SPI Energy Co., Ltd.

and welcome to SPI Energy's second quarter 2023 conference call. As a reminder, this call is being recorded, and all participants are in a listen-only mode. The call will be open for questions and answers following the presentation. On today's call are SPI Energy's chairman and CEO, Denton Peng, CFO Janet Chen, and COO H.K. Cheung. Before we begin, the company would like to remind everyone that various remarks about future expectations, plans, and prospects constitute forward-looking statements for purpose of these safe harbor provisions under the Private Securities Litigation Reform Act of 1995. SBI cautions that these forward-looking statements are subject to risk and uncertainties that may cause their actual results to differ materially from those indicated, including risks described in the company's filings with the SEC. Any forward-looking statements made on this conference call speak only as of today's date, Tuesday, August 22, 2023, and SPI does not intend to update any of these forward-looking statements to reflect events or circumstances that occur after today. I will now pass the call over to SPI Energy's Chairman and CEO, Denton Peng. Mr. Peng?

Thank you, Tiago. And thank you to everyone for joining us today on our second quarter earnings call. We generated strong double-digit growth during the second quarter, with net sales increasing more than 21% over the second quarter of 2022 to nearly $59 million, and the gross profit improving more than 35% to $5.2 million. Importantly, when we subtract out the operating costs loss of our bonus motor EV division, which we spent out on NASDAQ last year. Our core business land passed the broken even point during the second quarter, underscoring the strength of our rapidly growing solar operation. This exceptional performance further demonstrates our continued ability to drive growth and improve profitability as we execute our strategy with diligence and focus. In recent years, we have established a solid chain of strong revenue growth that has placed us on a clear pace to near-term profitability, especially our solar manufacturing capacity based on Sacramento, California. This business has been profitable since quarter four last year. We are in the process to build additional capacity in Sumter, South Carolina, to meet local strong demand. We are also in the process to build 1.5 gigawatt solar wafer and 500 megawatt popcorn solar cell manufacturing capacity in the U.S. We anticipate these trends will accelerate moving forward as we benefit from strong industrial tailwinds, including incentives under the Inflation Reduction Act in the U.S. and other provisions that continue to boost the global renewable energy market. We believe we are extremely well-known position in our sector with a diverse portfolio spanning solar and EV technologies. Our established chain of strong growth and improving probability metrics placed us on a clear path to near-term net probability. We believe that the combination of our strong financial performance, strategic reposition, and exceptional leadership team will enable us to continue executing on our mission of creating a sustainable energy solution while also delivering strong returns for our shareholders. SPI Energy is committed to creating a brighter, more sustainable future powered by renewable energy. And we are confident that with your continued support, we will achieve great success together. Thank you. I now pass the call over to our Chief Opportunity Officer, H.K. Chong. H.K.

Thank you, Denton, and good afternoon to everyone on this call. So over the past four years, SPI Energy has consistently achieved impressive revenue growth, demonstrating our ability to adapt and thrive in a rapidly evolving market and remain on track to accelerate this growth even further in 2023. As Denton noted at the beginning of today's call, we have a highly compelling value proposition for investors, So we are well positioned in the renewable sector with a diverse portfolio in solar, EV, and hydrogen fuel cell technologies, while our operating assets generating consistent cash flow in our solar project pipeline in the U.S. is robust and continues to grow. Additionally, we believe we have the opportunity to unlock significant additional value for our shareholders as we continue to pursue our plan to spin off key business lines. So we began this process in 2022 with the successful IPO of Phoenix Motor on Nasdaq and have already filed for second spin-off, which will also trade on Nasdaq under the ticker SJA. So we plan to follow this with the spin-off of our independent power producing business unit, Orange Power as well. In each of these spin-offs, we have or will have retained majority ownership of the new entities. So in the case of Phoenix Motors, we currently hold more than 80% ownership of its share. So while we have many exciting business lines and a wealth of opportunity to capitalize on, so we are particularly proud to have launched a new state-of-the-art 500 megawatt N-Type sub-quantum solar cell manufacturing in the U.S. through our Solar for America subsidiary. So with the launch of this solar cell manufacturing facility in South Carolina, it will support the production of the Solar for America made in the U.S., Pioneer 4 of 430-watt black module for residential market, and Pioneer 5, 580-watt bifacial module for commercial and utility-scale market. So this final series of American-made Swahili and modules are expected to be available for delivery to customers in the first half of 2024. Looking ahead, key growth driver for the remainder of the years and into 2024 will be the continued ramping of our American-made solar module manufacturing capacity. So we are currently based in Sacramento, California, with a 700 megawatt capacity in mass production and delivering latest M10 410 watt and 550 watt American-made solar module to residential, commercial, and utility customers in the U.S. So we are proud to say that this business has been profitable since quarter four of 2022. Our phase three capacity expansion of an additional 700 megawatts is on the way, and we expect to be up and running by the first half of 2024. So with the completion of this expansion plan, we will have 1.4 gigawatts per year capacity at our existing facility in California. In addition, the continual growth of our Australian solar distribution business throughout Australia. And Asia Pacific saw us delivering 448 megawatt of inverters, 105 megawatt of solar modules, and 83 megawatt of battery to Australian installer, which is equivalent to 15% of rooftop PV and residential storage installation in Australia in 2022. So we also expect steady revenue growth from other business arms Our current solar project pipeline has been stable, which is expected to drive improved profitability. Our Orange Power business has also consistently provided a stable cash flow for the company, and that will further strengthen our overall profitability. As I mentioned on the prior calls, the Inflation Reduction Act of 2032 provides attractive incentives for companies to produce solar cells and solar modules in the U.S., Currently, our manufacturing division in California and South Carolina are positioned to receive 7 cents per watt of solar modules produced and 4 cents per watt of solar panels produced. Our U.S. customers will also benefit from additional 10% tax credit, which should increase our ESP and our gross margin. Overall, the strong foundation we have established in key areas of renewable sectors including American solar manufacturing, battery storage, and electric vehicle, have positioned us extremely well to capitalize on the wealth of opportunities to expand our project pipeline, grow consistent cash flow from our operating assets, and increase our gross market and profitability moving forward. So before I pass the call over to Janet to discuss our second quarter financial performance in greater detail, I'd like to conclude my comment by noting that Our world-class team is building on a multi-decade track record of success. I'm confident that our strong foundation combined with growing industry tailwinds places us in a great position to rapidly increase market share across each of our business units, ultimately enable us to unblock new value for our shareholders as we accelerate growth in the quarter ahead. So I'd like to hand over the call over to our CFO, Janet Chan. Janet, over to you.

