Eguana Techs Inc Ord

Thank you for standing by. This is the conference operator. Welcome to the Iguana Technologies, Inc. first quarter 2023 results conference call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity for analysts to ask questions. To join the question queue, you may press star then 1 on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star and 0. If you're participating through the webcast, you can submit a question in writing by using the form in the lower section of the webcast frame. I would now like to turn the conference over to Brent Harris, COO of Iguana Technologies. Please go ahead, sir.

Good afternoon. Thank you for joining us for Iguana's first quarter 2023 earnings and update call. My name is Brent Harris, Chief Operating Officer of Iguana. On the call today, we also have the Iguana team, Justin Holland, CEO, Madison Duncan, Controller, and our newly joined CFO, Hansine Allberg. Please note that today's call is being recorded and participants will be in listen-only mode. If you have any questions during the presentation, please type them into the Q&A box at the bottom of your Zoom screen, and we will address them at the end of the call. Alternatively, if you're on a phone, you can follow the operator's instructions at the end of the call to ask any questions. Before we begin, please note that certain remarks may constitute forward-looking statements. Although we believe these statements reflect our best judgment based on factors currently known to us, actual results may differ materially and adversely. Please refer to the company's filings on CDAR for a more inclusive discussion of risks and more details related to the uncertainty of forward-looking statements. Please also note these statements are being made as of today. and we disclaim any obligation to update or revise them. All financial data is represented in Canadian dollars and on an unaudited, consolidated basis, unless otherwise noted. Some of you may have joined us for the fiscal year-end call just a month ago, and some of our comments may seem like a bit of a repeat of that recent information. In any event, thank you for attending, and over to Justin for the overall update.

Thank you, Brent, and thank you, everyone, for joining us again on the call today. The March quarter, although typically the slowest quarter of the year in residential renewables, was the second highest revenue quarter in company history and by a significant margin coming in at $5.9 million, which represents an increase of nearly 2,000% when compared to the same quarter of the prior year. Gross margins for the three months ended March 31st remain relatively flat at 2.6% compared to 3.9% in the December quarter. A slight variance was driven by changes to the product mix. We do expect to see up to 8% margin improvement later this year coming from the following. 2% from freight cost stabilization, which has now occurred through the logistics networks. 4% from battery module price reductions to pre-pandemic levels. and 2% from import tariff reductions as a result of supply chain relocation of certain components and sub-assemblies outside of China. Longer term, cost reduction objectives with battery modules and advanced power electronics are expected to deliver an additional 12% to 15% gross margin over the next 18 months. The Iguana mission is to be a global leader in grid-tied energy storage. We believe this will be a critical component of the power grid transformation to a distributed grid, which is necessary for electrification. Electricity needs are set to double in the next 20 to 30 years, which present a two-stage problem. One is generation. The second is transmission. Renewable energy assets and the transition to a distributed grid solves both of these problems. Iguana's combined product line approach with energy storage solutions and microinverters, along with the Iguana Cloud, provide a three-pillar approach to revenue generation inside of the residential marketplace. Revenues will be generated from the roof, the wall, and the cloud. We are now in position to aggressively grow all three of these revenue streams, which are in line with our strategic plan. Additionally, on the hardware side, We have one of the widest product portfolios in the market for both microinverters and energy storage solutions. At Iguana, we're trying to solve complex problems, which open up big opportunities, and our strategic growth focus includes the following key initiatives, business development and strategic sales. The company continues to expand key hardware and software development team members to support growth initiatives of new white label partnerships, to achieve regional and country certification requirements, and to improve Iguana Cloud's battery management solutions and battery integration and development. We strongly believe we have the best and the brightest on our team, with top-tier partners on the supply and demand sides of our business. Our recent partnership with VirtualPeaker is an outcome to some of these strategies. With the goal of integrating best-in-class software and hardware technologies while at the same time opening up recurring revenue streams through virtual power plant development. The company also continues to grow our trained installer network. The more boots on the ground, the deeper and broader our sales channels will be. It's the installer base that sells at the consumer kitchen table. They influence not only consumer buying decisions, but feature selections driving consumer choice. Iguana University is our online training and toolkit for distributors and installers. We continue optimizing and tweaking our modules and tools to continue simplifying working with our company, creating the best user experience. Training modules are inclusive of selling, installing, commissioning, design, and product knowledge for both energy storage systems and microinverters, along with a number of additional tools for our installation partners. Launching in late November, we have already had over 400 unique module logins to date, with the target to train the first 1,000 installers by the end of this calendar year. Efficiency and scale of manufacturing. This includes our state-of-the-art inverter functional test stations, or IFTs. These stations define Iguana's manufacturing capacity. Each IFT can test up to 400 energy storage systems per month across a two-shift operation. With the IFPs procured and commissioned and installed to date, provide an annual capacity of over 24,000 systems. This allows us to accelerate focus on system test process, which will continue to increase production capacity without further IFT investments. Cost efficiency. This includes supply chain optimization in both availability and cost. We see our alternative parts program and strategic inventory levels of the right products in the right regions as important positive contributors. By shifting certain materials outside of China, we also see margin improvement by managing import tariffs. As mentioned, we have executed a number of supply chain changes, which will result in a plus 2% gain in gross margins, once current materials have been consumed through the manufacturing and sales processes. Prudent financial management. Our financing activities in 2022 with outstanding long-term partners is contributing to a strong liquidity. Last year, we increased our cash balances and working capital flexibility to deliver on our growth objectives. With a couple of strong quarters under our belt and a positive outlook for the second half of 2023 and onwards, We have begun increasing our investor relations activities to get the Iguana story into the minds of additional investors and shareholders alike. At this point, I'll turn it over to Madison, who will once again lead us through our Q1 financial results.

