Electriq Power Holdings, Inc.

zero on your telephone keypad, and an operator will come on the line to assist you. At this time, I would like to turn the conference over to Jeff Besson, VP, Investor Relations. Please go ahead.

Thank you, Audra. Good morning, everyone, and thank you for joining today's call. Joining us from the Electric Power Leadership Team are Frank Lignati, Chief Executive Officer, and Petrina Thompson, Chief Financial Officer. During this call, management will be making forward-looking statements, including statements that address electric power's expectations for future performance and operational results. Forward-looking statements involve risks and other factors that may cause actual results to differ materially from those statements. For more information about these risks, please refer to the risk factors described in the company's most recently filed periodic report in Form 10-Q, the Form 8-K filed with the SEC today, and electric power's press release distributed after market yesterday, particularly the cautionary statements in it. Today's conference call will include references to adjusted EBDA, which is a non-GAAP financial measure. Please see the related explanatory language and reconciliation tables located in Electric Power's earnings press release. The content of this call contains time-sensitive information that is accurate only as of today. Except as required by law, Electric Power disclaims any obligation to publicly update or revise any information to reflect events or circumstances that occur after this call. I would now like to turn the call over to Frank Magnotti, Electric's CEO.

Good morning, and thank you for joining us for our very first quarterly conference call as a public company. For those that are listening for the first time, Electric Power is an energy solutions company focused on residential applications that was founded in 2014 in Silicon Valley at a time when stationary energy storage was still very much a concept. We were ahead of the curve. seeing the application of batteries outside of electric vehicles. Our fully integrated hardware, installation, and software solutions, which includes safer, more durable lithium iron phosphate batteries, were created to help shape our world's environmental and economic future. Our mission is to provide complete residential solar plus energy storage solutions that are prudent, panoramic, and serve all demographics with parity. Electric batteries help improve resiliency by offering backup power during utility power outages, and energy can also be exported to help stabilize the grid. Before I get into details, I want to hit on some key points and measures taken to set up electric for success. We have a debt-free balance sheet. with approximately $8 million of cash on hand as of the end of the third quarter. We are pleased to have signed a binding term sheet to equitize and extinguish the forward purchase agreement we entered into July for a fixed number of shares and warrants in lieu of any cash requirement, which will clean up the cap table for future investment. Along with Meteora's equity commitment The company will be exploring a private placement equity offering. We also have plans to leverage our $20 million of inventory for future financings. And measures are being taken right now to right-size our cost structure, improving our cash runway. We've announced partnerships with two municipalities last year and four already this year in our sustainable community networks, providing a path to growth over the next three years. We have signed a $300 million financing in March with a major U.S. clean energy company to support the growth of our sustainable community networks across California. We have a backlog of over 100 signed power purchase agreements in our sustainable community networks valued at approximately $3 million. And this gives us revenue visibility over the next two quarters. And we announced 8X. quarter-over-quarter top-line revenue growth, demonstrating our early stages of scaling and execution. We have demonstrated our technical capabilities with compatibility in California's Demand Gridside Support Virtual Power Plan program, and we've assembled a strong management team with a breadth and depth of experience working in public companies across renewable and technology industries. Something that we and our investors are very much aware of is the current stock price. While we are not able to control the macroeconomic impacts on the price, we are taking steps with what we can control to set up the business for success. We believe there is a substantial market opportunity which could allow electric to become a more significant market participant. With battery attachment rates increasing, in markets such as California because of NEM 3.0, and in New England from battery incentives, batteries are becoming the pivotal part of the renewable energy story. Electric goes to market in two primary ways, by partnering with municipalities through what we call sustainable community networks, and two, building relationships with nonprofits, home builders, solar asset owners, or similar organizations looking to create microgrids. We refer to this channel as sustainable solutions. Within our sustainable community networks, we develop and install full turnkey solar plus storage plus software solutions and sell those to a major US clean energy company under a contractual agreement for a current average price of approximately $28,000 per household that elects to participate in the related program. Electric receives an upfront sale, plus there is ongoing high margin recurring software revenue and the opportunity to monetize the batteries through the creation of a virtual power plant if and when there are sufficient number of participants within the relevant geographic area. Within our sustainable solutions, we provide batteries or batteries and installation service to our partners. which are generally sold at a gross margin in the high 20s. In either of these market strategies, as we deploy battery storage in these dense geographic locations, we are building a foundation for long-term recurring software and grid services revenues. Unlike most SaaS platforms, which require substantial upfront costs, we are able to extract value at the unit level in a capital light model by financing systems off balance sheet. While Petrina will get to the specifics of the P&L and balance sheet in a few minutes, I would like to note a few recent developments that don't have an immediate impact on our financial results. As noted in our press release distributed yesterday after the market closed, we signed two municipalities last year and four so far this year within our SCM business, meaningfully increasing our addressable market, independent of income level. This sales channel has started scaling, with over 100 signed power purchase agreements worth approximately $3 million. Importantly, we also recently announced our first signed agreement with a partner outside of California, in Derby, Connecticut, expanding our footprint into the Northeast. and validating our intent to diversify to other geographies with high utility rates, great congestion and favorable renewable incentives. The program will provide Derby homeowners, regardless of socioeconomic status, access to home solar plus battery storage solutions, which will help lower electricity costs and provide reliable backup power during power outages. Electric is continuing to break down the barriers that prevent low and moderate income homeowners from obtaining the economic resiliency and environmental benefits of clean energy. Just last week, we announced electric's compatibility with California's demand side grid support program, which is a new virtual power plant program. This milestone has demonstrated end to end technical and operational capability in our first real virtual power plant event in California. Electric software allows PowerPod 2 battery storage system customers to earn money by discharging excess energy to the grid and help stabilize it during periods of high demand. With ever-changing weather conditions, and an increase in demand of electricity coming from growing EV ownership and electrification of the home, Electric is well positioned with our integrated products to be part of the solution. I'll now turn it over to Petrina to go through the quarterly financial results in more detail and provide further information on our business model. Petrina?

