimis at $232,000. Now, let's summarize our first quarter pro forma results, which assume we owned HEC, E-Gear, and SUNation for the full quarter in 2022. The comparisons are all year-over-year. Pro forma revenue was up [60%] [ph] from 13.8 million last year, with HEC up 39% and SUNation up 68%. Pro forma net loss of 2.6 million, improved 53% from the prior year net loss of 5.4 million, which included 2.7 million of transaction costs. Pro forma adjusted EBITDA of positive $367,000 improved 142% from negative $871,000 in the prior year. Pro forma adjusted EBITDA includes adjustments for amortization expense of 1.3 million, an unfavorable fair value re-measurement of earn-out consideration of 825,000, an unfavorable fair value remeasurement of the contingent value rights of 250,000, and other items such as interest income, interest expense, depreciation, taxes, stock compensation, and a gain on sale of assets. Turning to the balance sheet, which represents GAAP figures, we ended the quarter in good shape. Cash available for use in our operating business was 3.4 million. We had another 4.2 million of restricted cash and liquid investments, which is reserved for the contingent value right holders. We plan to raise capital in 2023 to refinance debt and fund acquisitions. Our performance in Q1 gives us confidence in our previously stated full-year revenue range and ability to generate meaningful cash flow from continuing operations this year. Now, we would like to open the call for any questions. Operator, please go ahead.

Let’s see. Our first question comes from the line of Donovan Schafer of Northland Capital Markets. Please go ahead.

Hey, guys. Thanks for taking the questions. I see you reiterated the full-year guidance and it was nice to hear about the bookings you have that gives you some visibility there. I'm curious for those kinds of, I guess that backlog or in-progress installations. Can you give us any color on, kind of your sense of the cadence for the year, for the remainder of the year, trending as we head into the second quarter, should we expect steady sequential growth quarter-over-quarter through the year or like a seasonal dip in the fourth quarter or anything like that? Just trying to figure out kind of the shape through the year.

Yes, sure. Good morning, Donovan. Thanks for being on. Early on the West Coast for sure. It's a good question and it's one that we work through internally on our forecast as well. And every market is different, but certainly in Hawaii, but even in New York as well, you tend to see installation volumes and revenue build throughout the year. Q4 is a really strong quarter. And then Q1 declined sequentially. We saw that here as well. I believe we were down 5% or something like that sequentially on revenue, but that is a smaller decline than we would have anticipated previously. And when we reference over delivery versus our internal plan, we had a stronger Q1 because there was less of a, kind of seasonal dip. I think there is a, maybe one-time idiosyncratic factors on that both in Hawaii, we talked about that Department of Planning and permitting issue in December on the last call that delayed some of the revenue that should have been installed and then recognized last December instead, pushed forward into Q1. Similarly, we had something not quite as big, but in New York, there were, I think it was 8 or 10 or 12 jobs. We had modules sitting in a ship import that couldn't get in. So, they should have been installed in December and got pushed to Q1. So, I think that in a typical year you would have seen relatively more in the last Q4 and relatively less in this first Q1. But really happy with the growth overall in the year-over-year in Q1. I think as we look at Q2, Q3, Q4, in secular terms like, yes, Q2 will be higher than Q1, Q3 will be higher than Q2, and Q4 will be higher than Q3, and then it will get back down to Q1. Because of some of those one-time shifts that I just mentioned from old Q4 into this Q1. We don't really want to give quarter-to-quarter guidance, but it would be reasonable to expect Q2 to not see quite as big of a ramp up over Q1 as you might in another year. But yes, just the shape of the curve throughout the year is like you said, kind of sequential growth up to Q4 and then a big Q4. And then a little bit of a decline to Q1 of 2024 though because we're overall on the up and to the right trajectory organically that's going to be muted a bit.