Thank you, Justin, and good afternoon, everyone. As mentioned with our year-end 2022 update, our change in year-end puts a wrinkle in our comparative period. For clarity, we will be comparing this Q1 2023 with last year's Q2 2022. Both quarters are three months ended March 31st, so we are comparing year over year the traditional way. With respect to our income statement, Q1 2023 revenue of $5.9 million, a major increase of almost 2,000% from our comparative quarter in March 2022. which had product revenue of approximately $285,000. This revenue growth is due to expanded products, expanded markets, enhanced business development efforts, and overall company growth. On a trend basis, this is a decline from the previous three months ended December 31, 2022, and this is largely due to seasonality fluctuations. In practice, our global sales team have weekly demand meetings to proactively forecast opportunities in sales. They monitor our dealer channels, micro trends, inventory levels, and other sales factors. Q1 2023 gross margin was approximately $152,000, or 2.6%, a decline from 25.1% in the comparative quarter of March 2022. The three months ended March 31, 2022, was reported uncommonly high gross margins due to inventory adjustments, which positively impacted the gross margin. On a more comparative basis, gross margin in the most recent prior quarter ended December 31, 2022, with 3.9%. The slightly higher margin in December was due to a more favorable product mix, resulting in a higher gross margin. Margin management has been a focus, and we will see supply chain constraints and costs easing, but not yet fully abated. We believe our contracted manufacturing, inventory consolidation, cost reductions in advanced power electronics, and less expensive battery alternatives positively impacting gross margins on a go-forward basis. The exact timing of each item's contribution is uncertain. but it continues to be a key management initiative. Q1 2023 operating expenses of $3.4 million, a 30% increase from a $2.6 million for the comparative March quarter in 2022. This increase is largely due to higher expenses in product research and development in the first quarter of 2023, supporting sales and growth. 40% of our total operating expenses in the first quarter of 2023 were product development. This portion is a large jump from the 17% in the comparative 2022 quarter. Headcount additions, particularly for Iguana Cloud, U.S. sales, after-sales service, plus development costs for compliance, testing, product certifications, and new product design, development, and prototyping. The resulting Q1 2023 operating loss of $3.2 million is also an increase from the $2.5 million operating loss for the comparative March 2022 quarter. Moving to our balance sheet, Itochu Corporation, a strategic investor in the company, purchased approximately 16.7 million common shares for total proceeds of $3.3 million through warrants exercised. Additionally, both parties agreed to convert approximately $1.1 million of interest owing under this unsecured convertible debenture into approximately $4.2 million common shares in lieu of the March 1st, 2023 interest payment date. Working capital at March 31st, 2023 was $32.1 million, a slight decrease from $33.7 million at December 31st, The working capital position is much improved from the prior year at March 31, 2022, reported as a deficit of $12.2 million. At March 31, 2023, our total cash was $10.2 million and total receivables of $18.9 million. We continue to provide allowances against the receivables based on our best estimates. And although collection of a large receivable is slow, we believe payments will be forthcoming. Justin will now provide some details on the near-term outlook.