Thank you, HK. Good afternoon, everyone. Thanks for joining our call today. For the second quarter ended June 30th, 2023, our net revenue increased from 1.1% to $58.9 million, up from $48.6 million in Q2 of 2022. Revenues continue to be mainly driven by increasing sales from our solar business lines. Our cost of revenues, which consists primarily of raw materials and labor costs, increased to 53.6 million in the second quarter, up from 44.7 million in the prior year period, and consistent with our increase in net revenues. Our gross profit was $5.2 million in the second quarter, up 35.3% from our gross profit of $3.9 million in Q2 of 2022. Giving us a gross margin of 8.9% for the quarter, up from 8% in the comparable period year, prior year period. General and administrative expenses declined to 6.3 million or 10.7% of net sales in the second quarter. A strong improvement from GMA expenses of 7.6 million or 15.7% of net sales in Q2 2022. This decrease was a result of our continuous expenses control efforts. Total operating expenses in the second quarter decreased to 8.3 million, or 14.1% of net revenues, down from 9.5 million, or 19.5% of net revenues in Q2 2022. As Benton noted earlier, Our overall operating loss of just over $3 million includes a $3.2 million operating loss from Phoenix Motor, which we spun out on NASDAQ in 2022. Subtracting these outplaces, our core business lines passed the operational break-even point, a major milestone on our path to what we believe will be sustained profitability. Lastly, interest expenses was $2.4 million in the second quarter, up from $1.6 million in June 2022. Together, this and other factors resulted in net loss attributable to shareholders of SPI, of 2.5 million for the second quarter. As of June 30th, 2023, our total assets was 230.5 million with 5.9 million in cash, cash equivalents and restricted cash. I thank you all again for joining us on this call today. And we will now open up the floor for any questions that you may have. Thank you.

Thank you. And if you'd like to ask a question, press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star followed by the number 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from Tate Sullivan with Maxim Group. Please state your question.

Thank you. You maintained 2023 net income guidance of $29 million to $35 million versus the first half net loss of $12 million. Does your guidance assume an approval for the $0.07 solar panel U.S. manufacturing tax credit? And have you seen any other companies recognizing or accruing for that benefit?

Yeah, thank you for your questions. So our guidance is including 7 cents in the Inflation Induction Act. But for some reason, the Treasury Department and the 7 cents do not clear. So in our current finance report, we're not including the 7 cents. But this should be, we are eligible for getting 7 cents in the future. But now our current report is not including these 7 cents. And secondly, we are still confident that we are generous in our guidance for lead revenue and also for the profitability for this year.

With how much could this accumulated credit be or what percent of your U.S. solar panel sales? Is there any sort of context to what you recognize in U.S. solar manufacturing that you can give us today or better to wait and see?

We don't know how we will generate it by also revenue or as additional other income or other. Because now we have not get it clear which kind of this is 7 cents will be put in the financial report. Because we need to get it more clear. And also we try to get information from other competitive things. And now this information is not clear. Because the guidance is... still working on, but everybody's still waiting on that.

Do you also assume in your guidance any additional sales of commercial solar power projects or any resolution of the dispute with Simpson on previously agreed acquisitions as well?

Yes. We are working on that. You see, in last quarter, we just sell it some portfolio in Oregon and to Brookfield. So we are still working on other portfolio in Oregon, Massachusetts, probably Hawaii, and also other portfolios. So this business line is coming on more as we will generate more revenue and profit for assets sales for this year. So this year we will see them much more improving on SPI Solar for the solar project development business.

And can you comment on the dispute with CINCIN and could you potentially resolve that or is there a timeline or any guidance on that possible?

Yeah, CINCIN, because it's a long time, this is, you know, already in our balance sheet, more than $60 million are payable. And so the finance has already put the worst situation. So we are still working to find a result to resolve the CINCIN issue. So the company is continuing dialogue with the CINCIN. And currently, you know, we have a big chunk of cash, more than 30 million euros in the assets in Greece. It's not consolidated in the book. By the meantime, we have shown more than $60 million payable in the book. So we try to resolve this one as soon as possible. We are still working on that, but we cannot provide a timeline for that. But the company definitely will put to resolve this legal issue in the first priority.

Thank you.

Thank you.

Another reminder, to ask a question, press star 1 on your telephone keypad. We'll pause for a couple moments to see if there are any additional questions. Thank you. And our next question comes from Mark Anderson, Sacramento Business Journal. Mark Anderson, are you on the line? Looks like he put his line on hold. My apologies. And that's the music that you were hearing. Once again, if you'd like to ask a question at this time, press star 1 on your telephone keypad. There appears to be no additional requests for questions. I'll hand the floor back to management for closing remarks. Thank you.

Thank you for everybody joining today's conference call. So I hope to see you next time. Thank you.

Thank you. Thank you very much.

Thank you.

Thank you. And with that, we conclude today's call. All parties may disconnect. Have a good day.