Okay, that's helpful. And then I want to also talk about battery attachment rates, you guys gave that as I think 40% in the press release, which is great. And then you also mentioned Hawaii is at 85%. And so, I'm wondering if we can, kind of think about it in like a pro forma, like apples-to-apples, how things are trending broadly? I think the attachment rates are a lot [lower] [ph] in SUNation. So, if you kind of take pro forma or maybe that's not even – maybe that's too confusing because they're kind of opposite ends of the spectrum, but are you seeing a general, like improving trend? Is it basically saturated in Hawaii and so you don't really get improvement there, but trying to move SUNation in that direction? And if you could talk about the policy, it sounds like you said there's a policy or some kind of a change in Long Island that would drive more attachment there?

Yes, definitely. And some of it's just the math like how you get to the 40% is just the weighted average of like the high rate in Hawaii and the lower rate in New York. And so we kind of tend to view each of those in their own standalone silo, but then depending on the relative install volumes or sales volumes, whichever metric you're looking at, you'll get to that weighted average. And even then in Hawaii that itself is a weighted average. You have approaching a 100% battery attach rate on a new greenfield or green roof or whatever you'd call it. A brand new install on a roof that doesn't have any solar on it already. And it's been that way in that market for at least five years when [PUC] [ph] switched over to a non-export tariff. It really only became economic to continue doing solar, if you paired it with battery storage, you could self-consume your own excess. And so, what you have is almost every brand new solar install on Oahu has a battery paired with it. But you do have a healthy business of retro fitting and upsizing old systems that are [grandfathered] [ph] in under the prior tariffs. So, included in some of that is PV that we're putting on to those older systems that don't have batteries. So, even that 85% is a weighted average of like 99.9% and 0%. In Long Island, it's low-single-digits, right? It's like 5% or less than that. And I think we all look at that and think there's a ton of opportunity to grow there. I mentioned this 100 megawatt install. I was out there two weeks ago with the team at the customer's home. It was really a tremendous event and I got to see the good work the crew was doing in real time, but also walk with the homeowner and tour of the house. And so, it's the panels on the roof at a Tesla Power wall in the garage. They also had installed a span panel with us, as well as a span DV charger, and they'd recently switched over to a heat pump, which we don't yet install, but it's something that we talk about and potentially on our roadmap as well. So, this is a homeowner who's really going down that electrify everything path. And I talked to him about the battery and why the husband and wife had made that decision. And they said, well under the current policies with the utility here and like it doesn't necessarily pencil just on an ROI, but there's enough incentives and value streams in place that it's not that much more expensive when you'd net it all up over the life of it. And I just really think of this as future proofing the house. So, I think more and more that is becoming top of mind there and people are thinking more proactively. And then on top of that, the bigger change that we've mentioned is they're switching to time of use rates in that electric utility territory. And I'm not a 100% sure on the timing, but it'll come within the next 12 months. And there were even a couple of the utility execs at this ceremony. And I think everybody just had a lot of excitement for this switch where it just makes it much more economic to pair battery storage with solar. So, I think you've got the confluence of supportive regulatory and public policy with momentum starting where this is no longer like the bleeding edge, it's kind of getting to the cutting edge and then you get into the early majority. I think that's starting to come. Just combined with our own opportunity to continue sharing best practices and kind of spreading the knowledge transfer from Hawaii, which is just really great at talking to homeowners about this and how to think about it and understand different consumer needs. So, we're optimistic about the battery growth we're going to see in New York?

Thank you. [Operator Instructions] Your next question comes from the line of Chip Moore of EF Hutton. Please go ahead.

Good morning. Hey, thanks for taking the question, Kyle and Eric. And congrats on that positive cash flow milestone. That's great to see. I guess similar to the question around the revenue cadence, maybe speak to sustainability of that near-term, was there anything in terms of mix or anything else that was an outsized help in the quarter? And is your full-year outlook even higher than say you thought when we talked in Q4?