Thanks, Addison.

As we look forward into 2023, it would be amiss not to mention the macroeconomic factors influencing the current economy. Every day you hear people talking about inflation, costs, and costs to borrow. Although 6% interest rate as a historical average seems palatable, people have become accustomed to sub 2%. We expect consumer behavior to remain somewhat cautious in the near term, however, believe that sell-through will begin increasing throughout the summer. With Iguana University and dealer outreach, we will remain active to ensure our partners have continued success selling our products. As previously mentioned, we are integrating the Iguana user experience with our dealers and installers by integrating into their design and proposal software. We now have Iguana products listed in multiple software platforms and also with multiple financing partners across the United States. This pre-work and investment puts the company in a very good position as we do expect to see distributor inventories dropping over the first half of the year and anticipate new and recurring orders with a strong second half of 2023. We continue to evolve and adapt our product portfolio to the changing needs of the market and the consumer. This has meant more power and more capacity as energy needs increase, energy security is threatened, product pricing becomes more affordable, and non-renewable energy declines. This is why we launched the 10 by 28 whole home product, which will be followed later this year by the tower format product, which again is larger in both power and capacity relative to the whole home system. We believe higher power, higher capacity products are going to be required grid assets as virtual power plant activities continue to ramp up, and particularly in North American markets. With our rapid product development cycles, we believe Iguana will continue to have a competitive advantage. However, we'll also require continued investment in product development and research. In addition to larger systems, we have invested in sales and integration of the microinverter product line. Near-term demand for the microinverters continues to outpace energy storage system demand. The micro market is much more mature, with many more installers familiar with the installation processes. It is also a competition-light marketplace at the moment with very few players and a market forecast annual growth rate of approximately 17%. We've seen strong sales for the microinverter and expect this trend to continue throughout 2023. Our microinverter product line is inclusive of single, dual, and quad configurations, which provides the most flexibility to the installer and enhanced reliability to the consumer. We continue to add new battery options to our ESS platform to offset supply chain concerns about availability and pricing. Our partner, Otochu, continues to assist us with new battery technologies, development, and integration. A key industry milestone to watch is the growth within virtual power plant activity. Iguana solutions were designed from the ground up with virtual power plant in mind. With the expansion of our EMS license, we now have control over both hardware and software applications from utility to consumer to drive VPPs which we believe will be the start of mass adoption of renewable grid assets and energy storage. Virtual power plant allows for the grid assets to be operated as fleets, providing power grid services and features to utilities and operators alike. We believe there will be a shift to larger residentially focused batteries to run as a distributed grid, to provide the infrastructure requirements for electrification, and specifically to have a power grid that can meet the inherent power needs and infrastructure of the electric vehicle adoption. Take California, for example. There are currently around 1.5 million electric vehicles on the road. This is expected to grow by 15x in the next 10 years. Additionally, the amount of power those cars will consume is also expected to grow exponentially, setting the stage for an aggressive transition to the distributed grid where energy storage and virtual power plants will be crucial. The Iguana ecosystem brings a number of competitive advantages to VPPs. Our platform is an industrial control system initially designed as a cascading control architecture, which provides very rapid, accurate, and stable responses to changes in a range of remotely controlled set points. This type of control system is well beyond the capabilities of many of the simple switch mode controlled solar inverters that have been adapted for energy storage solutions. The Iguana VPP solution has been tested in Australia head-to-head against approximately 10 different systems from different manufacturers, and only the Evolv and one other system performed to the defined specifications. We have been early in this market, working with many utility companies to be ready for this power grid transformation. We realized early the need for full integration with cloud software applications, and our Iguana Cloud moves us into SaaS and recurring revenue-based solutions. Iguana Cloud and VPP revenue is currently small, but when considering the future state, believe VPPs will drive mass adoption of energy storage systems, particularly in residential solar plus storage markets. Utilities provide a number of subsidies and credits to homeowners to purchase and install energy storage systems. Utilities then access these assets from time to time, which will significantly increase the adoption rates versus solar self-consumption models. We believe our vertically integrated solutions will provide a competitive edge for iguana, build a leading brand, and drive the three-stage revenue streams. The Australia outlook also shows significant increased opportunity with focus on system sales, inclusive of all parts of a residential renewable home energy system. Our home builder and VPP program partners expressed strong interest in Iguana providing installation and support services alongside the industry-leading products. We believe the acquisition of Solar Lab will immediately add direct sales channel penetration. We are seeing this in the number of direct quotes sent out over the last 75 days, which now top $14 million in potential near-term revenue. Having the ability to control the sale start to finish, as well as providing the hardware and software solution, provides a one-stop shop for key partners. Global electrification has started and has a massive tailwind from policy. We have developed a three-pillar revenue stack across hardware and software solutions to touch each phase of the grid transformation from the wall and the roof to the clouds. We also believe we have the widest product suite in the residential solar pool storage market across both energy storage and microinverter solutions. We have iguana and premium branded products with direct and white label partners in multiple geographies. We believe our strategic focus is well defined, and we have the right team in place with sufficient operating liquidity for successful execution. With that, I'll turn it back to the operator to open up for questions.