Thanks, Frank, and good morning, everyone. As reported, For the three-month period ended September 30, 2023, revenues were $835,000, consisting primarily of sales of our residential energy solution, PowerPod 2, to our strategic programmatic partners in our sustainable solutions sales channel and through our SDN program. Operating expenses were approximately $7.1 million, which compared to $4.4 million in third quarter 2022. The higher operating expenses were primarily attributable to $1.4 million in higher headcount, a $0.4 million increase in D&O insurance expense, $0.2 million in increased professional expenses associated with the business combination and related financing transactions, and a $0.2 million increase in stock compensation expense related to new restricted stock awards granted during the three-month-ended September 30, 2023. Gap net loss was approximately $20 million, inclusive of $14.9 million in unrealized fair value adjustments. And adjusted EBITDA loss was $3.3 million, representing a $5.1 million sequential improvement compared to the second quarter, primarily as a result of the finalization of a contract termination settlement. As of quarter end, we had just over $8 million of cash on hand with no debt following the recapitalization that closed on July 31st. As we look forward, management has taken steps to reduce our cash burn rate significantly starting in Q1 2024. And with approximately $20 million of inventory on hand, we plan to continue to explore ways to leverage those assets for financing needs. In July, we entered into a six-month forward purchase agreement with Meteora Capital, which provided the company with a prepayment of $3 million through a commitment by Meteora to purchase approximately 3.8 million shares of electric. The agreement allows Meteora to sell shares in the market as long as the stock price is not below $6.67 per share. These funds would be used to pay off the prepayment and provide additional cash to the company. Given where our stock price has been trading, there has been nominal sales proceeds, resulting in a shortfall consideration to be paid by Electric to Meteora. However, we are pleased we will be able to equitise and extinguish the FPA, which eliminates any cash needs related to this agreement. Furthermore, this clean-up on our cap table for future financing as the equitisation and extinguishment of the FPA is for a fixed number of shares and warrants in lieu of any cash requirement. This is a material development in that a meaningful cash obligation has been terminated and Meteora has agreed to participate in a subsequent financing of a certain size. I wanted to take a moment to explain in more detail how we go to market and turn partners into revenue and cash. In our sustainable community networks, Electric partners with municipalities and is the developer and installer of these programs, providing a free solar and energy storage solution to homeowners in those communities, regardless of means. In exchange, the homeowners enter into an agreement to purchase clean solar power, at a rate that is up to 20% less than their existing utility rate, providing them immediate savings. To create this revenue stream, at the top of the funnel, we enter into an agreement with a city or county which has an addressable market of single-family homes we can target for those solar plus storage solutions. We believe, through historical market data and what we are seeing in our own marketing efforts, that over a three-year period of which we have visibility, we can provide our solutions to approximately 2.5% of the eligible single-family homes. Electric's model is not to own these assets on balance sheet, but rather sell these solutions to a third party. In March, we announced a $300 million financing facility with a major US clean energy company, whereby they purchase from Electric the turnkey solar plus storage solution on a home-by-home basis at an average price of approximately $28,000 for a low to mid-20% gross margin. And Electric receives cash and recognises revenue on a milestone basis throughout the installation process. We also receive from that financing partner ongoing monthly software revenue for any participating households. And as the deployment of geographically dense assets increases, we will share in virtual power plant revenues. As of September 30th, Frank mentioned we had over 100 signed power purchase agreements worth approximately $3 million. This is our backlog of signed agreements for which we will receive cash based upon the following milestones. 20% at PPA signing, 50% upon system installation, 20% upon approved inspection and the remaining 10% at permission to operate. It's important to note that at the signing of the PPA, we receive the cash but do not recognize revenue until the system installation is complete. So we effectively recognize 70% of the total revenue at system installation. From a timing perspective, these milestones can take between four to nine months from PPA signing through permission to operate. In our sustainable solutions business, We sell battery or battery plus installation services to our partners at a gross margin percentage of high 20s. In this channel, revenue is recognized upon shipment for battery only sales and milestone based for battery plus installation sales. Payment terms vary up to net 90. As you look at our results, you can see quarter over quarter top line growth of approximately eight times. demonstrating our early stages of execution on our SDN and sustainable solution strategies. Adjusted EBITDA has improved $5.1 million over the same comparison period, primarily as a result of the finalisation of the contract termination settlement, and we are taking proactive measures now to simplify our cap table and right-size our cost structure to reduce our cash needs. With that, I'll turn it back to Frank.