Yes, I think we talked about this internally yesterday and some of this is that we – the last time we spoke wasn't actually that long ago. You know, you think in your head you're going to do this every quarter and so it will be three months between these, but our prior call was on March 31, and so we had pretty good line of sight into Q1 revenue at that point even though the results we were sharing were just through 12/31. But top line was great. Some of it was – some of those one-time non-recurring shifts I talked about, about delays at the end of December in both businesses that spilled over into Q1. I think that we were – we over delivered a bit just broad based in both markets on top of funnel demand lead generation our ability to gain more than our share conversion rates on leads into sales, being efficient at getting those through the pipeline. It was just, kind of an across the board win and then we managed to control costs, as well and I think be a little bit ahead of the curve on some of the cost containment and some of the synergy efforts. And so, from that standpoint, I think it's definitely sustainable we're on that. And when you give guidance, it's kind of the expected value of it. And we are just a bit ahead of schedule on, kind of a lot of metrics across the board. So, I guess that's what I'd say on that. I think the margin performance is certainly sustainable and I think we're set up for a really good rest of the year.

That's great Kyle. And I guess the follow-on there is given that and that visibility on the fundraising side and would it be some of the near-term obligations? Have those options progressed and does this open up some more opportunity in that realm?

Yes, great question. Suppose we didn't touch on fundraising much in the script. I think that talk about debt, talk about equity, both pads are available to us. I think when we look at the stock price right now, don't love where it's at. That dilution is not appealing. Feel like we've got good line of sight and a great [indiscernible] of initiatives to continue creating value for the company, putting wins on the board and hopefully driving that up before we really tap that as the capital raising source. So, then you look at debt and I think that we've been engaged in multiple conversations ongoing with different lenders. I think that we had a really solid model. We had confidence in for the year, previously and then this strong performance in Q1 just reinforces that and makes it even more appealing. So, don't have any specific details to share on that right now, but I'll say that the operating results of the business give us confidence that we're going to be a really appealing credit for multiple different lenders.

Thank you. Your next question comes from the line of Jeff Grampp of Alliance Global Partners. Please go ahead.

Good morning, guys. Understanding the comments that you guys are expecting a continuation of the gross margins. Can we kind of peel the onion back there a little bit more? What do you see as kind of the main drivers? If I just look, understanding on the GAAP numbers are a little noisy quarter-to-quarter, but like the incremental margins look pretty impressive Q4 to Q1, so just kind of wondering if you can, kind of talk on the main drivers impacting the gross margins?

Yes, Eric, do you want to take that one?

Yes, sure. So sequentially, our gross margins were up on a GAAP basis, 60%, a lot of that has to do with showing a full quarter of SUNation in the first quarter that was not presented in the fourth quarter of last year. If you do peel the onion back a little bit, margins are fairly consistent if you look at the pro forma numbers. You did see a slight increase in price for [indiscernible] installed, sequentially from the fourth quarter to the first quarter. And cost of goods, our outlook on that is that panel costs will stay flat or even decline. So, we are confident in maintaining healthy margins going forward.

Awesome. That's great to hear. I appreciate that. And Kyle, I'm curious given your background, obviously strong marketing sales customer experience, when you guys are looking at M&A opportunities, how much time do you guys, kind of spend thinking about, okay, here is an interesting brand, but we don't think they're doing XYZ as efficiently as we at Pineapple could and maybe, kind of lean into an opportunity where you see a lot of synergies or opportunities for improvement versus say buying a brand that's already operating pretty efficiently like, how much time do you guys kind of spend on that and maybe, kind of leaning into some opportunities to improve a brand versus say buying a brand that's already operating efficiently? How do you evaluate those trade-offs?