Thank you. Analysts who wish to join the question queue, you may press star then 1 on your telephone keypad. You will hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then 2. If you're participating through the webcast, you can submit a question in writing by using the form in the lower section of the webcast frame. The first question comes from Ian Gillis of Stifel. Please go ahead.

Hi everyone. Could you provide a bit of an update on where receivables are today and how collections are going with that partner?

Yeah, absolutely. So we have started receiving payments and we do expect those to continue. We do realize that there has been congestion throughout the distribution channels. We also see the economy out there tightening up. However, with the sell-through starting to pick up again, we expect the liquidity situation to be very short-term for our partner and expect to collect on all the outstanding receivables. The good news is that payments have started and we expect to see the AR amount come down quite significantly in the coming months.

Okay. With respect to some of the commentary around revenue, do you expect revenue growth sequentially to start to pick up again in Q2? I'm just trying to figure out or measure the weaker consumer demand broadly on the macro front and what you're seeing in your existing business.

Yeah, it's interesting. We know that the distribution channels ramped up inventories kind of mid to late last year. At the same time, rates were being significantly increased, which kind of slowed consumer purchasing. And that's created elevated inventories within distribution. The good news for us is we're still seeing sales growth traction through distribution, albeit not at the rate that we would have expected. The reason is when we go into distribution and get vetted by the distributor, which typically takes roughly six to nine months, you then have to displace a competitive product. If the distributors are sitting on high or elevated inventory levels of the competitive product, you don't see significant growth through that branch or that channel until the competitive inventory position has been reduced. When that's coupled with a slowdown in consumer purchasing exacerbates that situation. The good news for us is the starting point. So even though there's softness in sell-through, we're still seeing growth through the distribution channel. But we do expect to see that accelerate through the summer months and certainly through the second half of 2023. as consumers become accustomed to the new interest rates and borrowing capabilities.

Okay. And then the last one for me on the margin side, I mean, there were comments kind of broadly about what you expect for uptake there. Could you maybe parcel that out a little bit and talk a little bit about the ESS margins, even if just broadly and similarly on the micro side and whether shipping is impacting both those items and so on and so forth?