Thank you, Petrina. Before turning it over to the Q&A portion, I want to reiterate some key takeaways that we started this call with. Electric is debt free. We signed an agreement to extinguish the forward purchase agreement for a fixed number of shares and warrants in lieu of any cash requirement. We are taking steps to reduce our cost structure. We have inventory on hand, which may provide financing opportunities. We have numerous agreements signed with municipalities creating an addressable market with existing backlog. We have recognized the quarter over quarter scaling in our top line revenue. We have validated our technical capabilities and we have a strong management team. I'd like to express our gratitude to our shareholders, employees, and all stakeholders for their continued support and trust in our company. We remain committed to delivering long-term value and growth. We look forward to the opportunities ahead, and we are really excited about the future. Thank you for joining us today, and we look forward to our next update.

Great. Thank you, Frank and Petrina. Last week, we requested that investors provide us with questions for this call. We will discuss questions that have been frequently asked for us. So with that, I'll read them off and either of you can jump in to address them. The first question that we received most is, why is there such a sharp decline in revenue compared to last year?

I'll jump in on that one. It's a good question. So we've actually disclosed this in our public filings that in 2021 and 2022, we had an agreement with Kohler. who is typically known for sinks and toilets, but also has a multi-billion dollar power and generator division. Electric sold to Kola a white labeled PowerPod 2 under the Kola brand, and then they sold these systems through their existing distribution channels. However, at the end of 2022, Kola notified Electric of their desire to exit the energy storage business. Fortunately, we had already been transitioning to a programs and solutions focused business model via our sustainable community networks and sustainable solutions. So while there was a significant decline in revenue after the end of 2022, we believe this strategic shift will result in higher gross margins and allow for greater recurring revenues through grid services and virtual power plant opportunities. In addition, as part of that termination agreement, COLA returned to us approximately $6 million of paid for and finished inventory, reducing our cash needs for procuring components and putting us in a position to have roughly 12 months of batteries on hand.

Thanks, Katrina. Next one. Can you talk more about the timing of revenue for the $3 million of PPA backlog?

I'll take that one as well. As of September 30th, we had over 100 signed PPAs and from the signing of a PPA, it takes between four to nine months to have a system installed, approved and fully operational. So we would expect that the majority of that $3 million backlog will be fully recognised by the end of the first quarter. Also during that time, we expect to be signing up additional homeowners in our markets. which will add to the backlog and they'll move through that same four to nine month cycle.