Yes, Jeff, I think that's a great question. And I think that we spend a lot of time on it. And there are multiple different [brand as] [ph] we view any potential acquisition or merger partner through different criteria. We look at diligence. I think there's, kind of a general size criteria that we think the juice is going to be worth the squeeze on going through audit, going through diligence, but not too big where it presents potential integration risk with the business. We have a lot of confidence about the model, but we don't want to get overconfident and have hubris about it. We want to make sure we can integrate the next one and the one after that, as well as we've been able to integrate Hawaii in New York. So, just kind of that size component. Certainly a financial component. We look at businesses that have around or even better than our current blended gross margin like that gross margin is really important for us. So, as cost containment and managing the business well for cash flow, so that EBITDA margin is important. We look at the multiples that we can pay for it because we've got to make sure it's accretive and we can fundraise for it. We look at cultural fit, which is a huge thing for us because of that integration, but also we just want somebody who shares that vision and that's what we found is the companies that fit on a lot of the other dimensions. They tend to like us and we tend to like them. So, I think those are all really important, but customer acquisition piece of it is so critical. And in my view, and I think it's – we all share this view here and it's in a way like our thesis. The companies that are committed to delivering a great customer experience are the companies that are going to win over time as we're still in just an early innings of this energy transition and on this path to electrifying everything. So, it's not just producing the power on your roof. It's producing it and then storing it in the batteries in your home. It's consuming it in your home with more and more devices electrifying induction cooktops, air source heat pumps, geothermal heat pumps, its mobility, electric vehicles with a charger, you produce the energy, you store the energy, you consume the energy, you move the energy around and then ultimately you also sell it back to the grid in virtual power plants and grid services revenue. The crux of all of that is that the company that has the trusted relationship with the homeowner and is the closest to that homeowner is going to win. And so, you do the acquisition cost one-time, but then you deepen the relationship and grow the lifetime value of the customer to those upsell, cross-sell, and ancillary opportunities. And so a company that isn't committed to that customer experience doesn't view things the same way, doesn't have high referral rates right now. Has high cancellation rates, those are not appealing to us. So, we spend a ton of time on that. Those are some of our key metrics when we look at these businesses. And so, some of it is just making sure we find ones that are there already. And then I think to your point, we do believe that and it's kind of the broader shared services model and extends beyond the sales and marketing, that's my background. But Eric's got tremendous background in driving synergies through shared services and integrating acquisitions on the finance and accounting and kind of back office functions too. So, there's different synergy paths. But I think, yes, our view of optimizing lead generation, what lead source you prioritize? How do you kind of do this inverted pyramid of starting with the lower cost ones? How do you performance manage sales for conversion? How do you just really keep a close eye on those unit economics around CAC and LTV? Definitely, it’s something we look at and I guess the only other thing I'd say at the end of this maybe long responses, maybe when I say all this, it sounds like it's going to be hard to clear all those hurdles. And we are discerning certainly, but there are over 4,000 sales and installation companies in this long and medium tail. And there are – there's an abundant set of opportunities to find these right companies and bring them in even that that meet all those high bars that we just mentioned.

Thank you. [Operator Instructions] Seeing no more questions in queue. Let me turn the call back to Kyle for closing remarks. Please go ahead.

Thank you, operator. Before we conclude, I want to mention some investor relations events we have coming up. Next Tuesday we’ll be in New York for one-on-one meetings at the Credit Suisse Renewables and Utilities Conference, then in early June we’ll present on a U.S. Residential Solar Panel and hold one-on-one meetings at the Cowen's sustainability week conference, which is virtual. Those are private events for the clients of each brokerage firm, so please contact your sales rep to register and schedule meetings. Let me now wrap-up the call. We're excited by the strong start to 2023 and are confident we will sustain this solid performance. We have great organic growth momentum and while we didn't spend as much time in the scripted portion talking about M&A that inorganic growth continues to be core to our strategy. We've been working diligently on sourcing our next acquisitions and there are abundant opportunities to bring in complementary businesses with strong financial profiles and a great cultural fit with Pineapple. We've reached the point where our national business has substantial revenue with positive cash flow from operations is run by an experienced management team and is building a pipeline of potential acquisitions to drive further growth. We look forward to reporting our progress at our next earnings call in August. Thank you again for joining us today and for your continued support. If you have any questions, please contact me, Eric, or Gary and Jenny with our Investor Relations team. This concludes our call today. You may all disconnect. Thank you.