Sure. So shipping does impact both of those items. We do see the increased rates. However, the shipping, once we have consumed material in inventory currently, we'll see an immediately plus 2% gain on margin. And that's just purely related to shipping costs that have already come down. And they're not down to pre-pandemic levels as yet. They may never get there again. but they've been cut in half from the kind of 17 to $18,000 range for a container of material coming from Asia to North America. So we know that a plus 2% margin gain will come from logistics. On the battery side, that is specific to ESS margins. Lithium pricing, as I'm sure many of our shareholders know, cranked up mid last year at the point in time when we were investing in those inventories to make sure that we could show the distribution and partner channels that we had not only the production capacity, but the material supply exiting COVID to produce and ship products. So we made those inventory investments. That was at a time when lithium prices were increasing, which in turn drove the price of battery modules up by roughly $4 to $450 per system. So we know that 4% comes back off the cost as standard cost begins to apply once we consume the batteries that we have in inventory. And the third piece, Ian, is again specific to ESS, which is the import tariffs. metals and different materials coming out of China typically come with a 25% tax rate importing into the United States. We've already moved magnetics and some other key components outside of China, which eliminates that 25% tax rate. And we're looking at additional supply chain moves outside of China to bring that down. That's another plus 2%. So that's specifically how the noted margins will impact on the ESF side.

Okay, perfect. That's helpful. I'll turn the call back over. Thank you.

Once again, if you have a question, please press star, then 1. While we wait for callers to join the queue, I'll pass the floor back over to Justin Holland to take us through some questions from the webcast.

Thank you. The question again, and I'll just, I'll take this one first because it is in line with the back and forth that we just had with Mr. Gillies. It's where do we anticipate terminal gross margins to land? Is it in the 20 to 25% range? And it is. And that range will be inclusive of the savings on costs that we just identified, along with battery module cost reduction exercises and advanced power electronic cost reduction exercises. They're mid to long term in the 18-month range. However, we do anticipate taking out 30% to 40% of the cost of the battery, as well as 30% to 40% of the cost of the advanced power controls. From a long-term perspective, once we get through the material and the inventories that were invested at mid to late last year, we do see significant jumps in gross margins where we should land in that 20 to 25% range.

And I just have another question here.

How should we view the VPP opportunities? Is it a separate business or an opportunity to accelerate ESS take-up? It's a good question. VPPs are just starting, and we've been working with different utilities since 2014, 2015 on the technology and getting the utilities comfortable with these renewable energy assets. It's in addition to the current ESS marketplace. We expect VPPs through utility sponsorship, utility rebate programs, utility subsidy programs to drive mass adoption of energy storage solutions. That is the bread and butter of Iguana. That's where most of our proprietary patents sit, is in energy storage. We do have the microinverter line, which we use to open the door and create a product ecosystem. However, we anticipate the energy storage devices to be the key part of the power grid transition. So you want to look at VPPs as pilot stage today with significant growth over the next couple of years due to lowering the initial cost burden on the consumer to put the assets on the houses or on the walls, if you will, and give access to the utilities to run the distributed grid. Another follow-on to that, do you need trained dealer partners to execute or does the utility provide? A lot of the same installers will install the grid assets for the VPPs. A lot of the products will still come through the distribution channel. So the VPP is a layer on top of the distribution planning that we've already done. That's why it's so critical to continue to train the installer base. The more installers we have out there, the more access to consumers and the more availability we have to enter into the VPPs.

How does the Iguana ecosystem complement partners?

I mean, from a bias perspective, I'm sure Brent would say we have the easiest technology to integrate with. We've seen this with several of the VPP pilots that we're in today. We've seen this with Virtual Peeker, feedback from our former EMS partners. So we complement the partners by being the easiest hardware and the easiest software to integrate with from the battery side right up through the software side, creating that full When will ESS sales take off? That's a great question. And we believe that the advancement on the virtual power plants with distribution centers now stocked with inventory will start to drive ESS specific momentum. We did want to create the entire ecosystem from a sales strategy perspective. But again, the energy storage device we think will be the critical asset in virtual power plant for the utilities to drive and manage the distributed grid 2.0. At that, I'd like to thank everybody for joining the call today. And we look forward to speaking with you next quarter. And I'll turn it back over to the operator.

Thank you. This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.