Okay. And what's the plan to get more PPA signed?

Okay, I'll take this one. There are multiple areas that we believe will increase PPA signups. First, we're going to continue marketing to our homeowners in our existing municipal communities as this marketing has recently just begun. Second, as we sign up more municipalities, this will increase our addressable market, which allows us to access a larger homeowner base. Third, and prudently, we are exploring strategic partnerships with solar sales and installation companies to complement our existing sales and installation capabilities to help fuel homeowner signups and system installations. We will optimally utilize insourcing and outsourcing to increase our marketing efforts. And lastly, we're honing our marketing message to be more battery-centric, which in a NEM 3.0 world, batteries need to be used for economics, grid services, and resiliency.

Great. Switching gears outside of the PPA world, you mentioned the Meteora agreement. When do you anticipate closing and extinguishing that forward purchase agreement?

Okay, I'll take that one. Well, we cannot talk about specifics, but we have the binding term sheet signed and working through legal documentation. We will file an 8 once the full agreement is executed. The term sheet expires if definitive documents are not entered into on or before November 30th, 2023, unless Meteor elects to extend the expiration date.

Okay. And why did you guys decide to expand into Connecticut?

Okay. I'll take that one as well. We've been saying for a while that after California, we see the Northeast as our next market. Why? Given the high utility rates, strong battery incentives, and ability to monetize batteries and grid services programs, we made it a targeted effort to move into Connecticut.

And in California, how has NEM 3.0 impacted the company?

I'll take this one as well. And this is a very good question. For those not familiar, NEM 3.0 is a utility-related policy in California that went effective in April of this year. And this policy reduces the compensation homeowners receive for excess power sent back to the electric grid in the majority of times. And this has been well publicized. What's not well publicized is that in a minority of the times, you can actually get compensated way higher than the retail rate. And that's why batteries are important. So, resultantly, it has reduced the size of solar. It has definitely lengthened the process of approvals in the near term, which has delayed our scaling. But the biggest positive is that battery attachment rates are up significantly. benefiting electric in the midterm and making batteries an essential part of the story.

Thanks. We know you have a partnership in Puerto Rico. Can you talk more about that?

Absolutely. And that's something that we're very excited to talk about. So we currently are the sole supplier of batteries to Barrio Electrico. And Barrio is a nonprofit committed to ensuring Puerto Rican families have access to renewable energy. So we announced with them an expansion of our partnership with them a couple of months ago, where we provide our battery and software solution, furthering our mission as well as theirs to deploy solutions to low and moderate income areas. And then just a couple of weeks ago, Barrio was named on the shortlist of organizations to receive a portion of the $440 million worth from the Department of Energy to install rooftop solar and batteries throughout Puerto Rico. So overall, this has been a successful relationship since joining forces in the middle of 2022. Great.

I know we've definitely been getting this one a lot. Where do your plans for raising capital, where does the $8 million you have on hand get you?

Okay, good question. So we are actively exploring financing options, both debt and equity related. We mentioned earlier that $20 million of inventory that we have on hand and currently exploring any opportunities to leverage these assets. In addition to an equity commitment from Meteora, the company will be exploring a private placement equity offering. Operationally, we are right-sizing our cost structure and extinguishing the forward purchase agreement, both of which we think will reduce our cash needs and extend our runway.

Last one, I promise. When should we expect to see guidance for 2024?

Okay, I'll jump in on that one again as well. So we felt it was best to first tell our story, clarify how we go to markets, and explain the revenue model and relevant timing so investors and analysts can better assess our business. We plan on providing guidance for 2024 during our year-end 2023 earnings call, which we are expecting to be towards the end of March. At that time, we expect to have a cleaned-up cap table, write down our cost structure, and have the increased visibility to municipalities and PPA sign-ups.

Okay, great. That concludes the Q&A portion of the call, and, Operator, that also concludes the call in general. So we want to appreciate everyone's time this morning and joining our first quarterly earnings call. It was great. So, Operator, with that, we can sign off, please.

Thank you, everybody, for our first call.

This does conclude today's conference call. Thank you for your participation. You may now disconnect. This conference call thank you for your participation. You may now disconnect.